Equity Residential (NYSE:EQR) Q4 2018 Results Earnings Conference Call January 30, 2019 11:00 AM ET

Company Participants

Marty McKenna - IR
Mark Parrell - President & CEO
Michael Manelis - COO
Bob Garechana - CFO

Conference Call Participants

Nick Joseph - Citi
Jeffrey Spector - Bank of America
John Kim - BMO Capital Markets
Steve Sakwa - Evercore ISI
Drew Babin - Baird
Rob Stevenson - Janney
Alexander Goldfarb - Sandler O’Neill
Hardik Goel - Zelman and Associates
Rich Hill - Morgan Stanley
John Guinee - Stifel
Tycho Okusanya - Jefferies
Wes Golladay - RBC Capital Markets
Tycho Okusanya - Jefferies

Operator

Good day, and welcome to the Equity Residential 4Q 2018 Earnings Conference Call. Today’s conference is being recorded. At this time, I'd like to turn the conference over to today’s speaker. Please go ahead, sir.

Marty McKenna

Thank you, Mary. Good morning from the Polar Vortex and thanks for joining us to discuss Equity Residential's full year 2018 results and outlook for 2019. Our featured speakers today are Mark Parrell, our President and CEO; Michael Manelis, our Chief Operating Officer; 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 Mark Parrell.

Mark Parrell

Thank you, Marty, good morning, greetings from [Sheryl] Chicago, it’s the negative 21 degrees right now, with a minus 50 degree windshield. Although the weather outside is quite cold, our business on the contrary feels quite one to us and we will spend a few moments this morning with you discussing it.

And we’re pleased to have delivered same store revenue growth at the top end of our original guidance range as well as solid normalized FFO growth in 2018, we had strong momentum in the fourth quarter and 2019 has started well. Now admittedly December and January are months with a seasonally well volume of transaction. So strong high wage job and income growth in our markets combined with positive demographics and a consumer preference for a Reno lifestyle in our highly desirable city has created a supported backdrop for our business in spite of elevated levels of new supply.

Recent announcements regarding Amazon HQ2 and Google’s continued business expansion are reinforcement of our belief that analogy economy will be focused and the markets will redo business. In Washington DC 70% of our NOI comes within 5 miles of rural location of HQ2. In New York we’ve more than 20 properties that are start to new. In the Long Island city location of HQ2 we’re more that are start to new from the new Google expansion location in the West Village.

We expect that 2019 will be another good year for us with strong demand across our markets creating high occupancy conditions, but continuing elevated supply levels for some of our markets keeping us within the price submission allow our internal dashboards blink and green, we’re also aware that the economic and other headlines are giving me more cautionary yellow signal.

With that in mind, in a moment I’m going to turn the call over to Michael Manelis, our Chief Operating Officer to give you color and how we’re looking at revenue growth across our markets in 2019 and Bob Garechana, our Chief Financial Officer will follow with a review of normalized FFO and expense results and guidance and also discuss our balance sheet and then I’ll wrap it up on the prepared remarks side by speaking on our investment activity and after that we’ll open the call to your questions.

Go ahead, Michael.

Michael Manelis

Thank you, Mark. So today I’m going to begin with a quick recap of our 2018 performance. I’ll share the assumptions that create the midpoint of our 2019 guidance range and I’ll provide updated commentary and outlook for each market.

Here are few key takeaways from 2018. First, strong demand fueled by good job growth and record low levels of unemployment in our markets aided the absorption of elevated supply. Second, equity employees delivered remarkable experiences to our residents which resulted in the highest customer satisfaction and online reputations course and the lowest resident turnover in the history of the company.

We reported 51.1% turnover in 2018 which is around 200 basis points less than 2017 and if you exclude turnover for those residents who moved to a new unit in the same community, our net turnover dropped to 45%.

Finally, our 2.3% same store revenue growth was achieved with 96.2% occupancy, negative 30 basis points new lease change and achieved renewal increases of 4.9% which were all stronger than 2017 results. As we sit here today we’ve strong momentum coming out of the fourth quarter. We’ve more pricing power today versus the same time last year which keep the dashboards blink and green and allows us to remain cautiously optimistic about the outlook for 2019, but we acknowledge that the hard work is still ahead of us in the future leasing seasons, but our teams are ready to deliver.

Consistent with our preliminary assumptions that we shared on the last call, our overall guidance assumes approximately the same occupancy and renewal performance as in 2018 with a modest improvements in new lease change based on expected pricing power during the first half of the year and an embedded rent roll that is better than one year ago.

Our guidance also assumes that the steady but lower job growth expectations as being predicted by many economists will lead to the continued efficient absorption of the new supply in our markets. In 2019 supply will be less in Boston, New York and Orange County and the other markets are expected to be flat or up as I’ll discuss in my market commentary.

Our 2019 same store revenue guidance range of 2.2% to 3.2% as a midpoint at 2.7% which is 40 basis points better than our 2018 results. The upper end of our range assumes a slight improvement in occupancy with strong pricing power on new leases staying in place through the peak leasing season. The bottom end of our revenue guidance assumes no intra period growth in rents and a modest reduction in both occupancy and renewal performance. All of our markets except for Seattle and Orange County are projected to deliver better revenue growth in 2019 as compared to 2018.

So let’s move onto the individual markets beginning with Boston. Boston finished the year strong with continued growth in biotech and other high wage job. Job growth accelerated in the second half of the year and fourth quarter deliveries were very light. These factors contributed to a fourth quarter performance to five seasonal trends by growing both rate and occupancy each month from that quarter.

In 2018, Boston delivered full year revenue growth of 2.5% with 95.9% occupancy negative 80 basis points new lease change and a 5% achieve renewal increase. The theme for our 2019 guidance in Boston is modest pricing power. Only a small percentage of the 2019 supply will compete with our assets in Boston and Cambridge which comprises almost 70% of our revenue in the market. Most of these new supplies expected to deliver later in the year which should lead to a favorable leasing season.

The 2019 revenue midpoint for Boston will be 2.8% which is primarily based on improving pricing power heading into a period with lower overall supply. Today our occupancy is 95.7% and January renewals came in at 5.8%. Our local team and portfolio are well positioned to capture the opportunity.

Moving to New York which delivered 80 basis points of revenue growth in 2018 with 96.5% occupancy, negative 150 basis point new lease change and a 3.4% achieved renewal increase. These results were also accomplished with using approximately 40% fewer concessions than in 2017. New York’s 2018 outperformance albeit with still the lowest same store revenue growth in our portfolio was a major contributor to us achieving the high end of our overall company same store revenue guidance for 2018.

We finished the year with strong momentum in the fourth quarter. New supply in our competitive footprint will be approximately 50% lower than in 2018 with expected deliveries just under 10,000 units. The deliveries will continue to be concentrated in Long Island City and Brooklyn where to date we have not seen a significant impact to our operations. In fact, we’ve been monitoring and forwarding addresses from our move outs for over a year now and we continue to see less than 2% of our residents leaving us for Long Island City.

Similar occupancies, strong renewal performance and improve in a new lease change are the foundations to our 2019 revenue guidance of 1.8% for New York. We expect the market pricing to remain discipline which allows us the continued used concessions that are very strategic and targeted level and in amount that we estimated will be 25% lower than 2018.

With 96.3% occupancy today, January renewals at 4.3% the local team continues to feel the strength that propelled and from the fourth quarter. So DC is the market we definitely have all been hearing a lot about in the news. Our assumptions regarding 2019 do not include the impact from any future government adjust.

During the initial shutdown we do not experience anything outside of waving a few dozen late fees. If there are additional shutdowns we have a good process in place to ensure that we work with any residents who is being impacted.

We finished 2018 with revenue growth of 1% in DC which was comprised of 96.3% occupancy, a negative 180 basis points on new lease change and achieved renewal increases of 4.4%. We also saw the Washington readings economy continue its strong performance in the fourth quarter ending the year with above the average job growth and an unemployment rate below the national average.

