AvalonBay Communities, Inc.

You stand by. Good day, ladies and gentlemen, and welcome to Avalon Bay Community's fourth quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. Following remarks by the company, we will conduct a question and answer session. You may enter the question and answer queue at any time during this call by pressing the star key followed by the digit 1 on your telephone keypad. If your question has been answered, you may remove yourself from the queue by pressing star 2. If you are using a speakerphone, please lift the handset before asking your question. We also ask that you refrain from typing and have your cell phones turned off during the question and answer session. Your host for today's conference call is Jason Riley, Vice President of Investor Relations. Mr. Riley, you may begin your conference.

Thank you, April, and welcome to Avalon Bay Community's fourth quarter 2018 earnings conference call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There's a discussion of these risks and uncertainties in yesterday afternoon's press release, as well as in the company's Form 10-K and Form 10-Q on the SEC. As usual, this press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available on our website at www.avalonbay.com forward slash earnings, and we encourage you to refer to this information during the review of our operating results and financial performance. And with that, I'll turn the call over to Tim Naughton, Chairman and CEO of Avalon Bay Communities, for his remarks.

Tim? Thank you. Yeah, thanks, Jason. With me today on the call are Kevin O'Shea, Matt Bierenbaum, and Sean Breslin. Sean has actually joined us remotely. The four of us will provide comments on the slides that we posted last night, and then all of us will be available for Q&A afterwards. Our comments will focus on providing a summary of Q4 and the full year results, and then the discussion surrounding our outlook for 2019. Before we get started, though, I thought I'd just note that we have chosen to eliminate quarterly guidance this year. You may have noticed that in our release. We've thought about this for some time and have concluded that so long as we continue providing good disclosure that allows investors to assess our business in a detailed way, which we believe we do, moving away from quarterly guidance is better aligned with how we think about the business and will help discourage undue focus on short-term quarterly results. We will, however, continue to update our annual guidance after the second quarter, concurrent with our internal midyear reforecasting process. Starting now on slide four, highlights for the quarter and the year include core FFO growth of 2.7% in Q4 and 4.4% for the full year, which was 80 basis points above our initial outlook. Same-store revenue growth came in at 2.7% for the quarter, or 2.8%, which include redevelopment. For the full year, same-store revenue growth ended at 2.5%, which was equal to what we saw in 2017. We completed $740 million of new development for the year at a 6.4% initial projected stabilized yield and started another $720 million And lastly, we raised $1.7 billion in external capital this year, this past year, principally through asset sales at an average initial cost of 4.7%, with more than half of that being raised in Q4, mostly from the closing of our New York JV, where we contributed an 80% interest in five stabilized assets to the newly formed venture. The next few slides provide a little more detail on 2018 performance, and I think that provides some helpful context to our 2019 outlook. Turning to slide five, as I mentioned before, same-store revenue growth for the year was consistent with 2017. However, some regions saw improvement, while others actually decelerated from the prior year. Specifically, Boston and Northern California showed significant improvement. from 2017, up 60 and 130 base points respectively, while Seattle decelerated by almost 300 pips as that market began to feel the impact of several years of continuous and elevated supply. Turning to slide six, while seeing store revenue growth was equal to that experience in 2017, the cadence of rent growth through the year was not. We saw rent growth accelerate in the second half of the year. outpacing 2017 in Q3 and Q4 by 70 and 120 bps, respectively, benefiting from a strengthening economy towards the end of the year and a cooling for sale housing market. This provides good momentum for our business going into 2019. Moving to slide seven and turning to the development portfolio, we continue to see a meaningful contribution to core FFO growth from stabilizing new development. although at a lesser rate than in years past as we delivered only about a third of the homes as we did in 2017 and completed about half as much in capitalized cost as we had on average in the prior four years. With our starts down by about 40 percent over the last couple of years, we will generate less growth from external investment over the next two to three years than we did in the early and middle part of this cycle when development economics were particularly compelling. Moving to slide eight of the capital that we raised this year, 1.3 billion came from wholly owned dispositions and the sale of 80% interest of the New York JV that I mentioned earlier. The initial cost of the capital activity was about 110 basis points greater than the 2.6 billion that we raised in 2017, where about 70% of that was raised in the form of debt. Since much of this higher cost capital was raised in Q4, at the end of the year in 2018, it will also contribute to lower external growth in 2019. Now to slide nine. Our elevated disposition activity in 2018 did help drive down leverage. At year end, debt to EBITDA stood at a cyclical low of 4.6 times. Our liquidity and credit metrics, as you can see, are in excellent shape as we move into what will be the 10th year of the current expansion. And finally, on slide 10, we've seldom made progress with several of our other stakeholders this last year, including our customers. We were ranked number one nationally among all apartment REITs for online reputation for the third consecutive year. With our associates, we were renamed to Glassdoor's list of top 100 best places to work for the second consecutive year. and by Indeed as a top five workplace in DC. And lastly, with our communities, where our efforts on the ESG front have been widely recognized by several organizations, helping to establish ABB as a industry leader in this area. And with that, I'm gonna turn it over to Kevin, who will provide an overview of our outlook for 2019.

Okay, thanks, Tim. Turning to slide 11, We provide an outlook for 2019. In particular, we expect core FFO growth of 3.3%, same-store revenue, fence NOI growth of 3%. In addition, we expect to start just under $1 billion of new development and complete $650 million of projects. NOI from development communities is expected to be roughly $27 million at the midpoint, which is down about one-half from last year. This is primarily a function of a lower level of completions in 2018 and 2019, and unit occupancies being weighted to the back half of the year in 2019. Turning to slide 12, which summarizes the major components of core FFO growth, as you can see, all of our core FFO growth in 2019 is expected to come from the stabilized and redevelopment portfolio. Internal growth from the stabilized and redevelopment portfolio is contributing around 3.6% to core FFO growth or 170 basis points more than in 2018, and external growth from stabilizing investment and lease-up activity, net of capital cost is not projected to provide a net contribution to core FFO growth this year. The next three slides identify some of the major drivers impacting projected external growth. I'll quickly summarize. And slide 13 demonstrates the impact of a declining level of development completions later in the cycle as we expect 2018 and 2019 completions to be down by about half a billion dollars from the average of the prior four years. Slide 14 highlights the impact of higher short-term interest rates on a billion dollars or so floating rate debt. And slide 15 shows the impact of higher funding costs on long-term capital raised in 2018. Each of these factors is contributing to a decline in external growth in 2019. Some are cyclical in nature, like lower development volume and higher interest rates, while others are more of a one-time impact, such as the mix of capital raised in the prior year. Turning to slide 16, the next few slides provide further context to our outlook for the upcoming year. I won't go into them in detail, but in many ways, 2019 is expected to be a bit of a mirror image of 2018. We're starting the year with a strong economy and labor market, But for a number of reasons, while we expect the economy to remain healthy in 2019, we do expect economic growth to moderate as we move through the year, driven by a number of factors, including a projected slowdown in global growth, the stimulative effects of corporate tax reform beginning to wear off, and heightened uncertainty and volatility surrounding government dysfunction and monetary policy. As a result, we expect corporate profit growth to decelerate in 2019, but remain at healthy levels. Combined with elevated corporate debt and waning business confidence, we may see a slowdown in business investment as the year progresses. The consumer, on the other hand, should continue to propel the economy in 2019. The healthy labor market and accelerating wages are boosting confidence, spending, and household formation. Furthermore, demographics and housing affordability should continue to support the apartment market on the demand side of the equation. On the supply side, we expect deliveries to remain elevated in 2019, at a bit over 2% of stock. And while construction starts have remained elevated over the last year nationally, we've actually seen the decline in our markets, which should provide some relief next year. Construction cost inflation has been particularly acute in the coastal markets, and lenders have begun to take a more cautious stance on the sector. These factors should help constrain supply beyond 2019. So overall, for 2019, we expect the macro environment to remain favorable, and fundamentals to support healthy operating performance in the apartment sector. As noted, slides 17 through 23 drill down on these themes in more detail. We'll let you review these on your own, but for now we'll skip to slide 24, where Sean will touch on demand and supply fundamentals in our markets and the outlook for our portfolio in 2019. Sean?

