Q1 2020 Earnings Call
[laughter].
Good morning, ladies and gentlemen.
On base.
First quarter 2020 earnings conference call.
This time, all participants trying to listen only mode.
Oliver.
The company, we will conduct a question and answer session.
Just a question and answer to you at any time during this call.
Star one.
Question has been answered.
Chris Star.
If you are using a speakerphone, please let's say instead before asking your question.
We're seeing from typing and shopping or cellphones turned off during the question answer session.
Your host for today's conference.
Jason Vice President of Investor Relations Mr. release, you May begin your conference.
Thank you Kathy and welcome to Avalonbay communities first quarter Twentytwenty earnings Conference call before they go. Please note. The forward looking statements may be made during this discussion there a variety of what's going on certain piece associated with forward looking statements and actual results may differ materially if they just got somebody is what's going on for teaching yesterday afternoon's press release.
Well <unk> fourth and very important Q filed with the LTV.
Usual. This press release does include an uncomfortable with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion.
That's really is also available on our website www dot avalonbay dot com.
<unk> earnings and encourage you to refer to this information during their view of our operating results and financial performance.
Ill turn the call over to cool chairman and CEO level, they can either be for his remarks.
Yes, Thanks, Jason and welcome to secure one call with me today or Kevin Akshay.
Sean Breslin I'm not sure.
I will provide a brief commentary on the slice. It we posted last night that all of us will be available here. They afterwards.
Oh lets us today will focus on providing a summary of Q1 results.
An update on operation so far this year according through April.
You have development activity.
Yes, well construction sites.
And lastly, a highlighting our liquidity position.
Oh.
Well before getting started a I'd just like we acknowledge that lots of very weak didn't talk from normal participants on this call are already are far more than 3000 associates that have all day.
Given our market footprint and large school so much whereas in the U.S.. There's just been impacted by this pandemic all professional and personal level.
It does it have to that had to learn to just do a different walker environment at home.
Well managing you in shifting sadly dynamics at the same time.
But even more of our search it's a bit Astra leaves a comfort and safety their homes. Most every day to bright house, we had service for the more than 800000 residents the call what I've articulated so.
What we do is fundamentally central and we are grateful and inspired by our kids amazing dedication.
Thanks for the commitment they demonstrate every day and service to our customers.
Let's turn to results like we're starting on slide four.
It was a solid quarter.
I like to include corporate program, that's almost 4%.
Triggered by helping internal growth with same store revenue growth coming at a 3.1 of 3.0% respectively.
All of our major regions, except Metro New York, New Jersey, that's supposed to same store revenue growth of 3% or more like Q1.
Hi, Yes, Q1, we completed three development communities totaling 215 million.
At an average initial yield of 6.4%.
Good thing or track record of creating significant value through its platform over the cycle.
Given the current economic situation or we have not started any new development or acquire any new carry so far this year.
And lastly, we raised over 900 million a capital Oh this past quarter at an average initial costs of 2.9% I.
With most of that tell me come a 700 million.
Dollar 10 year bond deal or 2.3% a completed in February.
Record low we operate sports in your body Richmond at U.S. registry.
And with that I'll turn it over to Sean Wholl discuss portfolio operations, including what we soon so so far and.
Jose.
Alright. Thanks.
Turning to slide five the impact that covered 19 in the various shelter in place orders.
No material impact on leasing velocity in March as noted in charge of one [noise].
With year over year volume down roughly 40% from March 2019.
In April however, as a result, the parties, becoming more profession virtually no contact tours.
Prospective residents, becoming more comfortable venturing out the tour apartment homes.
And the various incentives we offered to increase conversion rates.
Good velocity rebounds. It it was only modestly below 2019 levels, it's similar to the volume that notices vacates kill them up.
Unfortunately, the reduction in that leasing volume at March coincided with our normal seasonal increase in the Boeing has noticed is to move out from our communities.
As noted in chart to.
This resulted in fewer moved them to move outs during the month of April.
Chicken collectively and as depicted on slide six.
Villa be availability increase in occupancy suffered.
As indicated in charts, one and two on slide six availability was trending well below 2019 levels throughout most of the first quarter.
Correct in the second half of March leasing velocity told materially.
30 day availability peaked at roughly 50 basis points greater than last year during the third week of March.
But has picked back down a bit over the past six weeks six weeks or so.
The effective reduced leasing volume in March ultimately impacted physical occupancy as well as noted in charter three.
People down roughly 75 basis points from March at 50 basis points from last year to 95.3%.
The chart for you can see the impact of the recent environment on April rent change, which ended the month essentially zero.
The second reflects our efforts to help mitigate the impact of covered 19 on residents by offering I know rent increase lease renewal option to undecided folks.
And our response to the weakening environment, which you put it offering incentives to increase perspective resident conversion rates, which didn't affect increase for about 23% in March.
34% in April.
Turning to slide seven we collected about 96% of what we would have typically collected in an average month from our customers, which as noted in chart one.
And if you look at the collection rates by segment.
The rig for a marker big customers was the highest.
What's our corporate housing or short term medical customers, which only represent 3% of build residential revenue below.
It seems to make elections.
Over the past few days were trending at about 94, and a half or set of normal levels.
Or about a 150 basis points behind April.
But it's early in the bonds there are differences in how killing it lays out.
The first being not a Friday in bay versus a once in April and other nuances that influence daily payment volume.
Moving to slide eight collection rates <unk> hi, its income customers has been the best.
Which isn't too surprising given the impact of the pandemic on the various service related businesses throughout our markets.