Occupancy rates remain strong as class A absorption continues at a record phase. Expectations for new job growth in 2019 still indicate enough domain creation to aid in the absorption of the 13,500 deliveries expected in 2019. We’re forecasting limited pricing power to continue through the year and we expect DC’s 2019 revenue growth to be 1.4%, a 40 basis point improvement over 2018 is entirely due to growth that is already in place on the rent law as our full year assumptions include a slight decline in occupancy and very similar new lease change and renewal performance.

Most of the decline in occupancy is expected in the back half of the year where we have a difficult comp period from 2018. Today our dashboards are growing in DC and occupancy is at 96.5% and January renewals came in at 4.5%.

Moving over to the West Coast, Seattle delivered 2.8% revenue growth for the full year in 2018. This was accomplished with 95.8% occupancy, negative 220 basis points in new lease change and achieved renewal increases of 5.8%. Seattle supply is expected to increase next year to just over 9,000 units as we saw just over 10% shift in expected completions from Q4 of 2018 into Q1 of 2019.

In 2019 we expect to see more impact from new deliveries in King County Suburban East Bay than the CBD area. Professional and business services and informational sectors continue to lead the way within the areas of overall job growth. Major companies continue to announce expansions and new hiring into 2019. Even Amazon is still expanding in Seattle despite their plans for New York and DC. In fact, last week they had over 9,200 open positions in Seattle which is the highest we’ve seen in a while.

In terms of the deliveries, only some of the 3,900 units being delivered in the Bellevue Redmond submarket will be directly competitive with our well located East Bay property. In addition Downtown Seattle should experience some relief from supply in 2019 and we’ve almost 40% of our income in that submarket. In 2018 we saw growth slow significantly in this market in the back half of the year. And our 2019 guidance of 2% revenue growth reflects the impact of that second half slowdown.

Overall, we expect to see a slight improvement in both new lease change and occupancy which will be offset by a lower but still healthy renewal growth rate. We’re at 96.4% occupied today with January renewals at 5%.

Next up is San Francisco. Our markets that in 2018 demonstrated strong job growth, 34 new IPOs and a consistent daily stream of headlines about major office leases and land acquisitions to support future expected growth from companies in the area. In 2018, San Francisco delivered full year revenue growth of 2.9% with 96% occupancy, positive 80 basis point new lease change and 5.1 achieved renewal increase.

The expectation for 2019 is that San Francisco market will continue to enjoy economic and job expansion albeit at a more tempered phase. Deliveries will be higher in 2019 but the concentration shift to the East Bay Oakland Submarket. There is still uncertainty surrounding the broader impact from deliveries in Oakland. To-date there has only been a small viewer to come online and the majority of the deliveries are expected in the second and third quarter of this year.

We will be monitoring the impact of this new supply in Oakland market and the overall San Francisco market. Our 2019 revenue growth guidance of 3.4% is built on very similar occupancy, new lease change and renewal growth as we achieved in 2018. Today we’re 96.6% occupied with January achieved renewal increases at 4.6%.

Moving down to Los Angeles, where our 2018 revenue growth was 3.6% this was achieved with 96.2% occupancy, positive 140 basis point new lease change and 6.2% achieved renewal increases. On the supply front labor shortages continue to create delays in project deliveries resulting in approximately 2,400 units from 14 projects shifting from Q4 of 2018 into early 2019 completion.

This brings our 2019 delivery forecast at just over 14,000 units in LA. As I mentioned last quarter it is likely that we will see this trend continue with some of the expected 2019 deliveries being pushed into 2020. The combined total over the two year period has not materially changed and this is a huge geographical area.

In 2019 there will be supply concentrations in San Fernando Valley downtown and West LA. The growth in online entertainment content is creating strong momentum in West LA and will most likely quickly absorb the new units in the submarket. We’re projecting 3.8% revenue growth in 2019 for Los Angeles with slightly lower occupancy and renewals and the same new lease change as in 2018 which is being offset by gains already in place on the rent law.

The reduction in occupancy is primarily in the second half of the year and is recognizing potential pressure from the new supply in a few of the core submarkets that I mentioned. Sitting here today San Fernando Valley is starting off a little weaker than expected, but the overall market in LA continues to demonstrate strong demand which should continue to aid the overall absorption. In total the market is performing very well with 96.2% occupancy and achieved renewal increases for January at 5.7%.

Moving to Orange County, we finished 2018 with revenue growth at 3.5% which was comprised of 96.1% occupancy, positive 10 basis points new lease change and achieved renewal increases at 5.7%. Our revenue growth for 2019 is expected to be about 40 basis points lower at 3.1%. The decrease is primarily due to recognizing the impact of lower growth from lease assigned last year along with the slight decline in projected renewal increases.

2019 occupancy and new lease change expectations are very similar to 2018 results. Job growth appears to be slowing but the overall outlook remains positive. Overall, deliveries in Orange County will be less in 2019 with just under 3,000 units expected, but the actual impact to us from a competitive standpoint should be very similar to 2018. Today we’re 96.4% occupied and have achieved a 5.6% increase on January renewals.

And last but not least, San Diego. We finished 2018 with revenue growth of 3.9% which was comprised of 96.3% occupancy, a positive 160 basis point new lease change and achieved renewal increases at 6.1%. Our outlook for 2019 will be the same with revenue growth at 3.9% with similar occupancy and new lease change projection and slightly lower increases on renewals which is being offset by gains already in place on the rent law.

Deliveries are projected to be slightly higher than the 4,300 units and the impact to us is expected to be very similar to 2018 with pressure on our downtown locations. As of today San Diego is 95.9% occupied and achieved renewal increases in January are 5.3%.

Now we did reenter the Denver market in 2018 and added another property this month. Denver is not part of our same store pool and is not included in our guidance range. I could tell you that right now the market is performing to our expectation. The one in close with a huge shut out the employees of Equity residential. There were rent less commitment to our residents that was reflected in our all time aid customer satisfaction metric is amazing. We’re so proud of their accomplishments in 2018 and we look forward to 2019 being even better.

We have strong momentum and we’re off to a great start. Thank you.

Bob Garechana

Thanks Michael. This morning I’ll take a few minutes to discuss our guidance assumptions for 2019 same store expenses and normalized FFO. I’ll round out my remarks with a brief discussion of our balance sheet and capital market.

Before I begin a couple of quick comments on the fourth quarter 2018. In the quarter our same store revenue grew 2.6%, expenses grew 4.2% and NOI grew 1.9% putting us generally in line with our full year operating expectations from the third quarter call.

For normalized FFO we delivered $0.84 which is a penny shy of the midpoint of our expectation. As we mentioned in the release this is primarily driven by the negative impact of higher than anticipated casualty losses driven by rainstorm damage at several properties in our Washington, D.C. area portfolio.

Regarding 2018 same store expenses let me give some more specific color. The relatively high year-over-year expense numbers we experienced in repairs and maintenance and insurance are driven in part by very low or negative growth for the comparable period in 2017. For example, repairs and maintenance grew 1.6% for all of 2017 and only 0.7% for the fourth quarter of 2017 compared to the same period in 2016. Insurance expense for the same period was negative.

Moving over to payroll, as is typical in the fourth quarter onsite payroll was impacted by various throughout on payroll related reserves like the medical reserve which we’ve discussed in the past.

Now onto 2019 guidance. For full year 2019 we expect same store expense growth between 3.5% and 4.5%. 80% of our same store expenses come from three major expense categories. So let me walk you through and we currently estimate that unfold in 2019.

At a little over 40% of overall same store expenses, property taxes drive anticipated 2019 growth. We currently anticipate fewer refunds for the year relative to 2018 because of the great appealed success we had for that period. Also contributing to growth in 2019 are certain of our New York properties that are subject to the 421-a abatement program and are in various stages of burn-off that we've discussed on prior calls. As a result, we would expect 2019 real-estate tax front growth between 3.75% and 4.75%.