Thanks, Kevin. I'll share a few thoughts about the demand and supply outlook for 2019. and our same-store revenue expectations. Turning to slide 24, while 2018 job growth of 1.7% or 2.6 million jobs exceeded most forecasts, the consensus outlook currently reflects a deceleration to roughly 1.2% job growth or 1.8 million jobs during 2019. The slower pace of job creation is expected in all of our markets, but is most notable in the tech markets of the Pacific Northwest and Northern California. While job growth is expected to slow, the employed are certainly benefiting from the tight labor market. Wage growth has been accelerating over the past year and is expected to average about 3% during 2019. Turning to slide 25 to address supply in our markets, New deliveries for 2018 came in below expectations at 2% of stock, as the tight labor market and constrained capacity at local municipalities resulted in extended construction schedules. Supply for 2019 is now expected to tick up to roughly 2.3% of stock, driven by increases in northern and southern California and the Mid-Atlantic. In Northern California, the increase in deliveries will be concentrated in San Jose and East Bay, with San Francisco being relatively flat. In Southern California, the increase in deliveries is expected to occur in L.A., with modest reductions in both Orange County and San Diego. And for the Mid-Atlantic, the increase is driven by new deliveries in the district. While we're tracking the deliveries that represent 2.3% of stock, our expectations is that the type of market will again result in some construction delays. Actual deliveries will likely be in the range of 2% by the end of the year. Turning to slide 26, our same store rental revenue outlook reflects a midpoint of 3%, with expected improvement in all of our regions except Southern California, which should perform relatively consistent with 2018. We're starting off the year in good shape. with roughly 1.2% of embedded revenue growth in the portfolio based upon rent increases we achieved last year. And for the month of January, same-store rental revenue growth was an even 3%. In addition, like-term rent change for January was 2.1%, 150 basis points ahead of last year. And with that, I'll turn the call over to Matt to talk about development. Matt?

All right, great. Thanks, Sean. I'll start on slide 27. Our development activity has been moderating as the cycle matures, as you can see on this slide. We've averaged about $1.4 billion per year in new starts in the middle part of the decade, but are expecting about $825 million per year for 2017 to 2019, as good deals are harder to find and capital becomes a bit more costly. This is a good late cycle run rate for development volume for us, which starts in the $800 million to $1 billion per year range, keeping our local teams engaged while preserving our balance sheet strength. As shown on slide 28, we also continue to maintain a land-light posture at this point in the cycle. Since 2016, we have managed our land position to be at or below $100 million, and we will continue to be disciplined about structuring land contracts so that we minimize the risk of carrying too much land on the balance sheet when the cycle turns. At year end, the only significant land position included in our $85 million in land held for development is a site in Orange County, California, where we expect to start construction in the second quarter. In addition to minimizing the drag from land carry, this puts us in a good position to take advantage of any interesting opportunities that might arise if there is any future disruption in the land market. Turning to slide 29, we have structured our $4.1 billion development rights pipeline to provide a great deal of flexibility. These development rights represent future growth opportunities for the company over the next several years. Only about half are conventional land purchase contracts with private third-party land sellers where we would be expected to close on the land once entitlements are obtained. The other half are roughly split between asset densification opportunities where we are pursuing added density at existing stabilized assets, and public-private partnerships, which are generally long-term development efforts that span multiple cycles. These types of projects allow more flexibility to align the start of construction with favorable market conditions. Of the $800 million in new development rights added in the fourth quarter, $500 million came through three new asset densification opportunities located in three different markets. It is also important to note that we are controlling the entire $4.1 billion future pipeline through a very modest current investment of just $125 million, including the land owned and other invested pursuit costs today. And with that, I'll turn it back to Kevin.

Thanks, Matt. Turning to slide 30, as we've discussed before, another way in which we mitigate risk from development is by substantially match funding development underway with long-term capital. This allows us to lock in development profit and reduce development exposure to future changes in capital costs. As you can see on this slide, we were approximately 75% match-funded against development underway at the end of the fourth quarter of 2018. On slide 31, we show several of our key credit metrics and compare these to the sector average for unsecured multifamily re-borrowers. As you can see, our credit metrics remain strong in both absolute and relative terms, reflecting our superior financial flexibility. Specifically at year end, net debt to core EBITDA was low at 4.6 times, unencumbered NOI was high at 91%, and the weighted average years to maturity on our total debt outstanding remained high at 9.7 years. Additionally, as a result of our relative balance sheet strength, we enjoy relatively lower cost of debt funding, which is all the more notable because we issue longer term debt. Finally, on slide 32, Over time, we have fashioned a debt maturity schedule that enhances our financial flexibility by reducing the capital needed to refinance existing debt over the next decade. In particular, with over 20% of our debt maturing after 2028, average debt maturities over the next decade represent about $550 million per year on average, which is only about 1.5% of our total enterprise value. And with that, I'll turn it back to Tim for concluding remarks.