In terms of regional collection rate.
The Tech, let Pacific Northwest Syndros like California regions had been a strong is and southern California the weakest.
Unfortunately, the effect of the pandemic on entertainment and tourism businesses in Southern California has been pretty severe most of the studios in other businesses producing content have been shut down for several weeks now it all the major tourism related.
Equity Disneyland you've worked Universal studios in many other venues are closed.
With that operational overview, I'll turn it over to match to address construction and development.
Alright, great. Thanks, Sean.
To provide an update on how the pandemic is impacting our construction operations.
Slide nine shows our 19 active development communities across our regions.
We started to experienced slowdowns in the second half of March in Northern California, Seattle as regional shelter in place orders were announced and availability of both labor and section started to be impacted.
By early April the northeast saw similar impacts considered in April across all 19 projects. Our average daily manpower was reduced by an average of roughly 50% with white wide variations as reflected on the slide projects indicated in green have seen relatively little impact while those in yellow have been proceeding at a significant.
Only reduce pace and doesn't read our temporarily shut down except for like safety or that the preservation activity.
Residential construction is considered on essential activity in many jurisdictions and just in the last week or so we've started to see lifting of some of the more extreme restrictions and before projects in Seattle and the Bay area just.
Just recently moved from Red yellow.
We've been working diligently to adjust our on site health and safety practices to ensure appropriate social distancing among our subcontractor trade partners.
Really health checks and onsite wash nations and move arc supervisory stuff the staggered shifts as part of our ongoing responded.
He's 19 development communities represent a projected total capital costs of 2.4 billion, which is our lowest volume of development underway. Since 2013 as shown on slide 10, we shifted to more cautious stance as far back in 2017, and our development starts over the past two years have averaged just 800 million.
A little more than half of our mid cycle run rate of 1.4 billion per year. This puts us in a strong position as we navigate the shift from expansion into recession.
Slide 11 shows a breakdown of our future development rights.
We've been managing this pipeline of future growth opportunities to provide us with maximum flexibility at relatively modest cost.
And control over $4 billion of next cycle development projects with a total investment of just $120 million.
The development rights pipeline includes 28 different projects with more than 20% of the projected capital inflexible public private partnership deals and another 20% enhance and asset densification opportunities, where we are pursuing entitlements to add additional apartment homes at existing stabilized communities.
Most of these types of opportunities offered flexibility to align finding with favorable conditions in the construction in capital markets.
Kevin will now provide some comments in our liquidity and balance sheet.
Thanks, Matt.
Moving to slide 12 as shown on the exercise.
We entered this recession very well prepared from a financial perspective, with a healthy liquidity position modest near term maturities and are well positioned balance sheet.
Turning first to liquidity as you can see on slide 12 liquidity at quarter end told a $1.8 billion.
Credit facility in cash on hand.
This compares to the $900 million and remaining expenditures on development underway for the next several years.
Of which about $400 million is expected to be sense over the remainder 2020.
As a result quarter in a $1.8 billion and liquidity exceeds remain spend on development in 2020 by roughly $1.4 billion.
And our liquidity exceeds total remaining spent a development over the next several years by nearly $1 billion.
Turning next to our debt maturities on slide 13, we show our debt maturities over the next 10 years and our key credit metrics.
For debt maturities, we have only $70 million of debt maturing in late 2020, and only $330 million in debt maturing 2021 for a total of $400 million in debt maturities over the next seven quarters.
That's looking out over the balance of 2020.
And incorporating both development spend and debt maturities our quarter end liquidity of $1.8 billion exceeds remaining debt maturities and spent on developing over the rest of 20 $21.3 billion.
In addition, our liquidity exceeds all of our remaining development spend over the next several years and all of our debt maturities through 2021 by $500 million.
So you can see from us that we enjoy a healthy liquidity relative to our open commitments through 20 total wall.
In addition, we also enjoyed considerable incremental liquidity from cash flow from operations in excess of dividends as well from our ability to source attractively priced debt capital from the unsecured and secured debt markets, except the asked and equity markets remain an attractively priced.
In this regard at quarter end, our net debt to core EBITDA of 4.6 times below our target range of five times to six times, leaving that's meaningful capacity to absorb luggage increases as we proceed through these challenging times.
And our unencumbered NOI would at the near an all time high 93%, reflecting a large unencumbered pool of assets that we could cap if necessary for additional secured debt capital with that I'll turn it back.
Great. Thanks, Kevin just wrapping up then turning now to slide 14.
So overall a Q1 was it was very good core what results a good better than we've expected.
Despite the slow down we began to experience in the second half of March.
In April we felt much of the attack was shut down certainly, although we were able to still collect most of what was built for the month with only 6% I collected by month, and which is about 400 basis points lower than normal.
Progress that many of our construction sites to went back to advise the a pandemic or we expect that orders by some of the state and local governments temporarily halt inspections and construction what will result in the delay of good read opposite schedules of several communities.
Which in turn will push some of the lease up in a lot of projected for 2020 into next year.
Most sites that have been impacted or currently in the process of either reopening or slowly returning to full manpower. That's most states are now permitting a new construction as an essential services management.
Our shadow pipeline, a 4 billion and development rights, which is controlled mostly through options.
Or represent this densification opportunities at existing communities offers good flexibility in terms of timing feature starts with supported by market conditions.
And lastly, as Kevin just mentioned, we're in great shape financially.
We have ample liquidity to fund existing investment commitments.
Modest level debt maturing over the next several quarters and strong access at attractive pricing to the debt markets.