In on-site payroll, our second largest category, we continue to experience a very competitive job environment. Many of our markets were experiencing elevated supply as Mark and Michael mentioned which is competing with us not only residence but also for highly skilled employee.

That coupled with a strong general employment factor up means we continue to focus on retaining our colleagues on site. As such, our expectations on payroll for the full-year 2019 is for growth between 4% and 5%.

Finally, our last major category utility. Utility should benefit in 2019 from a couple of factors that reduce our expected rate of growth relative to the 4.5% increase we posted in 2018. First, in 2018, we experience higher than usual growth in trash and store expense in Southern California that shouldn’t repeat itself in 2019.

Secondly, we experience some very extreme weather in the first half of 2018 in the northeast that we did not include in our 2019 forecast. We are in the business of forecasting weather but our guidance does assume a more traditional run rate.

Finally, we continue to benefit from our on-road electricity and gas purchase contract along with our investment in LED lighting for generation and other initiatives to manage this extent. As a result, in 2019, we expect utility expense to grow between 1% and 3%.

Our guidance range for normalized FFO in 2019 is $3.34 per share to $3.44 per share. Major drivers for this change between our 2018 normalized FFO of $3.25 per share and the midpoint at $3.39 per share which from 2019 guidance include a $0.10 contribution from same store NOI and our same store properties based on the revenue and expense assumptions that Michael and I just outlined.

A $0.04 contribution from our leased up properties which anticipated to generate $40 million in NOI in 2019. A $0.01 contribution from the timing of our acquisition and disposition activity involve 2018 and 2019, offset by $0.01 in higher expected interest expense.

While we continue to benefit from favorable refinancing activity, we do anticipate short-term rates on average to remain elevated in 2019 relative to 2018. This expectation is driving a negative impact.

Final note on the balance sheet before turning it back to Mark. Our financial position remains the strongest in the company's history and one of the strongest in the REIT industry. During 2018, we not only issued $900 million in unsecured bonds, we retired over $1 billion in higher coupon secured debt. Our NOI is now over 80% on encumbrance creating ample capacity to opportunistically access either this secured or the unsecured market.

We issued an unsecured bond early in the year at one of the lowest 10-year recredit spreads ever and were the first multifamily rates issue a green bond. In addition to being an attractively priced piece of long-term capital, the green bond is a reflection of the many sustainable projects and initiatives that we have and continue to undertake balancing people plan it and profit.

For 2019, we anticipate issuing between $700 million and $900 million in debt capital to refinance debt that either matures in 2019 or matures in 2020 but it's prepayable at par in 2019. We are very manageable development spend that we anticipate being funded entirely from free cash flow and hold that capacity and industry leading access to the full-spectrum of capital.

As I just mentioned, we also have plenty of capacity to issue either unsecured or secured debt capital. For the first time in quite a while, we've also seen a convergence of pricing between the unsecured and secured markets for lower levered high-quality borrowers like our self.

With that, I'll turn it back to Mark.

Mark Parrell

Thanks, Bob. Just quickly on the investment front. We had a relatively quiet fourth quarter with no transactions as you saw on last night's release. We had a busy January, we acquired three properties. We continued our portion at Denver with the acquisition of a newly constructed property in the Golden Triangle neighborhood which is near downtown Denver.

This 274 unit property was completed in 2017, as a 90 walk score and is slightly less than 90% occupied. We acquired it for a 110.5 million at a 4.4% cap rate on the current rent roll and a 4.6% cap rate once fully stabilized. We see the price is at about a 7% discount to current replacement cost. We now have three properties or about $385 million of capital invested in Denver.

We will continue to look for opportunities to expand our presence in Denver as we think that assets in the right location, we'll produce excellent long-term returns. We do not that similar to many markets, Denver's experiencing significant new supply, this is both a challenge to near-term operating fundamentals that we do reflect in our underwriting and also an opportunity for us to buy well-located product at modest discounts to current replacement costs.

Moving over to Seattle. We acquired a 174 unit's property constructed in 2016 in the South Lake Union neighborhood; this asset was acquired for $74.1 million at an acquisition cap rate of 4.6%. The property has a tremendous walk score of 97 and we were able to acquire it at a discount to current replacement cost.

We like this properties location which is in walking distance of many major employers, parks, and other attractive amenity. We also added to our New York metro area portfolio with the acquisition of a 131 unit property in the desirable Paulus Hook neighborhood of Jersey City; we acquired the property for $74 million at an acquisition cap rate of 4.6%.

The property has a 92 walk score and easy public access, transportation access, into much of Manhattan. On the disposition side, we're in the process of disposing of several assets. We're closing expected in late in this quarter or the second quarter. This includes a sale of an asset in Manhattan that was reported in the press, I have more to report on this transaction once this is closed.

We have given guidance for $700 million of acquisitions and $700 million of dispositions in 2019. You can expect us to continue our selected portfolio pruning as we find attractive opportunities from both in acquisition and development perspective for new investment in our markets.

Overall, values and cap rates are holding steady in our markets as there continues to be demand own high quality apartment assets. On the development front, during the fourth quarter we completed a development of our 100K street property in Washington D.C. which we expect to deliver at a stabilized yoke of 5.6%. We also stabilized our Cascade development in Seattle at a yield of 5.8%. We did not start any developments in the fourth quarter.

Well now, let's go to the Q&A session. Operator, if you could begin?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We'll take our first question from Nick Yulico of Scotiabank. Please go ahead.

Unidentified Analyst

Hi, good morning. This is Trenter Hill here with Nick. Thanks for first all the market level color in your prepared remarks; that's great. Kind of a big picture question related to supply and like the theme that we continue to hear is more of it being shifted to one quarter to another from one year to another.

So, now 2019 based on industry level date, it seems to be the new peak for supply deliveries of the national level. And we appreciate you deal on internal analysis of supply. But we've been talking about this for a while as it gets pushed and pushed further end of the cycle.

So, when do you think we truly see the peak supply as it pertains to your markets?

Mark Parrell

Hey Trent, it's Mark Parrell, thanks for that question. So, it seems that we do have this conversation every year. We always seem to have the highest supply numbers right now for the year. So, our internal estimates now for 2019 are give-or-take 77,000 units. But we fully expect 10% or 15% of that to move because it always moves.

So again, we do think something will move in the 20. Right now our 2020 numbers are lower and we will be putting our an update on our numbers a little bit later in the quarter. But again, we see continued pressure on construction costs. Labor costs, materials cost, land prices is not really declined at this point.

We see all that, we also see rents not growing as quickly as construction cost and we see pressure on developers and we see that growing over time. When that really comes to pass in a very significant decline, we would expect that to occur at some point but I just can't have it to guess at this juncture that at this point we do think '20 is lower than '19.

Unidentified Analyst

Okay, thank you very much. And just a quick follow-up something relating to your guidance. It looks like you have a 25 basis point dilutive cap rates spread between acquisitions and dispositions. And you've already announced a healthy amount of acquisitions in the mid-4% range and you have that Chelsea asset pending sale which we would assume it would be something in the low-4% cap rate range.

So, I guess the question is what are you planning to buy yourself that would flip this dynamic from being accretive to delude if just to get some details on that, thank you.

Mark Parrell

Sure, Trent.

Bob Garechana

Yes, thank you. All we do with our guidance is give you the number that's in our estimate. So, it doesn't mean that will actually end up because we don’t know exactly what we're going to buy and sell during the year. At this point we do have somewhat of an accretive trade going on but there are other assets we've identified for sale that would be higher cap rate assets.

So, I could tell you there is almost equal probability that we could be 50 basis points accretive as 50 basis points dilutive. Mean, it's just a pretty small margin in between. And in terms of the impact on this year's numbers which I don’t think was exactly what you asked, it's really minimal.

Because it's really about the timing of these trades and because we're buying relatively early or going to be slightly accretive, my guess is in 2019 almost no matter what.