Thanks, Kevin. So, in summary, 2018 was better than expected for Avon Bay. We delivered core FFO of $9 per share, which was 7 cents above our initial outlook. We saw rent growth accelerate meaningfully in the second half of the year. We reduced our portfolio allocation to the northeast and began to make strides in our expansion markets of Denver and southeast Florida. And we reduced leverage to a cyclical low of 4.6 times extended duration and increased unencumbered NOI to more than 90%, as Kevin just mentioned. In 2019, we expect the economy and apartment markets to remain healthy. For us, same-store revenue growth is expected to be 3%, up 50 basis points for the prior year. Growth from external investment and capital formation will be lower than past years due to variety of factors mentioned earlier. And we'll continue to manage liquidity, the balance sheet, and our development pipeline to pursue growth, but in a risk-measured way as we move further into the current economic expansion. And with that, April, we'd be happy to open up the line for questions.

Thank you. Once again, if you'd like to ask a question or make a comment, press star 1 on your telephone keypad. If you find your question has been answered, you may remove yourself from the queue by pressing star 2. And also as a reminder, if you are using a speaker phone, please lift the handset before asking your question. We also ask that you refrain from typing and have your cell phones turned off during the question and answer session. And we'll first hear from Nick Joseph of Citi.

Thanks. Has the final decision to do a condo execution on Columbus Circle been made? And where are you in terms of pre-marketing and how's it gone so far?

Sure, this is Matt. I can answer that one. It is our plan, and the numbers that were provided are based on the presumption that we do move forward with condos there. Really, the next step is going to be opening a sales office, and we expect that will happen probably in April. And then we'll see how it goes. If sales go as we hope, then we would proceed along that path. But, you know, probably won't be, you know, probably won't be until the third or fourth quarter before we'd actually see any settlement proceeds. But that is the plan right now. We have a thin website up where we're just collecting names of interested parties, but we haven't really started active marketing yet. Again, we expect by April we will have a full floor in the tower complete with white glove ready models to show and a full sales office. So that's really when we'll launch.

Thanks. Then how's the leasing of the retail space going? I think with the last release, you were 45% of total retail revenue leased during advanced negotiations.

Yeah, so there's really no further update since the last quarter. You know, we are – those two spaces are spoken for, and we're pleased with that. And, you know, the retailers in general get pretty focused on sales over the holidays. So, you know, not anything more to report since then.

I said, when does the retail NOI begin to come online?

It will start, I believe, in the second quarter, late in the second quarter, when we turn the first spaces over to those first couple tenants for their build-out.

Thanks.

Next, we'll hear from Rich Hightower of Evercore ISI. Hey, good morning, guys.

Hello. Yep, can you hear me?

Yes, very fine. Thank you.

Okay, yeah, thanks. So a couple questions here. Can you – maybe this is one for Kevin. Could you kindly break down – there's a billion dollars here. It says new capital sourced from a variety of activities included within guidance. Can you – you know, I see $70 to $80 million of that as condo proceeds, so it sounds like you're baking in some level of certainty, at least with regard to that question. line item in that billion, but then between other asset sales and then other capital markets activities. Can you help us understand the detail behind that number?

Sure, Rich. This is Kevin. You know, there's a – on slide 15, you may see a little bit of the breakdown on the external growth. So, as you pointed out on our earnings release, page 23, we have on the top right some summary information with respect to our sources and uses for the year. You know, essentially, there's about a billion dollars of external capital. We expect to source a portion of that is, you know, broadly speaking, there's two pieces of it right now, disposition equity, if you will, which includes a modest amount from condo sales and the balance from wholly owned dispositions primarily, and then unsecured debt. So that's the capital plan. It's just really capital from those two sources, selling assets, if you will, and selling debt. What we ultimately do, of course, will depend on how the capital markets and the real estate markets and our business needs evolves over the year. But the current capital plan is a blended mix of debt and equity with the equity coming from asset sales and a little bit of condo sale activity.

Okay. Thanks for that. And then I guess maybe on a related note, you tapped the ATM the last quarter roughly around where we are today in terms of the stock price. Can you tell us how that source of equity – factors into how you view different sources of capital?

Sure. As you know, we sourced $1.7 billion of external capital last year. A little less than $50 million or 3% was from the common equity market. So it's been a pretty modest source of capital for us lately. In fact, over the last three years, we've only sourced $150 million of equity out of $6 billion of external capital. So 97% of the activity has been from asset sales and unsecured debt. You know, we're at the part of the cycle where, you know, that's a reasonable expectation is that we would be primarily looking at the unsecured debt market and the transaction market for equity. In terms of the ATM usage last year, you know, it was a modest amount. And essentially what we look at is, you know, among other factors, kind of the liquidation costs of selling assets and what that involves from a liquidation interview, if you will, relative to the alternative selling common equity. And we, of course, try to be thoughtful and judicious in raising common equity, given the sensitivity that some investors have to that topic. But ultimately, you know, we're making a choice in what we think is mathematically the superior choice from a capital allocation point of view, taking into account the alternative selling assets, not merely from a going concern point of view, but just taking into account the liquidation costs, which from time to time can include Prop 13 costs and tax abatement costs. And going forward, we'll wait and see what the capital markets provide in terms of alternatives and what the real estate markets provide in terms of transaction pricing and what our business uses need. But as I noted before, our capital plan currently contemplates looking to the unsecured debt markets and the transaction markets from a planning point of view.

Okay, got it. That is helpful. And then one quick last one here. You know, I appreciate that development starts on a trailing three-year average basis or down versus the prior sort of era, but starts are ticking up year over year in 2019. So is there anything specifically driving that with respect to specific projects in the pipeline, or is there anything that maybe characterizes a more macro view on development that's driving that, just any color around that? Yeah, Rich, it's Matt.

It's basically driven by one project, a large project, the one I mentioned that's the one land position we own in Orange County in Brea. We thought that was actually going to start last year, and if you look back to our guidance for last year's start, the volume was higher. That project is now likely to start in the second quarter, so it's just basically you move that one project and it changes the volume from one year to the next.

Yeah, Rich, just to add to that, Tim, I think we've talked in the past that we felt comfortable being in the 800 to a billion range, that's a level which we think we can start and basically do it on a leveraged initial basis based upon what the balance sheet capacity is when you look at a combination of free cash flow, additional debt capacity, and amount of asset sales that we're likely to do in any given year before sort of having to trigger any tax-related distribution requirements. When you look at it over a couple of years, it's kind of consistent with that 800 to 900 million range.

Got it. Thank you.

Next we'll hear from Jeffrey Spector of Bank of America.

Good morning. Maybe just a big picture question on strategy possibly for Tim. Just trying to think about developments and the comments on fundamentals are healthy. Yields remain strong on development. You know, maybe specifically we can talk about, I guess, rates. Rates are flattening. Maybe your cost of capital will remain flat. And all the forecasts have been wrong, I guess. How do you balance between, you know, the healthy fundamentals, again, all the forecasts for, you know, higher rates or real weakening economy have been wrong. How do you balance that from what you're actually seeing in your markets and how tempting is it to potentially even pick up development or take on more land? Just trying to get a feel for that balance when it comes to your strategy.