So if that Kathy we're ready to open up the call for questions.
[noise] asking questions. Please.
We will take.
Question.
<unk>.
Thanks.
First maybe on construction.
He said you've seen are also being seen really across the space just wondered how that impacts.
Supply 2020 and.
How long do you think individual pockets for pizza laid in terms of deliveries.
Sure Nick this is Matt.
Yeah in terms of what happens to total deliveries in 2020, obviously I think it's too early to tell.
You know what we found the last couple of years, even before the pandemic was that delivery wound up being you know tend to 15% below what we had thought at the beginning of the you're just due to labor constraints inspection constraints and so on so certainly I would expect more.
To be down by more than that relative to what maybe third party reports were at the beginning of the year, but yeah. It really depends obviously on how things play out here over the next couple of months as it relates to our our pipeline. So far what we've seen is and looks reflected on our.
Supplemental.
Five projects, we delayed initial occupancy by a couple of months color.
And projects we.
Right now we think are probably the final completion is gonna be delayed by about a quarter. So you know that's maybe a third of our 19 that are actively underway right now some of the others are either in areas that have been less impacted or early enough in their process that they haven't been materially slowed down obviously that could change, but yeah kinda.
That's the way, we see it as of right now.
Thanks.
States in different cities start.
And how are you thinking.
Kind of repositioning or minus the space to allow for social gifting team and then maybe medium and longer term.
The developments on the progress or any kind of future development, how do you think about changes.
He space, given maybe potential bigger picture trends, such as work from home or or anything else.
Yeah. This is Sean.
Pick that one of the third and others can jump in if they liked but in terms of the existing amenities space. Yeah. We do have a team that is taking a look at what's the occupancy standards are for different types of spaces.
No it our communities, but at our offices as well and what kind of limitations that will place on the occupancy limits that were in place you know before the pandemic, but still they gonna see you know that reduced a pretty materially but it depends on the type of space you know depending on what you're talking about fitness center equipped.
And so it was phase two feet apart we may have to go back to redistribute the equipment to have much spacing. As an example, you know chill spaces, where there were you have called soft seating that was side by side of the tables around that may have to be states, where we just reduce the number of items in there in terms of chair side.
Same thing in terms of our swimming pools. So that's fair amount of work underway to sort or you know we justify the various spaces that are communities to make sure. They comply with the proper English the 16 protocols and it's just can take some time to work for each one and then turn for the longer term trends you probably little too early to tell now, but certainly there was a trend.
To see more more people working from home, whether they were telecommuting or whether they were just for independent contractors working from home or that are producing content or.
Certainly got contracting business and things of that sort for.
Different types of industries Entertainment in particular, it comes to mind for a place like L.A.
So that trend you know likely continue I think is probably a reasonable conclusion from what we see but to what degree it's probably too early to tell at this point.
Thank you.
Yep.
Your next question.
Hey, good afternoon, guys, so Paul as well.
So I wanted to get your reaction to a one of your competitors comments yesterday regarding.
I'm, a little bit more underperformance in the garden style communities versus high rises.
These are the collections are you seeing the same in your portfolio or do you have any any comments along those lines.
Yeah. This is Sean I can share a few thoughts on that just we've looked at collection rates you maybe a few different ways.
You know certainly we talked about if I spoke about in terms of Ah you double that's because they're not in the slides into my prepared remarks, but in terms of or some other metrics that we look at it doesn't fall Wang first it's sort of price point A's versus these AIDS are running about a 100 basis points higher than visa. This point in time and that May look.
Suburban to urban what were generally seen across most of the markets. It suburbans outperforming by about 25 basis points or so so a little bit but not terribly material material yeah, probably the one exception as New York, where the urban environment a collection rate is better than the suburbs given the impact we've seen in Westchester attempt.
Pretty material in terms of a pandemic.
Then in such a high rise or versus garden in mid rise I write it just slightly better, but there's not a lot of high rise product to benchmark it against to be honest and most of that you know for our portfolio because to be in New York, a little bit MPC. It's just not a big sample size I, probably wouldn't draw too many conclusions about the product.
Differences.
Okay, and then maybe a little bit of differentiation there in terms of what you're seeing versus maybe so I guess houseware.
And in recently and Okay. That's helpful color.
And then I guess just as soon as you think about.
So traffic and demand patterns picking up now that we're into may and things just kind of come off the bottom are you seeing any differentiation between in suburban and urban or within the portfolio along those lines.
You know not material at this point its more market driven I'd say, where you've got you know certainly the hot spots are a little more sensitive to the rebound and.
Seeing people want to still continue with more of the virtual tourism as opposed to self guided as opposed to maybe like the mid Atlantic where people seem to be more comfortable given the state of the environment.
Either way self guided tours.
For the most part at this point another than any personal tourists. So I think it's really a market based dynamic as opposed to maybe price point at this point or location as you pointed out urban versus suburban.
Okay, great. Thank you.
Your next question.
With bank of America.
Hi around this is actually a little Oscar I forgot sponsored thank you for taking my questions I'm, sorry, I just wondered if you guys could give some more color.
No sales going on right now so I think you.
Okay.
For Q1 team on the call.
And so just wondering I assume all day.
Oh, so far and are there.
Under way is Uh huh.
Are you expecting to take a lot of price concerns.
Oh sure this is Matt acting.
Some people couldn't hear the question it was about Columbus Circle condo sales and recent progress so.
As of today, we have 41 units close and have generated 129 million.