Unidentified Analyst

All rightt, thank you very much. Thanks for taking the questions.

Bob Garechana

Thank you.

Operator

We will now take our next question from Nick Joseph of Citi. Please go ahead.

Nick Joseph

Thanks. In the last few years you've been pretty conservative with initial same store revenue guidance that you ultimately at the high-end of your initial expectations. So, first a basic change is here with tightly set guidance. And then which markets have the largest potential variants that will drive maybe the high-end or low-end of the range?

Mark Parrell

It's Parrell, and Manelis will kind of split this one up. So, in terms of anything changing in our process, no. our process is sort of both the bottoms up and the top-down process and we sort of arrived at a consensus number. So, not the process is the same.

We talked our field personnel, there's often assets specific positive and negative going on. New supply where they know sort of the exact impact, maybe a renovation at a property, things of that nature. Or the top of the house we're looking at supply numbers, job growth, we're thinking about how the market moved the prior year and we sort of merged those two together and reach consensus.

I'll let Michael speak to the markets with positive and kind of that.

Michael Manelis

Yes. So, I think that the one way to just start thinking about this is there's four core markets that are driving 18% to 20% of our revenue which would be kind of D.C., in New York, San Francisco and L.A. so, obviously those are big focal points because if any one of those markets kind of either out performs or under performs that have more weight into the overall company.

I guess, I'm just going to tell you sitting here today. I think we're up to a great start, right. You got Boston, San Francisco and New York but we feel we got good momentum and with just left towards kind of the outperform state but again we're very early in.

I think on the downside we're going to watching D.C. and L.A. just for any signs of softening and the absorption of this supply which could impact our projections. But as of right now, we're not seeing anything to suggest if that's occurring.

Nick Joseph

Thanks. So, then with supply coming to Oakland in the East Bay. Do you think that the new product will pull demand from San Francisco or do you expect it to be more muted somewhere toward what you've seen in New York with Long Island City?

Michael Manelis

I think that's a great question and that's something obviously that we're going to be looking at. I think I even said that on the last quarter which is yes it's a little bit different than Long Island City because Oakland does have areas to go to today. So, it's a little bit more established than Long Island City.

It's something that we've got to watch, I think in the next probably several weeks we're going to have one of the first deals, bigger deals, 420 units start to the free leasing's but just going to be interesting to see kind of that price relationship to San Francisco.

My guess is it will come out of the box somewhere 15% to 20% discounted in rents but we'll see. And then we just got to watch their ability to absorb what happens with them to see if they do start to drop from San Francisco.

Nick Joseph

Thanks.

Operator

We will now take our next question from Jeffrey Spector of Bank of America. Please go ahead.

Jeffrey Spector

Thank you, good morning. Mark, just stepping back from results for a minute. Now that you're in the CEO, see I just want to confirm from a strategy standpoint, is there any potential change or anything you've been wanting to do whether it's more development, less development market exposure.

And it even say but even the balance sheet increasing leverage possibly at this point?

Mark Parrell

Thanks for the question, Jeff. I've been at the company 20 years and was the CFO for an 11. So, I fully invested in this strategy. I mean the strategy is always more then changed over time and it undoubtedly we'll continue to. In last year, we went back into Denver, we telegraphed that, we talked about it, we continue as we did under David's time at the helm as we will undermine, we'll always think about markets and different types of assets we can buy in our markets.

Now I think that sort of evolutionary process will continue but in terms of some dramatic changes that the board now are contemplating that that would not at this point in the case.

Jeffrey Spector

Okay great, thanks. And then, just two quick follow-ups. On Oakland, I was just going to ask historically have you seen an impact when there's a new supply in Oakland in your San Fran portfolio or are we saying that it's really not a good comparison to look in the past given the changes going on in Oakland?

David Neithercut

Yes, I think so. I think you got to wait and see, this is some concentrated new supply high-end stuff coming online. So, I think in the past I don’t know that they've ever had this wave of the concentration all coming online in a couple of quarter period that really have an impact and really touch the ability to absorb.

Mark Parrell

And Jeff, if I can just add to that a little bit, it's Mark. We do see maybe 3500+ units being delivered. This is into a market that has I know I mean the Bay area in general, the least amount of housing in the country; it needs more housing.

So, whatever little blip this might cause or might not cause to the operations of our assets across the Bay in San Francisco or the few assets that we do have in each day, in the long run this market will absorb this product readily because it's just an area where there's just incredible demand for housing.

It's very under supplied and so we don’t look at it as some permanent disability or even frankly much more than a temporary blip.

Jeffrey Spector

Okay, thanks. And then, my last follow-up is just on supply New York City, you commented that you're still expecting a decline of 50% in '19. We hosted or broke a call last week and we heard '18 supply was down more than we expected. So, we weren’t sure of the slippage into '19 would decrease that estimate.

But it sounds like you're sticking with the 50% decline in New York City supply.

Mark Parrell

Yes. So, actually when I look back at where we thought '18 was going to be, we really have not seen a significant change at all. So, the 19,000 units that we expected kind of came in maybe one unit's look smaller, two units small units but we really didn’t see that kind of slippage in New York.

And again, as we think about the 2019 landscape is against our competitive footprint.

Jeffrey Spector

Great. Thanks, guys.

Mark Parrell

Thank you.

Operator

We will now take our next question from John Kim of BMO Capital Markets. Please go ahead.

John Kim

Thank you. Based on your market commentary, it looks like the biggest improvement that you're seeing in 2019 in same store revenue guidance will be coming from New York. But when you look at the earn-in from a lease growth rates from last year, it does not appear to be that strong.

I'm just wondering if you could provide some more commentary on your constant level in achieving this other than just supply coming down.

Mark Parrell

Well, I guess I would say from an earn-in perspective New York contribute with 70 basis points stronger and better growth today than we did at this time last year. So, we do have some embedded growth in the rent wall from leases that were saying for like maybe or to the back half of the year and we've got good momentum right now.

We've got demonstrated pricing power. It's not robust pricing power but it's more pricing power than we've had in a long time. And if that momentum can continue, I think we're going to be just fine with this range that we put out there.

John Kim

You had strong momentum in the fourth quarter versus I think your prior year guidance in New York? I just want to make sure that was the case.

Mark Parrell

Yes, both from a demand; from an occupancy; from a renewal; everything.

John Kim

Okay. Also there was a commentary on waiving some late fees in D.C. and just wanted to make sure that we understood your revenue recognition when a tenant is late in paying rent. And also, is your expectation that government workers will be fully current on rents when the government shut down it's primarily over?

Bob Garechana

Yes. So, I'll take real quick the revenue recognition is not waiving on late fee. So, we recognize the late fee one due. So, we recognize that through revenues almost like on a cash basis. Obviously, we didn’t collect it, we would not recommend it.

Mark Parrell

So, just to give you an order of magnitude, John, to help you a little here and we're talking about two dozen people. So, we're not concerned about it. We waive those late fees, so we're not going to get them. So, that's undoubtedly true.

So, we do charge the accounts the late fees, we do recognize that through revenue and if they aren’t paid, we have a process where a couple of months later it all gets written off.

We've very low write offs in this portfolio, one of the advantages of the portfolio shift is to have a portfolio where you didn’t have a lot of people that move out in the middle of the night, you didn’t have a lot of people that don’t pay the rent.

So, write off this portfolio effectively the minimist. So, I don’t expect that change as a result of this recent incident.

John Kim

But the workers to your knowledge that they will be caught up in rents once they go back to work.

Mark Parrell

Yes, I guess at this point there is nothing out there that would suggest that even if there are additional shutdowns that there is not going to be a retro pay catch up. And therefore, the residence won't be in a position to get caught back up nonetheless.

Bob Garechana

Yes. We have, there are family members are kind of workers that were for loading, they know they're getting the money and they bid all that but that just between that readings the paper, I expect you'll get the money and then we'll get the rent.