Well, Jeff, yeah, thanks for the question. I mean, some of it's strategy and some of it's opportunity, right? In terms of adding land to our balance sheet or, you know, significantly increasing level of development rights beyond maybe some of the densification opportunities that you know, Matt mentioned the opportunities that just isn't that compelling to really ratchet that up relative to maybe early in the cycle. You know, I'd say the way we're managing it really is really kind of how we're thinking about risk. We still think it's profitable as long as you match fund it, which we're trying to do. Even the deals that we're starting this year, we think they're sort of comfortably clear cap rates by 150 basis points plus. And as long as we're match funding, we're basically bringing that capital you know, onto the balance sheet, and then it just becomes a matter of execution. As long as it's match funded, it shouldn't look that much different than your stabilized portfolio, other than the execution risk behind it, which, you know, is something, obviously, is a competency of the company. So, and then lastly, it's just, you know, making sure that we maintain as much optionality as we can, not much land, trying to really manage pursuit costs carefully, If we get caught in the downdraft, we'll have some options. In the last cycle where you had a pretty severe correction, in many cases we were able to salvage those development opportunities in part because we didn't own the land and we're able to go back and in some cases renegotiate the basis. But it's really just about maintaining flexibility around the development pipeline. But I think just given where we are, from a capital market standpoint, we're not, over the next two or three years, it's not our intent to rely on the equity markets to develop. There may be opportunities from time to time to tap the equity markets in the ATM, but late cycle, typically, I don't think it's a good strategy to rely on the equity markets to be an open and available price at a level where it's going to be, we're going to be able to accrete a lot of value to the development platform.

Okay, thanks, Tim. That's helpful. And I guess just if we can turn to supply, I don't believe you discussed supply by market. Could you talk about that a little bit? And again, one of your peers commented that they expect New York City supply to be down 50%. Can you give a little bit more details on supply in your various markets?

Sure. And I'm going to ask Sean to jump in on that. Sean, you want to take that?

Yeah, Jeff, I'm happy to take that one. You know, in terms of the various regions, I can give you kind of a high-level overview and then, you know, talk about the distribution in specific markets if you're interested. But in New England, which is pretty much Boston, we are expecting supply to tick down about 40 basis points. It was 2.9% of stock in 2018. We're expecting it to be closer to about 2.5%, which is roughly a reduction of about 1,100 units. In New York, New Jersey specifically, you mentioned that region overall is expected to be relatively flat at about 1.9% of stock. New York City itself we also expect to be relatively flat on a year-over-year basis in terms of deliveries being around . Relates to the comment you made about reductions in specific parts of New York City. Just so you know how we look at it, we look at it in terms of the aggregate amount of supply delivered across New York City as opposed to potentially others may only look at it relative to what they think may impact them. We try to look at it more in an aggregate fashion, so sometimes that leads to differences in the way people talk about supply. So that's specific to New York, just so you know as well. In the Mid-Atlantic, I mentioned in my prepared remarks, we're expecting an increase in the Mid-Atlantic. That's all pretty much concentrated in the district, where all that supply is coming online. We're pretty flat in suburban Maryland and Northern Virginia. Seattle, the Pacific Northwest, so 4% year over year, both 18 and 19, pretty much concentrated in the urban infill markets in and around downtown Seattle. whether it's First Hill, downtown Seattle, or South Lake Union as an example. That's where the heavy amounts of supply are located in Seattle. There's not as much in places like downtown Bellevue, Redmond, and the north end of Seattle, which has been helpful to us. And then in Northern California, we are expecting it to tick up the most in Northern California from 1.6% of stock to 2.7% of stock in 2019. That's all coming, as I mentioned, in both San Jose and in the East Bay. It's relatively flat in San Francisco in terms of deliveries, so should be pretty much at par there. And in Southern California, it's taken up about 30 basis points from 1.4% of stock to 1.7%, which is about 4,200 units. All of that is in the L.A. market, primarily downtown L.A., kind of mid-Wilshire, Hollywood, those submarkets primarily. a little bit in Warner Center, Woodland Hills, as compared to Orange County and San Diego, we're expecting supply to come down and actually both of those markets. So that's sort of a high level overview. And if you want to, you know, talk about specific sub markets, happy to chat with you about that offline as well.

Hey, Jeff, just one thing that as you probably hear from Sean's comments, a lot of it is continues to be concentrated in the urban sub markets. This is probably the last year we're expected urban to basically outpace suburban supply by about two times. In our markets, you know, that 2.3 basically breaks down to about 1.7 in the suburban markets and about 3.2% in the urban submarkets. So it's almost about twice as much. Next year, we expect that difference to narrow quite a bit.

Great. Thank you. Very helpful.

Nick Ulico of Scotiabank.

Oh, thanks. Good morning, everyone. A couple questions on the condo project. On attachment 14, you give some details there, which is helpful. I guess the question is, when you talk about the projected gross proceeds from sales expected to be $70 to $80 million, is that the total after-tax profit for the project?

No, Nick, I think this is Matt. I think that's just the number that we have in our budget for settlement proceeds this year. It's cash in the door, basically. Obviously, that's going to vary a lot based on when the settlements actually happen, how sales actually go. We just had to put something in as kind of an unexpected case for starters for budgeting purposes. If it winds up being more or less, then we may raise more or less capital from from other sources, as Kevin mentioned. Okay.

Yeah, I think he said in the past that you expected about $150 million of incremental value above your cost on the project, which is on a pre-tax basis. Is that still a good number to think about?

Yeah, Corey, that was really about what we think the building is worth as a condo building versus a rental building. not necessarily relative to our basis, although we do think it's worth more than our basis. But we are saying that based on where we thought the condo values would settle out, if you looked at what the total sellout would be of that relative to what it would be worth as an apartment building if you leased it up and you put a cap rate on it, we think that that difference is about $150 million. That is a before tax number.

Okay, so do you have any number you could share on what the ultimate NAV benefit is, assuming you hit your sale plans on an after-tax basis?

Well, Nick, this is Kevin. I mean, I think it's all premature at this point. We've yet to even commence marketing. So we'll see over time what happens in terms of the sales we close, not only this year, but in the succeeding years when most of the sale activity would occur. If you take... Matt's comment about $150 million pre-tax value associated with the residential or condo portion, you just have to apply kind of a tax rate to that, which, you know, for rough numbers, assume a third is taxes. And then the balance, call it $100 million, is what we would hope to achieve on a pro forma basis in terms of net profit after taxes to our shareholders when all is said and done, when we finally sell everything out. But, you know, We're early days in this, and we'll see what happens when we go down the path and market this and see if this is a path we ultimately want to pursue. And then, if so, what comes from that effort.