That's an average price of 3.15 million per per per a condo. We have 22, others under contract with finding deposits that represents another 70 million of proceeds that's actually slightly higher priced a 3.17 3.18 million per unit.
I'd be are the sales activity of the new contract cat activity was pretty strong in January and February.
In fact, if you go back to our first quarter call. We had 54 contracts at that time. So we've actually added nine since then or about 40 million an incremental sales.
Since the first quarter call and really all that came in a February in the first half of March because you know wants to stay at home worse came into place we went to 100% a virtual tours in mid March with our sales agent there.
ER and traffic did slow dramatically in the back half of March in the early half of April I will say in the last just two or three weeks traffic has picked back up and it it although their virtual tourist traffic is back up to over 30 per week, which is a pretty strong number uncomfortable to where it was kinda before things stopped in mid March so.
But until you know people can actually get in physically feed the product, which we hope they'll be able to do within the next month or so we don't really know how that traffic might convert to additional contract pricing has been consistent you know we haven't really seen a difference in terms of the pricing level.
Either asking or what we're achieving you know for the last 10 or 15 20 contracts in the early contracts. They said, there's a lot of different price points in the building depending what line on what floor. So you know, it's not exactly apples to apples, but yeah. So far.
I haven't seen any impact there yet, but again until we really get people back into the building and start being yes. Some additional new contract activity, you know, which hopefully will happen soon we'll have a better sense.
Okay, great. Thank you.
Well take our next question.
With Green Street.
Hey, Thanks, Sean I'm as you and you guys rollout of concessions in different markets, which markets are responding better in terms of traffic coming in and the rollout specials and what's your few markets just aren't responding them out or you know how how a generous concessions become.
Yeah, I mean, the John the response has been pretty healthy across most of the markets. I mean, I guess I'd have to tell you that based on what you.
Probably have heard from others.
Are you know just pointing out some of the weakness.
L.A. price tickets slightly more concessions on average than the L.A. market as compared to others to get those conversion rates so to answer a reasonable levels.
In terms of the rebound.
For the most part I would say that it's been.
Pretty steady with limited exceptions under the exceptions really more relate to.
Hot spots and I'll just be specific around in and around New York, where people are still pretty houses that given the environment to be out shopping for apartments people are doing virtual tours and the concessions are reasonable but are not as much as what was required in L.A. to get people to.
For an action just give us getting what was happening in that market environment, which is already weak as you may recall to begin the year and pandemic certainly only made it a that much more difficult in terms of that people are qualified being able to come out and shop or department and be able to afford to rent an apartment given what was happening with all the studios being.
Closing a lot of people that produced content in southern California, the chefs being close so that's why the one market, where it's been a little more challenging.
Okay, and then last one for me. It's just a question about D.C. and the defensiveness of that market. Obviously, a winner on a relative basis during the GFC in your mind or the price point of your portfolio, the DC Metro and that employer base now that shifted is easy different.
This time or would you start yeah put it up there against any are there any other market or the next 12 24 months just in terms of rent growth in occupancy trends.
Yeah, I mean based on what we know as of now and just thinking about the composition of the workforce.
I think he sees should hold up relatively well.
You can think about the nature of the pandemic. It how things have started in the impact on joblessness joblessness today for the most part as opposed to kind of a trickle down it's really a trickle up type thing where a lot of the job losses.
Heavily concentrated at those local level service jobs you know.
You're talking about food service was bars restaurants will tell workers things is that sort it may trickle up some.
And in certain geographies, where people are paid well.
Again like I later, this content that'd be disproportionate impact, but do you see a highly educated population a lot of professional services the funds et cetera.
But expected to hold up relatively well and we've seen that thus far even though it's only been sort of six weeks satisfying a in terms of what's happening but.
Others may have a different.
No I agree I may between the sits at between the knowledge base.
Knowledge nature, they dominate the federal government on a state local governments are gonna be bench I think your answer cutbacks there, but not as much in there. So federal government I think that just in a pretty well I mean I think these he was hurt a little bit initially just as are our exposure to hospitality.
Obviously, both Hilton and Marriott here, which had massive furloughs.
Kinda early on in a a pandemic, but I think I think over time, Sean as John has run of expected to set up pretty well relative to the CEO, Sir well John.
Okay, Okay actually it's <unk>.
I'll take your next question from Austin Wurschmidt.
Hey, good afternoon, everyone. I was curious if you will to negotiate a new contract today on the construction project. What do you think hard cost would be versus which is pretty close to 19.
Yeah. Good question, often it's Matt we certainly think the direction is headed down I think it have you seen here in this very mild I'm not sure that.
You would see that yet a and several of our project we have decided to defer a one of the reasons, we deferred some of our potential 2020 starts. It's because we think that there'll be a better buying opportunity and you know I don't know three four quarters, maybe so I think it it takes a while to work its way through.
The system.
And probably will.
See it first and some of the early trade, where like concrete or site work paving where you know feels like starting those folks will start to see they have excess capacity and probably start to cut the price in personal probably take longer before it gets to some of the finished trades, where there's plenty of stuff under kind to be finished.
Anything they take longer to get finished over the next you know four to six quarters. So I'm. One of these advantages. We have is because you had 90 plus percent of our construction, we our own general contractor, we can kind of time that and play that strategically a little more than if we were using a third party general contractor, which is the way a lot of the private side of the business works out.
I still too early to tell we'll see what happens in though in the last downturn. It was down maybe 15% having said that was 1000 extreme correction, but time will tell I think came on that so yes, I'd just say have been going into this obviously, we've been seeing a lot of crusher construction costs are probably wouldn't sitting now 60% increase as philosophy.