John Kim

Got it, okay thank you.

Bob Garechana

Thank you.

Operator

We will now take our next question from Steve Sakwa of Evercore ISI. Please go ahead.

Steve Sakwa

Thanks. I just want to touch on the investment market and just maybe get your comments on kind of unlevered IR's today, how you guys are underwriting sort of acquisitions just late in the cycle and do you guys think about a down turn, do you put that in or how do you sort of think about the next possible recession?

Mark Parrell

Hey Steve, it's Mark. Thanks for the good question. This is as much are the science as you know we got people on the ground really looking at this hard, we underwrite every deal. We end up bidding on a select group of oneself. I'll give you a little bit of flavor of how we're thinking about things.

When you're talking about revenue assumptions in the next few years, we do feel like we have more visibility there. So, for example the Denver asset that we just bought a few weeks ago, we effectively assumed because we know there is near-term competition, no revenue growth for a couple of years and concessions.

We understand that market, we know what's going in the next few years and then over time at some points things will balance themselves differently. And you'll have a year with the six in it later on. Well, what generally happens is in the near term, you have whatever you really think is going to happen in that market from your knowledge on the ground from our investment in property management teams.

Going forward, you sort of revert to some sort of average in the market which generally for us and revenue growth then your five on might be somewhere in that who is depending, how we feel about the markets long-term prospects. And then you look at your cap rate, you're reversing every cap rate at the end because of a lot of the product we're buying like the stuff we're buying in Denver, a high rise.

We don’t see as much cap rate widening in the sale as maybe you'd see if you were buying garden product. That give you just a framework for our thought process but again picking what your seven revenue growth is going to be is definitely an estimate.

Steve Sakwa

So, no effective real downturn in a market like or just nationally two, three, four years out. There isn’t sort of a down 4% or 5%, 6% within a strong bounce back and could you kind of just kind of look through that basically?

Mark Parrell

Well, we accomplish. Yes well, and you just said if you look through that. I mean if you think the number is going to be 350 in the market for revenue growth over a long period of time. You may have underestimated it in year four and you over estimated in year seven and that just kind of averages out.

So, again the near term stuff, we underwrite tight based on having product in these markets, knowing how it's performing, having a real good feel. As you go further out, it's a little bit more of an averaging effect.

Steve Sakwa

And then, just in terms of unlevered IRR's. We're on the things that you've been buying or the things you've underwritten but have a one. Where would you say the market is today and you're kind of core five or six markets?

Mark Parrell

Yes. And we're seeing trades go off and we think unlevered IRRs maybe in the sixes, the stuff we've been giving the purchase has been in the sevenths. Again, some of that is skewed by Denver, maybe being a little bit higher cap rate market but the stuff we're buying in the sevens but we do see product rate.

In at the sixes, maybe even in the five or high fives in terms of IRR's but again those are the deals we wouldn’t plan.

Steve Sakwa

And then, just lastly on development. Obviously, the pipeline for you is kind of dwindling down there or how do you sort of think about new land sites and new development starts over the next couple of years?

Mark Parrell

Yes. Thanks for that question. So, on development. We've had a terrific run, we have a great team in place. We do think about it as a long-term value creator for our company. Right now, our development folks are mostly been busy with adjacent land sites; the properties we already own. We do have a couple of other land sites on the west coast that we're thinking about.

But we made a decision a few years ago as we saw these costs really go up as we saw rents kind of flattened out but it really wasn’t worth the risk. We completed I think a very lucrative development pipeline for the most part, there are couple of things still in process. I guess the way we think about it right now Steve is, we think about it as part of the long term mix to capital allocation for the company. I don't think you will see us accelerate that in the year or so we just don't see an opportunity to do that as yields were willing to accept to take that kind of risk. But I do think you should expect that there will be a time and a place where we will do more development for sure and I think we will constantly do these densification plays where we take a property and it's the parking lot, the back parking lot or the garage and we will do something there. We are adding units. We are adding new building and what not.

Steve Sakwa

Okay, And then just quick one for Bob. Just on the debt that’s expiring this year and kind of your new debt that's in guidance just kind of from a timing perspective how should we think about that and to the extent that you were to come to market with say a new ten year deal where do you think pricing is?

Bob Garechana

Yes. It's a real quick on the timing. So the two components of that that are either maturing or pre-payable at par are kind of midyear, end of the day one of them is unsecured bond that's floating, swap to floating. And another one is that I think secured debt deal that I mentioned its pre-payable at par. So that's kind of midyear so I think from a modeling standpoint mid-ish year is probably pretty close. We obviously could be opportunistic if the market presented opportunity to go a little bit earlier and take them off the line, etcetera. But overall that's the timing plan.

From a pricing perspective, I would say and this probably applies for secured and unsecured low levered secured for borrowers like us because as I mentioned in my comments the threads are pretty tight to each other. I would say we are probably a little bit under 4 overall. So sitting here, call it 275 treasury here and that kind of 115 area for either one.

Steve Sakwa

Great, thanks very much.

Mark Parrell

Thanks Steve.

Operator

We will now take our next question from Drew Babin of Baird, please go ahead.

Drew Babin

Hi, good morning.

Mark Parrell

Good morning.

Drew Babin

Moving past on the earn and assumptions moving into 2019 and looking more towards peak season, I mean the potential for continued second derivative leasing spread improvement. I guess, are you assuming that most of your markets are – are your markets kind of on average roughly in line with 18 as far as renewal and new leasing spread or are there certain markets assuming some incremental acceleration or deceleration?

Michael Manelis

No, I would say and I went through each kind of market as to what those overall assumptions were, but I would say clearly in New York probably stands out where we have significant improvement in the new lease change assumptions. So the rest of the markets I would say are pretty close, Boston where you have pricing power existing is going to generate improvement in new lease change as well. And I think as we get closer in the March we will have an investor presentation deck, you get to see a little bit of those assumptions as kind of a layout by quarter as well.

But I really point to the markets where I talk about kind of having some pricing power momentum. Those are the ones that our expectations are kind of geared towards improvement in new lease change and the rest is probably just holding the line on the occupancy and renewal.

Drew Babin

Thank you, that's helpful. Can you talk some about the repair and maintenance costs being relatively high in 2018 off of difficult comps? I noticed that the building improvements and replacements capitalized per unit were down about 9% year-over-year in 2018. Can you talk about how the capitalized expenses were kind of going down while the expense ones are going up? Is there any different on the accounting side? Does it reflect the younger portfolio? Just curious kind of why that bifurcation is occurring?

Mark Parrell

Drew, it's Mark. So specifically when you look at building improvements, building improvements are large scale systems so that's why air conditioning unit replacements on top of buildings, elevators and things of that nature. So there is some interplay between that. There is some things that when you do a big capitalized project end up falling into expense. But that interplay isn't quite right. There wasn't a switch there as much as I would like to tell you. That's what happened. It really was just these sort of additional expenses relating to slight damage that hit same store and otherwise non same store. So that really was more of it.

Michael Manelis

So nothing changed on the accounting front or capitalization policy at all.

Drew Babin

Okay. So what do you say in the 9% decline year-over-year. Is that just sort of asset mix over the years? Is there anything kind of behind that?

Mark Parrell

Sure. Those are generally big projects, in a few cases big window replacements or sighting deals on a few mid rise units we own. So those just slide. Just move down a little bit and they'll get done in the next year. So it's really more about just timing of some big chunky projects more than anything else.

Drew Babin

And then, one more for me obviously there have been some headlines about tech companies kind of reaching out and hoping to increase the inventory of affordable housing or in some cases kind of medium income type housing projects. Has there been any talk of them partnering with other capital to potentially do larger projects that might deliver more units that we're kind of currently talking about? Do you think there's any potential that these companies might reach out to EQR or other public REITs to kind of partner in these projects and would you say that the rents on them are probably a little bit too low kind of considering to ours target customer? Is there anything developing on that front or is it maybe just too early in the process?