Okay. And then in terms of the FFO impact this year, the guidance is assuming that this project is a $0.04 drag on FFO. Is that right?

So just to walk through the pieces for the sake of clarity, if you look at page 23, attachment 14, we lay out sort of the bottom right sort of the core FFO adjustments related to Columbus Circle or 15 West 61st Street. So as Matt noted, we only have a modest amount of sale activity in our forecast for this year, $70 million to $80 million that would generate an anticipated amount of gains of $8 million that would be included within NAREID FFO, but then excluded when going to core FFO. So you see that negative $8 million shown on attachment 14. There are also two other line items that are worth talking about here. The first is expense costs incurred related to condominium homes. Those represent basically, you know, marketing costs and operating costs associated with selling condominium inventory. We'll incur those. They'll be part of EPS and NAREID FFO, and they will burden those items. But then we will add them back and carve that out of core FFO. That's $6 million. And then there is the final line, which is the estimated carrying costs of unsold inventory. Essentially, when we complete this project, you'll have roughly $400-plus million of condominium inventory that we will have put onto our balance sheet at a cost. We'll continue to carry those costs. And so we will be carving those costs out of core FFO and adding it back. So essentially what we're trying to do with these adjustments is recognize that this is a different business line. It's not a traditional REIT activity. And trying to present our core FFO in a manner that shows our operating performance year over year on kind of traditional REIT multifamily rental activities and looking at this plump and circle activity as a discrete business and carving those costs and gains out and treating them differently from a core FFO point of view.

Right. Okay. That's helpful. But still, the net result here is it looks like a four-cent negative impact to your reported FFO in 2019. Is that right?

No, it's just the opposite. Adding it back. Okay. Look at those items as being sort of at NAREID FFO to Core FFO reconciliation with NAREID FFO at the top. So adding back to NAREID FFO $6 million of expense marketing costs, reducing $8 million of gains, and then adding $8 million in imputed carrying costs for unsold inventory for a net addition to Core FFO of $6 million or 4 cents. So the net positive impact going from NAREID FFO to Core FFO when taking into account those three line items is $0.04.

And Nick, our guidance difference was $0.05 between Core FFO and NAREID FFO, so basically this is for that $0.05.

Yeah. Okay. All right. I can follow up offline. Thank you.

Our next question comes from Rich Hill of Morgan Stanley.

Hey, good morning, guys. I want to maybe spend just a little bit more time on your development pipeline, recognize why development might be coming down late cycle and clearly see it as prudent. But there's still likely some markets that need new supply of apartments. So I'm curious, when you're thinking about your development pipeline, what land you have under option, where you're already developing, how do you sort of think about that relative to your existing portfolio?

Hey, it's Matt. I'll try and take a shot at that one. It is somewhat bottom-up, as Tim was mentioning, so it really starts with where are we seeing the best risk-adjusted opportunities? Where are the economics of development still favorable? Typically, that's going to be a wood-frame product at this point in the cycle. I don't think we have any – all of our starts planned for this year are high-density wood-framed product, and everything we started last year except one fit that description as well. Typically, they're in kind of infill suburban locations where demand is strong, and there are more supply constraints than the urban submarkets, so it takes a little longer to get through the process, and that tends to meter out supply in a more measured way, which is one reason Those sub-markets aren't necessarily seeing the same pressure on rents, although urban markets actually have seen rents rebound here recently a little bit. But generally speaking, rents have held up a little better over the last couple of years. So, you know, we are seeing some of the suburban northeast deals still pencil out. This past quarter, we added a development right on Long Island. It's probably a two- to three-year entitlement process. You know, those types of deals tend to be pretty resistant to the cycle, so still be favorable. And then we're seeing opportunities in our own portfolio, locations where we already are. And again, as I mentioned, we have six densification development rights now, which is a billion dollars, in locations that we love where we have the opportunity to do more over time. It's going to take a while to get at those. They're complicated from an entitlement point of view, but we have one in Redmond. We have one in Mountain View. We have one in suburban Boston. So those are great things. where the economics are likely to work through most market cycles. And then we are also trying to find opportunities in the expansion markets, and we started a deal in Florida last year in Doral. We have our first ground-up development right in the Denver market, which is in Rhino, which is kind of a very hot neighborhood outside of downtown there, but it's a wood-framed product that we hope to start this year. those are kind of the places where it's still making it through the screen.

Yeah, Rich, I think sort of probably the three areas where we probably, where we haven't been as active because of just psychodynamics. It's been the Bay Area. We just haven't, you know, this land and construction cost generally doesn't make new development feasible from our standpoint. Densification is a different kind of opportunity. So within our portfolio, we've been able to do that. Seattle, I think, is where we haven't been that active in the land markets for the last three years. And then most urban submarkets, again, or concrete generally doesn't pencil later in the cycle. So those are, you know, we try to blend sort of where we want to be, where we want to be from a portfolio allocation standpoint, use development to help us get there, but to recognize there are times in the cycle where something just doesn't pencil, it just doesn't make this, it's just not as good a use of capital as other places.

You got it. What I'm ultimately getting at, it sort of sounds like your development pipeline is a nice to have and not need to have. I was struck by your growth being driven by a stabilized portfolio with no contribution coming from new investment activity. So it sounds like the development pipeline is a nice to have. It's in areas that you think really still need supply, but even if the development went away, you know, as we start to think about 2019 and beyond, your stabilized portfolio can grow consistent with peers. Is that sort of fair in the way you're thinking about it?

Our outlook, I mean, I think our outlook for this year probably is somewhere in the middle of where kind of our peers are, just glancing at it real quickly. So we're in 20, 25% of the U.S., which a lot of our peers are in the same market. So, you know, the notion that we might perform similar in terms of the same sort of basis, I think, is a reasonable expectation. But on the – you know, I would say on the development, I wouldn't say it's a nice to have, but I think we think it makes sense to have still at this point in the cycle, albeit, you know, at a lesser amount and, you know, being judicious about where you're deploying that capital. We think we – this year is a really – is an anomaly just for what's happening both on the on the delivery side and the capital that was raised in 2000 and 2018, but we still think it's accretive both to, on a go-forward basis, accretive to both NAV and FFO, and particularly as you consider sort of reinvesting, you know, free cash flow, which it doesn't have at least an initial, you know, financial cost to it, accounting cost to it. So we think we can still grow accretively both from an earning standpoint by, you know, continuing with our development pipeline, the opportunity set that we see.

Great. Thanks, guys. I appreciate it.

Austin Werschmid of Quebec Capital Markets.

Yeah, thank you. Good morning. You guys pointed out that your cost of capital in the past year is up about 110 basis points versus 2017. I was just curious, what are you factoring into guidance for the billion dollars you've assumed in your capital plan in 2019?