A year. So it was probably already well above trend and that's that that that's provides a little bit more conviction that we're likely to see a correction and certainly in terms of you know wages commodities materials profit. So from subcontractors Bush at all come down putting downward pressure on pricing offsetting that somewhat.
We do it we would expect a little bit higher general conditions, just just given the changing protocols social distancing things like that perhaps.
Productivity, you know being a little bit strain offset again by.
As a subcontract start to reduce their their workforce are left off them with their most productive crews and you often times get their cost benefit so from that and you come as you come out of a downturn in the early parts of the liver expansion. So so overall, we would expect we do expect costs come down a bigger and easy just to make to make.
Sense.
Make sense.
Let's see economics given.
Wise or flat the on their way down and ER and the capital cost if anything or options to be an independent Mike.
Looking at both sort of the bog and the equity markets obviously.
So that's that's really helpful. I mean, you guys had previously start now expected to start 900 million, Matt I think you alluded to some of those projects you delayed purposefully with the potential for cross to come then what percent of that 900 million or costs, you know fully baked at this point.
I would say none of it I think I've had the costs are where the start commitment we haven't committed to starting anything this year.
The cost on on you know some of the talk project yet.
Only cost it would be bags would be where we bought the land I'm already I think two of those nine and we get by two parcels of land in the first quarter. There. It's a deals that could have been what could be 2020 starts. So we spent 38 million on those two deals so far.
Yeah, a little bit of a soft causes baked, but yeah. We haven't bought any any of the construction on any of those jobs.
Understood. Thank you and then last one from me, Kevin maybe on the pool yen, they're a bit on the balance sheet certainly in great shape, but if you don't start any are only a small subset of that 900 million.
Where do you expect leverage to finish the year.
Yeah, I mean, often you know work will probably gonna have to provide more fulsome update on what we expect our capital plan to be between when we had our mid year call and provide you know.
They.
Have a clear visibility on a whole range of things, including not only at alive, but also you know investment activity.
And in capital markets activity, you know well, we're standing right now that it yeah.
Remarkably low leverage level net debt to EBITDA of 4.6 times sources.
The target range of five to six times and and that's intentional you very much into you know drove that leverage number down over the last few years to give us more scope more capacity.
As you might have to pay that through a downturn and so we find ourselves kind of in the spot. We had hoped we would be which provides us an awful lot flexibility to respond to opportunities that may present themselves here in the coming months, a as well as capacity to take on debt if need be to pull through you know incremental development spend but as I pointed out in the open lay opening with.
Marks you've already got abundant liquidity here relative to our open commitments here over the near term and from a capital plan standpoint, Although we were true guidance.
We provided guidance our initial expectation was to raise external capital $1.4 billion.
And we've already raised 900 million or that's a little further through the year and raise two thirds or what we initially hoped to rate you may not need to raise as much as all that but I think the bottom line answer. Your question is why we haven't updated our guidance I think.
You know.
Our capital need pull forward, a pretty modest and so you can probably looking at the balance sheet in terms of absolute debt levels, where it is it's probably not going to change a whole walk from here, it's a level.
Yeah. That's helpful. I guess I was just getting it seems like it could be lower the extent you get some lease up and you're not you don't have the incremental spend but ah, but we'll wait and see what we haven't seen two kids. Thank you.
Yeah.
Your next question.
Scotiabank.
Hi, this is somewhat a from a push out in for Nick. Thank you for taking the question just following up on on the development Ah discussion.
You mentioned as a footnote that you've lowered the the yields on now on yard developed since I'm. Just wondering if you could give a little more color as to what kind of you conduction you're looking at for New York or Ah do elephant talk developments in lease up blesses such it stuff that's going out.
2021 22.
[noise] sorry can you repeat the question or this is this is not the question was about the yield shown on the development yeah.
Yeah, So you footnoted or the you could as a slightly reduced saying that you know you you are brought down the yields for.
Oh, you brought down the assumptions for a dilemma is nearing completion on d. steps. So just trying to get a sense of.
What's the split in the yield a reduction for particularly for development, so that more near term and 2020 metric.
[noise], yeah, so as a general rule, our practice has been that when a deal.
Gets more than 20% leased Dan we kind of remarks rents to market to reflect the experience that were actually having and until that time, we tend to carry the rents at what we initially underwrote. So we've talked for years about the fact that we don't trends rents and that's one by that so.
And this particular release, we only have the three deals they completed and that takes those those are rents reflect the actual rent roll in place.
Those are all more than 90% leased it's on schedule and then there's three other communities, where we have enough leasing done that we've reflected the most current rents are there on the on the chart there on attachment.
The other 16 assets, we haven't done enough leasing yet so those are still the original pro forma rent. So that that's consistent with what our practice has always been I guess, we get out enough just to make clear that we have not endeavor to uptake of.
Cause of any changes in the environment related to the pandemic, we're still carrying into France that were in the initial pro forma and you know when we get leasing activity we will.
Adjusting accordingly, so it's really not any change from our current practice, having just an additional disclosure that you know to make sure folks understood that it's evolved into more volatile environment than it's been Sean do you want to talk to kind of how to currently yeah. Just that's one thing on that as Matt indicated it just for the first quarter there were six assets.
Lisa.
If you look across the rents for the six assets.
Four of them, we're producing rents at that time kind of average for the quarter that were above the original perform a one was equivalent to our original perform a and one deal kind of in northern Seattle was modestly below our original pro forma what do you blend all that together rents at that point in time for roughly 3% a above pro forma around.