Mark Parrell

I'm thinking it's too early I mean we certainly know these people in our markets but we don’t have a lot of detail on those programs at this point. We've run very affordable product before. We own some bay area stuff that I would characterize as highly affordable product. We have affordable units throughout the whole portfolio as well. So I think we have the ability to manage in our markets all types of price points if the returns make sense. So, we'd be interested in it and I'm sure possibly but I guess I just don't know enough to react to that yet.

Drew Babin

Great, that's all from me. Thank you.

Operator

[Operator Instructions] We will now take our next question from Rob Stevenson of Janney, please go ahead.

Rob Stevenson

Good morning guys. What's your expectation for fee growth in 2019, the application pet and all that other stuff and are there any new ones that you guys have recently implemented or will implement 19?

Mark Parrell

So I would say I think right now if we look through the guidance I'm guessing it's 3% which is kind of in line with kind of where we see these other income lines going from an initiative standpoint. I'll tell you we did a hard look at the parking many years ago. Our parking revenue is up to 54 million in 2018. We actually grew parking by 3 million or 6%. We have basically the road map laid out for every single property and some of that just takes some turnover, some renewals, some changes in the leases to get that income.

But if we still have a little bit of room left to optimize some of the parking income but it's not like there's significant kind of opportunities in front of us. The rest of the fees I mean it's a very strategic review asset by asset to try to understand where do you have opportunities, where do you have levers to increase. I don't think I'm aware of anything kind of on the new fee side coming in that that's worth talking about on this call.

Rob Stevenson

And then what are the expected stabilized development yields on the three properties in the current pipeline?

Mark Parrell

Sure bear with me for a second here. So for West End 6 for 249 third square 5 and for 1401 East Madison 58.

Rob Stevenson

And what's the $0.08 gap between the REIT and normalized FFO guidance for this year?

Michael Manelis

Yes. So for 2018 or 2019, sorry?

Rob Stevenson

For 19, the guidance.

Michael Manelis

Yes. So for 19 the guidance there's a page in the very back. The biggest issue and we noted on the disclosure or the biggest item is the write off, or anticipated write off of an unamortized discount on a tax-exempt bond that we would expect to incur in conjunction to a plan disposition that Mark may have alluded to in his comment.

Mark Parrell

Yes, so it's a non-cash charge Rob, so it's cost we incurred when we bought this asset a long time ago and we have to write it off. So that runs through the REIT and EPS versions of FFO after our normalized version and that's the biggest item.

Rob Stevenson

And I know that there hasn't been any sort of formal plan put out there yet Mark, but given that the administration says that they have the ability to do something with the GSTs I mean what's – how you guys thinking about that and does that impact any of the timing for you guys in terms of dispositions and/or the way that you guys think about financing in the space through the remainder of the year?

Michael Manelis

Yes, I'll take this real quick and I'm sure Mark can take you back on it as well. So we're familiar with the same kind of media reports that you guys have seen and it's been all over the page right in terms of -- as of late most recently it's in the privatization kind of rumors. What I'll say kind of more specifically and I think answering your question on 19 is at the moment we see no disruption to the GSE and it's the kind of the operating business as usual.

They had very large production volumes in 2018 prior to the change of the regulator whose term expired at the end of 2018. They put out their caps which were very similar to what they were previously. So for 19 we wouldn't expect anything to kind of impact our position or their kind of operations overall. I guess what I would say kind of longer-term is who knows right, I think the bigger issue that will drive kind of GST reform is both political but also probably single-family financing in this country and so it is unclear.

From a specific standpoint I'd say for us we would certainly be less impacted or less negatively impacted by GST reform I would say for two reasons. The first as it relates to funding ourselves. We have very strong access to capital as I alluded to in my comment particularly strong relative to the private market which is very reliant on the GSTs whether it's for stabilized assets or for refinancing their construction loans I mean every bank in the country basically when doing a construction loan underwrite to take out to the GSTs. So we benefit kind of from a direct standpoint of having all this access.

The other thing I would say is our portfolio on the secured debt front it's very attractive to other secured lender types as well so we don't have a lot of the large-scale suburban kind of stuff that is probably more the core GSP product today than what we might have had ten years ago.

Mark Parrell

Yes that's the point I just want to emphasize Rob without beaten this to death is we got rid of a lot of the product that we thought was more susceptible to GST risk some time ago but some of these dispositions including Florida and the Denver suburban stuff this product we thought but really only financed fear was the GST market. So we don't feel and it so it's not changing our plans. Most people who buy assets from us are buying free and clear and you may finance it later at some point but the financing market is not particularly relevant to them. They are cash buyers.

Rob Stevenson

Thanks guys. Stay warm.

Mark Parrell

Yes. Thank you.

Operator

We will now take our next question from Alexander Goldfarb of Sandler O’Neill. Please go ahead.

Alexander Goldfarb

Thank you and I guess given the temperatures maybe that Florida assets look a little attractive now. Just two questions, first you guys are not alone in facing operating expenses and taxes are what they are, you can grieve them all you want but that is what it is. But wages especially with the sustained with this economic recovery ultra low unemployment and the fact that you've had a lot of local mandates for higher minimum wages just seems to be something that's continuing to weigh on the apartment.

Some talk about more automation but still you need people at the properties to run them, to fix them, etcetera. So do you expect that for the next few years we're going to see force type percent expense growth driven by payroll or do you think there's some offsets here?

Mark Parrell

Yes. I believe in the mean reversion theory of these long term expenses. I mean over the last five years our expense growth rate is average 2.5% certainly we're expecting it to be higher in 2019 than it's been. Real estate taxes are what they are, but some of these sales of these New York assets where we've affected the 421A growth in our real estate tax line item that stuff Alex is going to help us over time. So we expect that number to go down here. These appraisers have noticed how well apartments have done. They've raised their values. They've taxed us more. At some point that will change and those values will go down and we'll have more appeal success that's just the cycle.

In terms of headcount and wages and stuff I would say the same. Right now with so much new products being built there's just a lot of competition for talent as Bob suggested. At some point that'll wax and wane. So I don't I don't know I don't feel like 4% is a run rate. I feel like that's just kind of this year's number and I think there's some good chance it could be lower depending on how things break during a year. I know Michael if you got anything you would add.

Michael Manelis

Yes, I think I guess I can bring up that obviously from an automation standpoint we're about to introduce pilots to kind of go after mobility on the maintenance side of our business. I don't know if that that's really not a head counting that's more around utilization. So it's allowing us to maybe get some more stuff done in-house and have less dependency on contractors but it I think you are right some of these minimum wage increases and they're not done in 19 they're going to continue going and that is going to continue to keep pressure on any of the contract labor services that we utilize.

So I think we're taking a hard look at all that trying to make sure that we've optimized, trying to make sure that the staff is as utilized as possible. So I think there will be things that come out of the learning from 19 that will get folded into 2020 but I don't think we're in a position to really impact the 2019 with any of these types of initiatives yet.

Alexander Goldfarb

And then the second question is as you look here in New York obviously Albany is now all democrat rent control is up this summer. There's a lot of talk about a lot of, taking out a lot of things that were more favorable to landlords. From any of your local real estate contacts especially who deal with Albany. Is there any concern at all that rent control may spread to market rate units and/or that they may start to limit the ability to raise rents within existing 421A deals on either the 20% restricted or I think someone mentioned that the other 80% is still subject to some qualification. But just sort of any commentary of what you're hearing as Albany didn't do debates renewing the rent control this summer?

Mark Parrell

Yes thanks Alex. Listen this is a very complex area. New York rent control regulations are very involved that we have several full-time staff members who administer this. It's that complex. We are used to these regulations. The Governor was rather general in his remarks. I don't have anything specific to react to. We will continue to advocate through our local trade association as we did very effectively in California that rent control in the long run and New York give me listen a rent control New York forever and it hasn't helped keep prices down to somehow lower level on workforce housing or produced more affordable and workforce housing I would argue.