Austin, this is Kevin. We've never commented on that before. We actually typically don't comment on the capital markets. So by even showing the 50-50 blend of asset sales and unsecured debt, we're doing something we've never done in our 25-year history. So You know, we'd be tempted to invite you into our budget process, but we're essentially assuming that we're going to achieve kind of market rate execution on transaction activity and, you know, unsecured debt issuance over the course of 2019.

Kevin, on the debt, we typically just look at the forward curve and make some adjustments off of that. Yep.

Thanks, appreciate that. And then just curious what the attractiveness today is for redevelopment, as you have seen rental rate growth improve, albeit gradually, and given the decrease in development starts moving forward.

Yeah, thanks, Austin. Sean, you want to take that?

Sure, happy to do so. Yeah, Austin, I mean, development, excuse me, redevelopment has been pretty active for us. You know, we invested almost $200 million in the past year across about 7,300 homes. A chunk of that related to the rebuild at Avalon Edgewater. It's about $70 million, but still around 7,000 units that we developed last year. And in terms of planning for going forward, I'd probably think about we're going to spend somewhere in the range of, you know, $150 to $200 million a year over the next couple of years. on redevelopment activity. And then beyond that, it'll probably thin out a little bit. But the returns have been compelling, and the opportunity set has been something that we're comfortable with. So, you know, that's kind of where we are.

And how do you think about the returns on those? And is the majority moving forward more kitchen and bath type opportunities versus, I guess, the redevelopment and edgewater, a little bit of a different animal?

Yeah, Edgewater is certainly unique. That was, you know, sort of a one-time thing. The rest of it is a combination of either full-scale redevelopments where we're doing not only the apartment homes, but we're doing the common areas. It includes some projects that are just purely large CapEx projects that really there's not generating, you know, any kind of incremental return. It's just CapEx. And then there are other projects, which we call apartment-only, which are just touching the apartment home. And so when you look at the redevelopment activity and the apartment-only activity, typically we're seeing returns that are sort of in the 10% on capital type range based on the enhancements that are being invested in the building. And, again, as I said, the CapEx side of it is probably something you should just underwrite basically zero. But in terms of apartment-only and redev, they're generating nice returns.

Great.

Thanks for the time. Yep. Joe Bobbin of Baird.

Hey, good morning. Presumably looking out to 2020, as more of the condos at Columbus Circle are sold, the gains on sale number will increase. And I think that the positive add-back between Nereid FFO and Core FFO should go negative, I'm assuming. While the apartment NOI that you would have been getting from the project is replaced with these gains which would be backed out of core FFO, I guess the difference is now you have more cash coming in that can be reinvested. Do you think the reinvestment of that cash will occur rapidly enough to offset the dilution to core FFO that would be happening in 20 to say if you just sold the condos and held that as cash, if that makes sense?

Yeah, Drew, this is Kevin. I'll make a couple comments. I don't know if Tim may want to add on top of that. So essentially, you know, to the extent we generate gains on selling condominiums, that will boost near-read FFO. And of course, as it would be true for other real estate gains, we will exclude those gains when computing for FFO. From an underlying cash point of view, you know, certainly – I'll speak where we would prefer to sell through the condos quickly and receive the capital back so that we can reinvest it and generate a return on that. And then that return, of course, will, you know, flow through naturally as any source of capital would in our earnings. In the meantime, while we have inventory outstanding in terms of capital, you know, we've created these condominiums. We're marketing them. We're bearing a cost for having created those condominiums, but we've not yet sold them. Essentially, that creates kind of an inventory cost, if you will. And we are adjusting for that, as you can see, on attachment 14, where we have $8 million in PUD carrying costs on the capital associated with the unsold inventory condominiums that we're calculating at our corporate unsecured borrowing rate, which is about 3.7% today. So essentially, that's an add-back to core FFO from NAREID FFO. during the pendency of the sale process while the inventory is on our balance sheet and not otherwise earning a return. Now, Tim, if you want to add.

Yeah, just, I mean, obviously as we sell, the amount of unsold inventory goes down, and so that carrying cost adjustment would go down with it. And secondly, Drew, I would just think of this as just more disposition capital. And so it just means we're going to sell less assets than we otherwise would. So in terms of how quickly it gets deployed, it would get deployed presumably as quickly as any other assets that we'd sell. So I don't know that you need to really think differently in terms of In terms of how you model, it's just a source of capital and cash, as Kevin mentioned.

That's very helpful detail. The other question I would have here is, if you look at, at least on my numbers, total NOI for 2018, not same store was up just over 6%. Corporate overhead, property management, investment management expenses all increased. And this is on adjusted for severance and things like that, but in the double digits. And then based on guidance for 19, it looks like that rate moderates quite a bit. So I'm guessing were the large investments internally kind of sourcing some of these development projects or things like that in 2018 that are kind of explicitly going away in 19? Or is there anything kind of going on behind the scenes there causing that variability?

Well, in terms of 2018, there are a number of factors that kind of drove overhead over costs up. You did have, as you may recall, rent advocacy costs that were included. in PMOH, which is part of the overhead that's referenced in our attachment 14 for our outlook. G&A increased for a number of reasons. Compensation was part of it, but there were some settlements in state and sales use tax accruals. And then there's some severance costs. And at the same time, there's also been historically some investment in some strategic initiatives, which will certainly and are bearing fruit on the operating side, as Sean could speak to. So there's a number of drivers of growth that we've had over the past couple of years that are starting to abate, which is why you're seeing that relative decline in year-over-year growth in overhead, which I think is about 2.7% based on the math from Detachment 14.

Okay. That's all very helpful. That's all for me.

Thank you. John, Kim with BMO Capital Markets has our next question.

Thank you. So you have development starts picking up this year, but there's still a noticeable gap between the construction cost growth rates and rental growth. So I'm wondering if you believe that gap will narrow as you go through the development pipeline, and if not, how will that impact yields?

Sure, John. This is Matt. It's a good question, and certainly one we've been watching. It does feel like construction cost growth in some markets has moderated somewhat. And again, this speaks to the mix of business. As Tim was mentioning before, we've signed up very few new development rights in Northern Cal and Seattle over the last three or four years, and we have very few starts in those two regions. In fact, we don't have any in Northern Cal last year or this year. And that's really a function of the reality that those are the markets that have seen the most aggressive growth hard cost growth relative to their rent growth. So it does affect the regional mix. And again, I mentioned, you know, some of these northeastern markets, a lot more stable, and the gap between construction cost growth and rent growth is not nearly as wide. But it does put downward pressure on on margins. And you know, that's one reason the volume is down.