80 bucks or so.
But there were some recent cost changes on those deals. So the net reduction in yield really was only about 10 basis points to weighted average of 5.9. So.
Really immaterial in the in the context to the whole basket.
Hi, Thank you so much.
Well take our next question.
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<unk>.
Oh, great John Guy need here two quick questions one is that.
As this situation.
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Given you a any thoughts on speeding up or slowing down a into other markets, such as South, Florida and Denver.
Then second if there is a slowdown in development starts in 20 Twond tea.
How would that affect gionee and interest costs in 2021 as you need to walk you can no longer capitalized so people end up development interest expense.
Oh.
Yes, John.
This is Tim I'll take the first and.
Kevin if you want to take the second piece of it or not but.
With respect to that with respect to our market footprint ever talked about in the past week.
Absent to potentially diversified bit of our exposure to the to the larger acos markets with the other knowledge economy type markets are part of what drove a you know its renewed at the Denver and.
The southeast, Florida for sure and there have been other markets other than our screens as well we've been pretty active in terms of our investment in both those markets. Both in terms of acquisitions and the and the development and also a funding funding a third party developers. So we try to really set our.
Sort of activate all the levers if you will oversee with respect to those markets are really.
Really haven't been held back by a desire to get in those markets. So it's a so it's a function as much of your opportunity as a as anything but oh, we'd expect that but that's the case I knew that will make you paid is sort of trim a from a from some markets and recycle some capital or which doesn't make sense to grow the balance sheet.
Invest capital in those markets, we we can do that as well, but right now it's more a work through debt and and access to an asset recycling.
So I don't think anything's changed there will continue to evaluate no other markets that we think.
It does make sense gross to be and long term that we think are.
You know over indexed to the innovation economy, and therefore, we think will.
Outperformer for over a long period of time from a firmer demand standpoint.
And I think your second question had to do with a G.A. around the around development I could maybe start that and true Kevin If you want to you. If you are coming in as.
We're always going to try to.
Rightsize, the the development organization to sort of the.
Will we be near the opportunity set over next two or three years.
Quickset, we delay deals this year. It means we're probably going to have more stacking up in 2021 or 2022.
So part of it is make sure that you're a you're probably position not just for what you have to do something like six months, but really for the platform over the next to organize three or four years to extent this becomes a very true a protracted recession, but that changes the calculus. Obviously, that's a that's not work that's not how would you ever.
Environment today, we RV and this is a kind of a slow build up a from a from a sharp sharp downturn and if we do see meaningful contraction in a in construction costs for the balance of that's 2020 at it and then as you start to see some some recovery in the 2021 you start.
To see 2020 to 2023 could be really good times to be delivering a new product, which would argue for for heightened starts in a in 22 minutes. So we want to make sure. We've got to rightsize development construction organization really over the next three or four years not just server over the next six months and not much has changed in terms.
So our view that but it needs to that it needs to.
Change material in part because we'd already brought it down from as Matt mentioned prevented ugly imports that are roughly 800 million that's sort of late cycle. So it's already kind of there's already kind of size for for late cycle, a downturn type of type dynamics.
Kevin the yeah, maybe just a couple of things I mean.
And will result in some of those all the decline in Stark blog we.
We did have some leases staff reductions in our clockwise groups.
Last year, so and sell them for their budget together for this year, we did expect.
Capitalized overhead for 2020 to be a bit below what it wasn't in 2019.
If you look at what happened in first quarter kept level of it did sequentially increase a little bit in the first quarters. He will give you a few onetime items such as increased benefits and payroll cost, but also for your 2020.
We would expect at that capitalized overhead run rate was with the calling in the back half of the are somewhat and based on looking over the long.
Great. Thank you.
Well take our next question from Alexander.
Hi.
Hey.
Good afternoon.
Just two questions.
For me one in the because they did the into beliefs about the impact of law fees 1.4 billion per month or can you just talk about your expectations I'm, assuming you get victory moratorium market. Obviously, they've made late fees and then you have got to wherever you don't have the Menzies, hoping you are charging them.
Entities. So how should we think about yeah. This 1.4 million a month is that something we should be thinking about yes to the next few months is your view that you know within whatever baby by mid summer a bunch of communities will fully be opened were December won't be as big as it is right now.
Yeah. Alex This is Sean just give us some perspective about 80% of that 1.4 million within way, it's common area amenity fees, because our amenities are close.
So our expectation is you're going to see I kinda slow rebuilds of that.
That line item over the next few months as a United States begin the reopened we re size our occupancy limits as I was describing earlier in response to a question and that it was smaller rebuild but are expected to snap back I guess I would say just because the pace of opening is going to be different by jurisdiction.
Based on the local market environment, but that's the majority of it that that should fully rebuilt the rest of it was you know small stuff related to.
Some late season, you know credit card convenience fees and things of that it's hard.
Okay, Okay and then.
Oh, you're on your line of credit you guys had drawn to 750 and then you quickly take you just paid back to 535 sounds like you have about a 150 billion or so rough numbers I'm on condo sales.
What drove it's pretty quick you guys pulled it down and then paid it back so what what shifted in year end, you're thinking was it board that hey, we weren't sure. Thanks, we'll get a fun for we weren't sure exactly what's going to be there or was it just once you guys laid a bunch of objects suddenly realize they didnt meet all that much.
At once.
Hey, Alex this is Kevin So we drew a portion of our line of credit.