I think enlisting the private sector by having incentives like the affordable New York program, by having zoning that's more inclusive things like that or where you're going to make a real dent in it. The industry does want to be helpful both in New York and otherwise and in fact Alex, the annual trade show event for the industry is going out right now in California and I know right now because we've got senior people attending that there's conversations about New York, about California, about all the places that have these affordable housing issues but this isn't an area where you can legislate a good outcome.

You need to really enlist I think the private sector. I think the industry is willing to do its part. So I can't answer your question specifically because there's no detail. Once there are there will be on it but our sense is in New York that the industry association has been pretty effective in education and we'll hope the same occurs this time.

Alexander Goldfarb

Okay thanks Mark.

Mark Parrell

Thank you, Alex.

Operator

We will now take our next question from Hardik Goel of Zelman and Associates. Please go ahead.

Hardik Goel

Hi Mark, thanks for taking my question. Thanks for providing color on your markets earlier regarding 2019 guidance and as I look across them I'm just wondering where are the ranges the widest? Which markets do you see potential for upside and also on the other end potential for downside and what are the factors influencing you there?

Michael Manelis

Yes, this is Michael. I guess I would say from a range perspective we have equal upside and downside in almost every one of our markets relative to our midpoint. I think as I alluded to earlier in one of the question, the markets that have the elevated supply so we will be – DC and LA and they're driving 18% of our revenue, other markets where the range could be tested both on the upping and the downside.

So it's the markets where we need to watch the absorption of the elevated supply and we need to balance kind of the pricing power that we have in place. Right now like I said earlier the dashboards are all green we've got good pricing power in those markets. So sitting here today I would say we have minimal on the downside risk. But I think the way to think about it is the markets that are contributing the majority of the revenue growth and where is their elevated supply and that's kind of how we're thinking about it.

Hardik Goel

Thanks.

Operator

We will now take our next question from Rich Hill of Morgan Stanley. Please go ahead.

Rich Hill

Good morning guys and thank you for the time. Once just come back to two things one of which you've already spoken about maybe some of that add links. But New York City looks like you put up a really nice number in 4Q and expect that acceleration to occur. One of the things that I know you and I have chatted about in the past is sort of how neighborhood by neighborhood New York City is and certainly our own analysis supports that.

So I'm curious when you think about the various neighborhoods and where your properties are located what's driving that outperformance relative to maybe what we see in trends in overall New York City. Is it lack of supply or is it just people unwilling to move or a little combination of both?

Mark Parrell

I think it's a little bit of a combination of both and then you also got to remember what our earning or what our embedded growth is sitting in some of these neighborhoods. They maybe didn't have as much pressure on supply in 18 that allowed us to start getting some momentum on raising rents and getting some momentum on pricing power. So Manhattan still has an attractiveness to it, at least we see it in our foot traffic. We see it in the demand for our product type.

And sitting here today when we look through New York and I go through almost every submarket, every sub market is demonstrating more pricing power today on where our rents are in the marketplace than where they were this time last year. So I think you're right to think about at a sub-market level we could see kind of deviation in the projection and in fact our own projections have ranges going down to 1.5% up to all the way up to a 4% based on various sub-markets.

So I think some of it is what is embedded with us and some of it is what should we see is the competitive landscape that we're going to be facing in 19.

Rich Hill

Got it, that's helpful thank you. I mean I want to come back to the supply comment. One of the things that we focused on and we'll keep hearing a lot about is a tremendous amount of private equity dry powder that that's on the sidelines. I'm wondering if you get any sense that the supply which continues to get pushed out is really driven by builders anticipating that maybe that private equity wants to go into apartments and they can't find enough apartments to buy.

So is there a chance that developing it maybe last longer than we're all anticipating because of all this dry powder that might be attracted to multifamily or do you think that's maybe misguided?

Mark Parrell

Yes I'm not sure that dry powder is looking for development exposure. I mean some of it is but I think some of it is probably interested in value add and some of its interested in core and different flavors and the continuum there. I would say that lately we've had more anecdotal evidence to the contrary in terms of more inbound calls to Alan George, our Chief Investment Officer and his team of people that have sites tied up but can't find the equity to do it or their equity went away and they're looking for someone else to jump in and wondered if we were interested.

So I'm not suggesting that yet a full trend but we are hearing more of it. We are also seeing and again not yet meaningfully, but we also seeing land come available at prices that were lower or less high than before. So to us I'm not sure that that dry powder is waiting for development. I think if you really wanted to do development and you didn't care too much about the yield you figure out a way to do more development. I think a lot of that is probably interested in other kind of plays in real estate in general or in apartments and right now I kind of see equity.

Equity is probably a little bit more hesitant in our opinion on development now than it was a year ago, but until something dislocates they're still going to put some measure of capital into that because the plays work so far.

Rich Hill

Got it, thank you, that's helpful, that's all for me guys.

Mark Parrell

Thank you, Rich. Have a good day.

Operator

We will now take our next question from John Guinee of Stifel, please go ahead.

John Guinee

Great, just nice quarter by the way guys. Just building on the last couple questions on development, the merchant builders dominate the business. What do you think the yield on cost that they are willing to accept versus the yield on cost that you're willing to accept? Is that a overall 25 basis point gap or a 150 basis point gap?

Mark Parrell

That's almost an existential question for us because when we think about development it isn't with the merchant builder mentality of what's the cap rate if the market is trading at 4 in a quarter we need to get 5 in a quarter and otherwise we won't build it. We're looking at a price per unit, a price per square foot, feeling that this location has been hard to buy I mean a lot of what we built coming out of the great recession that we got from our stone was [chat] with properties in San Francisco because we had such a hard time finding stuff to buy. So we figured we had to build it if we wanted to own it.

So I guess, I’d tell you I think, the weak industry in general in Equity Residential for sure on the apartment development side just thinks a little bit differently and more like a long-term investor. So I think most of these developers that are private guys who build until someone doesn't give them the money and they can have different yield expectations that they are what they are. I think for a company like ours we are very disciplined that's one of the advantages and we're perfectly willing to sit on our hands and like I said continue to look at things that are already in the portfolio to create densification and/or buy assets that already exist. So I don't know that it can be reduced to the manner you just reduced it to.

John Guinee

If you try to reduce it to that manner could you?

Mark Parrell

It's probably too cold outside. Well, we might accept a little lower spread than they are if it's really hard to build asset in like San Francisco. We might require a lot more in a place that maybe is a little bit easier to build like DC because we have the ability to go optionally between buying existing streams of income and building new streams of income. So I guess that would be my full answer.

John Guinee

Great, thank you.

Mark Parrell

Thank you.

Operator

We will now take our next question from Tycho Okusanya of Jefferies. Please go ahead.

Tycho Okusanya

Yes. Good afternoon. Keep warm in Chicago please. First question, the 700 to 900 million of debt you are planning to raise in 19 and the debt you are planning to pay off I just wanted to confirm from a payoff perspective it's the 450 million notes due July 1, 2019. And also the 500 million due July 1, 2020 is that what you're planning to pay off?

Mark Parrell

That's correct.

Tycho Okusanya

Perfect. Second question, the green bonds congrats on getting that done. Just kind of curious what kind of buyers you're seeing for that specific type of bond and it's generally the type of REITs you're getting on them whether they're more advantageous and just issuing regularly on secured bond?

Mark Parrell

Yes. So I'll cover kind of a buyer base and the differentiation between a green bond and a conventional bond. Obviously with the green bond you do attract a different type of buyer base in part but not in total as what I would say. So in part, this deal that we lasted did probably have 15% or 20% of capital that came from dedicated kind of green institutions that had a mandate from their stakeholders to invest in these types of bonds and that is certainly helpful to the overall demand as you're issuing a bond.