On your dispositions that you that you executed last year, it was the highest amount that you've sold the lowest cap rate, but also you had the lower IRRs compared to what you've achieved historically. Is there anything unusual in what you sold last year that brought down that last figure?

Yeah, this is Matt again. It really is kind of a mix from one year to another, so I wouldn't kind of infer anything from, you know, kind of the basket that happens to be one year versus another. The one thing that we do tend to see as it gets later in the cycle, there's probably more pressure on us to sell assets with a little bit lower tax gains because we've just had, you know, kind of a long cycle of realizing gains and that starts to put pressure on our dividend coverage. So again, you know, there's plenty of other assets we could sell that would have higher returns, but they might generate enough tax gains that it would require special dividends. So that's definitely more of a consideration later in the cycle. And then also, to some extent, you know, we start looking for assets which maybe are a little bit more difficult in terms of the execution. and calling some of the ones that maybe weren't our greatest successes where it's easier to do that in a very strong sales market like what we've seen recently.

Okay, and then a final question. I guess, Tim, you mentioned in your prepared remarks at the beginning that you're moving away from quarterly guidance, and I'm wondering if it ended up being too distracting to manage that quarterly number. And generally speaking, what do you think about quarterly reporting and whether or not that's completely necessary.

Well, I don't have a view necessarily on quarterly reporting. We intend to continue to issue quarterly reports. You know, it really comes down to how we kind of manage the business. When we talk amongst ourselves and, you know, to our board, we're not talking about managing the business to what's happening in the quarter and trying to minimize variances relative to our budget or explain variances relative to our budget on a quarter-by-quarter basis. When it comes to revenue, we're looking at that daily and weekly. I mean, but when it comes to sort of the overall earnings, there's just a lot of noise from quarter to quarter. And just we don't think it really serves a great purpose ultimately for investors to be trying to, you know, always trying to, you know, sync up and explain and reconcile. what we think oftentimes is noise. So as much as anything, that's what's driving it.

Thank you for your thoughts.

Alexander Goldfarb of Sandler O'Neill.

Good morning. Good morning down there. So two questions. Just first on the condo project, Columbus Circle, or I guess 15 West 61st. Just with some of the recent articles about sort of weakness, I mean, today in the journal they had the article on weakness under the $5 million price point. Can you just talk a little bit about how you guys are thinking about pricing for the project now versus maybe last year when you were contemplating switching it to condos? And then how much flexibility do you have once you set price or it's sort of a fluctuating factor as you go forward with the sales process to try and you know, hit that target number of units that you want to sell before fully committing.

Yeah. Hi, Alex. It's Matt. It's definitely a dynamic process. So, you know, we can change pricing, you know, weekly. You know, you have to file your offering plan with the Attorney General with your initial pricing. But once you've done that, obviously, you have the flexibility to meet the market however you choose to do so. And that's just like we change our rents every day. We'll be watching that very closely once we launch for sales. Yeah, the market is definitely, as we talked about last quarter, it's softer than it was called 18 months ago. And the slowdown had more been at the higher price points. There might be some softness now, a little bit more in the moderate price points. So I think most markets... Experts would tell you if the product had been available to sell and settle in, you know, 17, it would probably sell for a higher price than what it would sell today. But the price we believe it will sell today is still very attractive relative to its value as a rental building. But again, you know, we'll know a lot more in probably four or five months once we actually get some sales activity underway.

Yeah, Alex, I don't know if you know this or remember. I mean, a little over 80% of the units are actually scheduled to be less than $5 million, where, as Matt mentioned, it's kind of the higher end that's been feeling more of the softness. And one of the things that we like about potential condo execution here is we think it's a unique offering, particularly in that sub-market where units tend to be larger and much more expensive in terms of total price. So we think we're going to be competing against, you know, other neighborhoods that may be offering a little bit larger unit, but not near the location and lifestyle amenities that this site has. So, it's, you know, ultimately the market will determine whether that's, you know, that strategy, you know, is a successful one, but we do think it's positioned relatively uniquely to everything else that's out there. Plus, it's going to be available versus, you know, buying off the plans, so.

Right, Tim. Yeah. And that's why I asked the question, because the journal article referenced that under 5 million price point is being, you know, softer. The second question is on the development, sort of going back, one of the earlier questions was on sort of the external development is all the benefits that are offset by the funding. So assuming that, you know, the economy sort of stays as is, would it make sense to curtail the development pipeline even more? I'm just thinking from a risk reward perspective, if you're not being paid for it as far as boosting earnings growth from a risk perspective, why not curtail the development program even more than where it is right now if it's not adding to your earnings growth?

Alex, I think I did mention earlier, this is an unusual year. This is a unique year, and I mentioned it to an earlier question that we do expect it to add to our earnings growth and NAB growth, that we do see it as accretive, and there's just some the unusual things about the cadence of deliveries this year, it's only generating the midpoint development NOIs is $27 million, which is half of what was generated the prior year. And a lot of that has to do with a combination of Columbus Circle, but mainly the cadence of deliveries this year, which is largely back half-weighted. So a lot of that capital is already raised and was raised in Q4, was raised in the form of dispositions, was raised at, you know, as I mentioned, sort of at a 5%. So I think there's some unique you need things happening. And then if you look at what's, quote, unquote, unfunded or not match funded, it's pretty small relative to our remaining liquidity where we have, you know, zero out on a billion and a half line. So we think from a risk standpoint, it's already pretty measured.

It's remarkable, actually, if you look at attachment nine, the development attachment, I don't remember the last time only three of those deals are basically in lease up right now. And of course, just starting out of 21 deals, it's just an odd coincidence of the schedule.

Okay. Thank you.

Hardik Galal of Zellman and Associates.

Hey, guys. Thanks for taking my question. Just on the Meadows acquisition, I see that's a 2018 build in a relatively suburban sort of area. Do you see a situation in the future where there's a lot of merchant-billed sort of product coming on the market that you could acquire at, you know, a small premium to replacement cost and you would rather do that than develop ground up if it's in the right areas?

Yeah. Hi, Arik. It's Matt. Definitely we're doing that. If you look at what we've been buying in Denver and in Florida, and even the one deal we bought last year near BWI Airport, They all fit that description. They were brand-new assets built by merchant builders where the premium to replacement cost was pretty modest. I don't necessarily view it as an either-or. I think it's kind of an and. But those are deals where, you know, certainly on the development deals we're doing in those markets, we're looking for a bigger margin, obviously, because there's more risk involved. But we think that's a great way to add to our portfolio, and certainly we're doing more of that than we are of development in those markets, but we're doing some of each.

Could there be a tradeoff, though, in the future where you see more of these opportunities come up and you pare back development and maybe put that capital in acquisition? And I understand the cadence is different because with development, it's more a little bit at a time rather than acquisition. You need to come up with the capital right away.