Basically three for the 750 or 1.75 billion in mid March and we really did it on a precautionary basis, not because of anything that our business not because of our development activities not because.
We had you know any particular use we didnt have commercial paper there was really nothing related avalonbay that caused us to draw that 750.
Instead, it was really just a reaction to the a the initial stage of the pandemic and its impact on the capital markets.
And before the fed it's fully stepped in to stabilize the markets. So it's really done on the precautionary basis to submit to ensure that we we had greater control over the capital.
That would give us incremental above in time and room to maneuver through a through what we thought would be a choppy set us up month ahead of us.
Yeah, maybe just that they've just ask that Alex I mean, what's affecting that obviously the bond markets became very constructive and Oh, we had oh, absolutely. We would have acts of on market. So if we needed to so that was the reason, but also just better but.
Okay. Okay.
Thank you.
Yeah.
Well take our next question from Rick Anderson.
Yes.
Yeah. Thanks, good afternoon, everyone.
First question you know this this whole thing started to take effect.
No the beginning of what would be considered the heavy leasing season for multifamily my first gas was perhaps it was a good thing because that then then I thought about it may be was a bad thing because there was you know more activity in tenants, maybe you had on our own or quiver to negotiate so what do you think you didn't <unk>.
Not that we could have changed it but do you think you were <unk> industry or yourself was negatively impacted by the timing or or how do you think that played out from a from a cadence standpoint.
Hi, Rich a tender you know it's hard to know I mean.
No one thing I would say when youre in the peak leasing season is when we get most of our rent growth.
For the year, yet you haven't you have both the benefit of a better market pricing more leasing velocity. So so your rent roll is a is increasing.
The agenda earn it all kind of in that that March to fly timeframe and obviously, that's that's challenge right. Now. So you know that basis that you can see can time pandemics. Many they argued for a [laughter] for like a late tall starts [laughter], but where we have a lot of things out of control wise or.
We haven't gotten area [laughter], yeah, I mean come on can you guys do anything right.
[laughter]. The second question is perhaps more realistic longer tomorrow.
[laughter]. So you guys are our thought of as sort of visionaries and I don't know what's your different you know you Nick.
Product types and price points came out of the great recession, but let's pretend for the sake. This question that he did do you feel like visitors and evolution to multifamily as a consequence of all this maybe a more more comparable with the work from home environment, maybe more of a build out of internal office space or.
Acknowledge youd enhancements or laser printers, or whatever might people be meeting right now that they don't have because of the working from home is that something that you think or maybe there's another alternative about how multi family will evolve out of this do you do you have any idea it's or have you thought about it at all about what the change in the you know the basic fundamentals of the.
Of the industry might look like you know five years from now.
Rich I'd tell you it terms of the math for multifamily I think that's going to continue to be driven by the nature of the household. So there's no such great growth and single single person households, that's what's really what drives demand for our business. It's a lesser households are singles and professional couples there were two children you know it.
But to put the terms of kind of the product and the service.
I do think you'll probably see some of this you know the work from home to Textron roll those already that's rather sorry, I think that John alluded to some of his remark. So you know I think there's a good good.
'cause basis, we're expecting that that might accelerate a bit we had already started.
Putting co working.
You know welch's.
It's spaces with meeting rooms, and and all of our all of our case I mean, maybe they need to be a little bit figured out just right a little bit more space, but they're pretty pretty good sized to begin with him. If you think about it from a resident standpoint, the might prefer that environment to Starbucks, which is a much more controlled environment, if they're going to sort of work from.
They're going to work from someplace other than the other than the office I think I think similarly, you a there's been a movement towards you a much bigger grander fitness centers.
I think you're going to continue to see that I think people are going to have more facing tougher to your working out in a in a community of there with their peers them and you know maybe a large large club with a.
It was a bunch of.
Hi School first.
Clean up [laughter] and things like that so.
And then within the year that you know another trend that has already started thinking it might accelerate its just more flexible open units spaces that given the nature of it to the space can change during the course of the day, but it's been kind of where do you are your and your day.
Yeah were kinda kitchen dining spaces convert to office spaces, My office faces, a and apartment community right across the street I noticed a number of people are sort of set up there there are their desk right up against the window and I don't think that's where it was to begin with instead of spending there you know good part there.
Good part of their day there now so I think people start to think about that in terms of in terms of units design, but first maybe leasing the space more during the day than they have.
It has historically, there's certainly just the need for.
And then.
Hi, speed and reliability, there and anything that we can do to kind of support that.
And then as I guess last interest mentioned, it's kind of kind of the smart home initiative, which you know a lot closer pursuing now, but I think though.
I think one listened treating aspects of that is the is the remote entry or being able to allow the goods and services to sort of flow freely oh throughout the throughout community or rather than having to be handled by somebody there the front desk or in a central office that no people can get a can.
Get access right up to the unit and potentially you're right into the units of expenses. The resin has just stepped away. So I think you'll see you know all those things that were trends anyway, you know, perhaps just a accelerated as result of those.
Oh really good color. Thanks, Jim appreciate it.
Sure.
She would like to ask your question. Please press star one.
<unk>.
We will take our next question.
So.
It's probably I can you hear me.
Yes.
Yes. Thank you.
Thank you actually see my question.
I was just wondering if I look into redevelopment pipeline I know not talk about how people that don't try and Robinson.
Only lilly updates on one there's probably some leasing.
If you look up the development pipeline, that's going to deliver you're not 2021 late 2021 of my 2021 and beyond.