To kind of get to your second point which is from a pricing perspective it is really hard to quantify whether or not you get kind of any differential between the spread on a conventional bond versus a green bond. That being said obviously demand for our paper which has been high given our credit quality and kind of our reputation in the space for fixed income is very good. It's helpful to always have more buyers. It was certainly helpful in the market in the fourth quarter because the market in the fourth quarter was pretty choppy. So it did assist us in that regard.

Tycho Okusanya

That's helpful and then another one for me if you don't mind appreciate the intimation about renewal rates in January and kind of an overall sense of what it could look like this year. Could you just talk a little bit more around kind of new rates, kind of new rent growth and what that's shaping up to be there 1Q overall views for the year?

Mark Parrell

So the projection for the first quarter is that what you're asking on new lease change?

Tycho Okusanya

On new lease change yes, just some general thoughts about for the year that's built into your forecast?

Mark Parrell

So I don't have it broken down by quarter in front of me. I know that in the fourth quarter of 18, the new lease change was down at negative 2.4 and I think as I’ve said on previous call not really thinking that that metric should be looked at on a quarterly basis as much as it should be looked at kind of the annual year-over-year basis.

I'm happy to kind of share it as we get through the first quarter. I don't have it down with me right now as to how we broke that improvement up. My guess is most of the improvement in new lease change that I talked about at the top level is occurring in the second and third quarter as we start to experience pricing power in the peak leasing season but I'm sure there's an improvement over Q4 and that I'm sure we stagger it up as we work through the year and then we take Q4 of 19 back down.

Tycho Okusanya

And kind of -- for 19 over and last 12 months I'd basis are you expecting that number to eventually turn positive?

Mark Parrell

Yes. So for the full year revenue guidance we would expect new lease change to be positive 10 basis points.

Tycho Okusanya

10 basis points. Excellent, thank you very much.

Operator

We will now take our next question from Wes Golladay of RBC Capital Markets. Please go ahead.

Wes Golladay

Yes, good morning guys. Looking at the wage growth you're seeing in your markets I know it's at your property level you’re seeing 4% to 5% but can give us a sense of what you expected for the overall markets that EQR markets and which markets are you seeing the biggest buildup in affordability?

Mark Parrell

So it's Mark. So you're asking less about high like wage growth in general of our residents?

Wes Golladay

Yes.

Mark Parrell

So just to be clear about the data we have is a little bit limited on this. So we only pull our residents, are able to effectively request what to take when they first apply to lease portfolio. They're not as forthcoming afterwards. So we're trying to do renewal negotiations. So we don't necessarily know what's happened. So again it's a little bit of an estimate.

Generally speaking as we see it the portfolio has had higher wage growth by our residents and certainly the best way to look at it is that affordability statistic compared to our rent continues to be pretty well. There's room we think to raise rents the old-fashioned way because of the wage growth and just the fact that in our segment are more affluent renter segments there's room to raise rents because the rent income ratio is not terribly high.

Michael Manelis

And it really hasn't moved much either on a trailing 12-month, we're at 19.3% and our ranges in our market go from 17.5% to 23% with Washington, Seattle and New York kind of being the lowest and like that 17.5% to 18% ratio and Southern Cal averages at the highest at 21.3%.

Mark Parrell

Is that helpful Wes?

Wes Golladay

That is fantastic. That was what I was looking for. So fantastic there and then for your employees now there's a 4 % to 5% wage pressure you are seeing. Is there any markets that stand out or maybe West Coast versus East Coast?

Mark Parrell

No, I would say it's kind of just across the board that we are experiencing that.

Wes Golladay

Okay thanks a lot and stay warm.

Mark Parrell

Thank you.

Operator

We will now take our next question from [Indiscernible]. Please go ahead.

Unidentified Analyst

Hi guys thanks for taking the question and good results. Just a question on the tax cuts in Jobs Act. There was some clarification about two weeks ago on some of the deductions and the path through. Has there been any adjustment on your side? Have you guys gone through all the new legislation and these clarifications, has there been any updates on your side for any implications on that?

Mark Parrell

No I mean there's macro implications and Bob may supplement my answer but there's sort of big and small implications. I mean what the tax cuts did is actually give our residents on average more cash and I think you're asking a more technical question, Bob is going to answer it more general way initially. It gave our residents more cash because they weren't taking, they were now able to take a larger standard deduction. So for us it's generally been okay.

A negative in our markets could be that some of these jurisdictions were in our relatively high state local tax jurisdictions and if those taxes aren't deductible is it harder for those jurisdictions to raise capital to renovate subways in places like New York and DC and things of that nature.

In terms of the technical aspects again Bob and I can go back and forth a little bit with you but generally speaking they have not been terribly meaningful to us. We appreciate the work the industry association did on the pass through stuff. There's some technical depreciation things that still need to be resolved but there's nothing that we're watching with a great deal of concern at this juncture.

Unidentified Analyst

It was more on the technical side, if there was any kind of additional pass through that you could take advantage of. But obviously on the FF&E there's a bit more flexibility on that side as well. Has that created any opportunities for you to perhaps move into furnishing, move into furnished departments in greater scale or are you guys still pretty comfortable where you are?

Mark Parrell

Well, our tax person will be so excited to talk to you about. So certainly we can do depreciation studies if we needed to lower our taxable income and that's why people do these sorts of studies and we've done it before. So you can reclassify some things into a faster depreciable class. What's possible we could do that we're aware that that exists we don't need to do that right now. So it's fine to sit where it is and if we need to do that study we will.

Unidentified Analyst

And just that the last thing is also on legislation but it's more of Boston, Cambridge focused and I know you got a question earlier about some of the rent control concepts that are being thrown out there. The Mayor of Boston recently is trying to impose a cap of 5% on tenants that are over the age of 75 which is effectively a stealth rent control and things like right to purchase and of course Cambridge being what it is, is they're also trying to impose some things like paid relocation expenses for evictions and larger rent increases.

How I mean, as you have more pricing power with your tenants and there's going to be more, there's really more ability to push up the rent. Obviously the government's are going to get more involved particularly in Boston and Cambridge. So I mean, how worried are you about this? Is this I mean, this is something that's going to gain a lot of steam?

Mark Parrell

Yes. Well people thought that in California and we want a resounding victory the industry did through I think a good educational campaign. Once people understand that this is not a productive way to solve a problem you tend to get a better reaction from voters. I mean Cambridge had rent control for a long time and it worked very badly and in fact there's academic studies about it and that was one of the reasons they got rid of it some years ago.

I realized memories are short, the industry does need to stay very engaged. You can expect we will be. We have very senior guy in Boston who is involved with the Boston Apartment Association and the different functions groups in Boston that are involved on the industry's behalf and we will continue to have that conversation. But again, I think enlisting private industry and creating more workforce and affordable housing is the way to solve a problem. I think a lot of the things you mentioned certainly are negative and it's our job to have a conversation about those and they're not just negative for us we think they're just negative in general. I think they're not going to provide more affordable housing. I think they're going to do the opposite over time.

Unidentified Analyst

Agreed, all right that's it for me and I'll say the prerequisite of a stay warm. Thanks guys.

Mark Parrell

Thank you.

Operator

We will now take our final question from Tycho Okusanya of Jefferies. Please go ahead.

Tycho Okusanya

Yes, thanks again for indulging me. 2019 guidance does that have any expectations forecast in regards to any benefits from HQ2 or Google which you did discuss in your comments?

Michael Manelis

No. There's nothing embedded in our guidance either in New York or DC regarding those expansions. I think our view right now it's a positive psychological impact. It reinforces like Mark said in his opening remarks as to why we're in those markets to begin with and I think it's, like I said it's too early to kind of see any economic impact from that.

Tycho Okusanya

Understood, thank you.

Operator

This concludes today's question-and-answer session. I'd like to turn the call back to your host for any additions or closing remarks.

Mark Parrell

Well, we thank you all for your time today for sticking with us and what was a pretty long call and we'll see many of you on the conference circuit over the next few months. Thank you very much.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.