Yeah, I think it's a hard one to answer. Not every cycle is the same. This cycle was particularly attractive from a development economic standpoint. Some cycles may not yield quite the development opportunity as others, and therefore you might be inclined to allocate more capital to acquisitions on a risk-adjusted basis. So if the returns aren't there on a risk-adjusted basis, then we're not going to allocate capital allocate capital towards that activity. We'll allocate it somewhere else or not deploy it, raise it and deploy it in the first place.

And just lastly, thanks for indulging me. On the Harrison deal, could you highlight how you found that deal and what the process was like and why you picked that specific location?

Sure. That was actually a public-private partnership. We broke out the dev rights that way. for the first time, but that would have been in the public-private partnership bucket.

With MTA.

If we had been showing it that way for the last couple of years. So it was the MTA. It's literally at the train station in Harrison. It was a long process. I think we've been working on that deal for at least five years. And, you know, there's a significant amount of retail there as well as residential. Very infill, very high barrier to entry location in Westchester County. Honestly, we had hoped that there might be more of those at those train stations, but it's just a very, very difficult process between the state and the local jurisdictions, so I'm not sure how many more of those we're going to see.

Perfect. That's all from me. Thanks.

As a reminder, this is Star 1. If you would like to ask a question or make a comment, next we'll hear from Tayo Acasana of Jefferies.

Good afternoon. Question. Do you guys put any impact of Amazon HQ2 into your numbers for 2019 guidance? And if you don't, can you just kind of talk generally about how you think about how that could impact numbers?

Yeah, this is Tim. I mean, certainly when we look at sort of job growth, you know, projections, we rely a lot on third parties and certainly to some extent they're incorporating, you know, a little bit of the Amazon effect. I think, honestly, I think potentially the opportunity may be more in Virginia than D.C. properties, maybe some of the knock-on effects of just Amazon coming in. I think a lot of other technology companies that are already doing it, whether it's Apple or Google, Facebook, you know, are looking well beyond, you know, Seattle and Silicon Valley for talent and establishing beachheads and, you know, other markets where there's a depth of technology talent. So I think, you know, I think the HQ decision just sort of validated. And when you look at where the finalists were and ultimately where they chose, where they thought there was depth of talent and, you know, ultimately it would be more of a magnet, you know, I think for potentially other technology companies. So We'll see. I think Nashville is a huge winner in this as well. By the way, it's only 5,000 jobs, but I think it might have as big of an impact, maybe even bigger in that market, just given the size of the market.

Gotcha. And then 2019 guidance, while you don't explicitly talk about acquisitions, could you just talk a little bit about kind of what you may expect to see and then, too, if the focus is still on building your presence in Denver and Florida?

Yes, Matt, exactly. You know, we'll We'll see. We don't specifically include any number for acquisitions in our guidance just because it's so unpredictable. To the extent we find deals we like, then we will fund that likely with incremental dispositions, which is what we've been doing the last couple of years, and sometimes we do that through tax-free exchanges. So, you know, neither acquisitions or dispositions are reflected in the capital plan per se, but our primary focus is going to continue to be Denver and Southeast Florida.

Gotcha. So the $1 billion you have, is that all in guidance for sources of funding? That's all just condo sales?

No. So, Ty, this is Kevin. So essentially, conceptually, we sell assets for one of two reasons. One is to fund development. The other is, as Matt related to kind of a pair trade basis to help fund acquisition activity. We don't have any acquisitions in our budget for the year. And so, correspondingly, we don't have any related disposition activity paired with acquisitions in our capital plan. However, the external capital of a billion dollars, which represents roughly a 50-50 blend of disposition equity from selling wholly owned assets to fund development and unsecured debt is what you see there. So, we do have disposition activity related to funding development.

Okay, perfect. And then one more, if you could indulge me. The joint venture, could you just talk about the fee structure associated with that, just trying to get a sense of if we should be building any meaningful fee income into our numbers for 2019?

There are fees, primarily it's a property management fee. There are some other minor fees around kind of deploying renovation capital, but I mean, the way I think about it is there's a kind of a market rate property management fee that will be added in.

And I guess from a guidance perspective, how do we kind of think about how much it could be made, forecasting that?

I'm sorry, in terms of what was the question again?

In terms of 2019, how would you kind of think about quantifying just how much fee income could be coming from that?

So essentially we sold 80% of $760 million or $610 million, which will generate a certain amount of revenue. and against which we'll generate a property management fee of call 3%. So that's one way to think about the incremental fees associated with the New York City joint venture. You know, it's a moderate amount of fees, but it's not akin to the asset management platform that we had where we had a full suite of fees that were property management, asset management, and so forth. But it does provide, you know, good economics for the activity we expect to do for this venture. Okay.

Yep. That makes sense. Thank you.

Next, we'll hear from John Pawlowski of Green Street Advisors.

Thanks. Kevin, just two quick ones for you. Your comments that lenders are becoming more cautious on the sector, can you provide more details? Because everything we heard at the NMHC meeting was that lenders love multifamily.

I think on a relative basis, you're right. I think probably both comments are probably true. It's I think there's increased caution as you're in the later stages of the cycle that you want to make sure that with respect to non-recourse financing that you're not over-levered, that there's appropriate equity support, that there's not a lot of flexibility on terms. I do think there's – while there is cautiousness around structuring, to your point, there is relatively higher interest by construction lenders in multifamily, and pricing is relatively competitive from what we hear. We're not in the market, as you're well aware, because we don't fund our construction from the construction market, but rather on our line. What we understand is pricing for construction financings on recourse basis at 55% to 60% LTC is kind of more in the L-plus, mid-200 basis points range.

And, John, just to be specific, this is Tim. I mean, just refer to, you know, slide 23. We provide that one chart to the right, which speaks to, you know, senior loan officer sentiment, so...

So there's interest, but I think that lenders are just being a lot more judicious, which is probably a good sign for the markets overall. Good discipline.

Okay. On the expense guidance, could you provide the property tax and payroll growth assumptions that are baked into 2019 guidance?

John, do you want to answer that?

Yeah, absolutely. John, property tax growth we're expecting is about 3%, and then payroll is 2.4%. Just to give you some perspective, about 60% of the total OPEX growth we expect for 2019 is coming from property taxes and insurance. Controllable OPEX growth is really projected at 2% for, you know, payroll, utilities, R&M, and everything else.

All right, great.

Thanks, guys.

Yeah, thank you. At this time, there are no further questions. I would like to turn the call back over to Tim for any additional or closing comments.

Thanks, April, and thanks, everyone, for being on today, and we look forward to seeing many of you in the coming months over the course of the spring. Thank you.

That does conclude today's conference. Thank you all for your participation. You may now disconnect.