How do you feel about the underwritten the yield on those I know there's lot of uncertainty, but what kind of buffer is there where you would still I'm delighted today.
Hey, Matt.
You know.
Deals that are delivering and 21 Ah first deliveries and 21 or deals the generally restarted in the last.
Here color.
You know 'cause.
Oh, I said, he delivering sooner than that so on those deals.
Yeah, I guess, we'll just we'll see what happens right I mean, it's Paul fundamentally its can depend what happens market rents what happened and alive.
You know they some of those deals were higher yielding deals in the first place just because of the geography of where they were.
So you know that in theory, I guess gives you a little more room, but.
You know I don't think and there's a few that her early enough that we might actually be looked like a little bit under construction cost savings and as I mentioned, we are in some cases shifting from trying to get to buy things out as quickly as possible the slow paying out a little bit to take advantage of hopefully what it could be a better market to buy construction services in a few quarters.
But oh, yeah, I mean, you know.
The repairs the same as the Redskins stabilized portfolio.
It's just the risk of what happens to you know market rents between now and then.
There are I guess I'd, just add to that Werent <unk> first recognize these deals are capitalized and it's a different or different capital environment. So you got to figure you know as opposed to cost of capital as well as a as well as the underlying.
Fundamentals, but I'm just your thoughts John's remarks rents at April roughly flat on a year over year basis, I think there's a basis for believing that they should continue to come down.
It was lost 20% of our workforce and even a three quarters with comes back as they start to open up the timing as we're still looking at 8% on unemployment and you know likely see you know flat maybe slightly negative household growth, while we're still delivering some new supply. So that's going to that's going to pick up so in the near.
Our term Oh on.
You know off analyzed the there's I'm honored I mentioned before I think you've never it's a.
Ultimately, it's a it's you know we could see a pretty pretty strong late 21 and 22.
Deliveries.
The people, who start or do what we're doing which is the length start let me start to have a you know a dearth of a a deliveries at a time when maybe becomes really starting to really regained its footing.
Just kinda one other thing hard to get you think about sort of developing how it flows through.
Yeah, our earnings from a business model standpoint, and then compared perhaps it will last downturn.
As you know, we've emphasized or though the cycle. How match funded we are with respect to long term capital being.
Sourced to fund the development underway and really a Q1, we are about you over 80% match funded with long term capital against the developer book. It's underway. So that's an important point 10 touched on in his dance between will go but I really do think that's as you think about avalonbay and how we might perform here in the coming years, it's an important distinction to draw.
All in terms of how we are positioned for the balance sheet and funding point of view and it built in accretion point of view with respect to dissolve and relative to say the last downturn, we had a lot more much more in the way. It open an unfunded commitments at island 12 years ago development, we're coming around five or 6% yields can your funding with deck.
And 6%.
Very different we'll see where they the yields ultimately shake out to be but we know that costs Ross on a 10 year basis today, I, probably someone with a 2% range. So and we don't really need much of that at all and we're already over 8% match funding on the developing under way. So they really are in terrific shape from that standpoint to sort of benefit from from you know thinking.
With that growth on the 80% or so that we've already paid for that's underway and to the extent sourced incremental capital needs to do so.
That's likely to be an additional source of accretion.
Hi. This is just from my standpoint, guys I have no problem with the balance sheet I'd never have I find that confusing when people are.
Kind of being you for that and that's resulted in your guys holding at 750 million on your balance sheet, that's kind of crazy really no is because of the bound to at all that's been doing this for two decades and people. So get nervous about this stuff I was thinking more about the entourages I'm not on all of you guys have talked about 9% to 12% range for the cycle.
Does that nine for signed on assets started doing the last downturn maybe 12.
And your best assets.
What I'm trying to understand is on an IR basis. Obviously, these things will lease up more slowly coming on kind of stressed environment.
What does the our are on the developments that are you know kind of 2021 and beyond me about a 9% number 10% number what does that number looks like.
Yeah.
We have shared with you in the past at least where you know last couple of cycles, where we had.
Yeah. When we started deals kind of late in the cycle delivered into a downturn, but those were well when you kind of run out 10, 15, yara or they are lower than deals that you start at the beginning a cycle or did the downturn at lease up with the early stages cycle Weve, but I think we saw ranges from.
And then it narrows over time ours as you've seen at the time horizon for some time here with over 10 years rise, but I think we were still clear on our cost of capital loss on Cross Council thing on the low end those right and a half and half percent on the on the high end. There was one of the 13 a half percent range. So you know I would say you know it's gonna be you know somebody's deal.
With that are.
The work that we're sort of time little worse that started with construction costs are PQI and delivering and to depressed environment.
I think that could still be you know high single digit kinda.
Our and Ah you know deals that we start in the 2021 and 2022 to be you know much though.
Got it. Thank you that's great color.
Thanks.
Well take our next question.
Yes.
Hey, guys. Thanks for taking my questions that quick couple to lose U.S.. So just talking about equal that caused us a quick second I just love to prosecute affordable rights collections trail markedly collections I've seen some of this is incomplete insulated, but I guess I'm also pleased to see the more meaningful like in corporate apartments business.
She has been a little identify help us understand what the key reasons Vicki how does your face amount in the rent collection and.
The proposals but.
Okay did you were little muffled on some of it but I heard the collection rate in the quarter its and yeah. It is lore I think the way I think about it is.
You know these are the a cut a corporate apartment homes providers, it's not a corporation per se that are they the end users here, but a sort of intermediaries that are essentially a hasn't sales team that have reached agreements with progress corporations or have a booking side essentially that's the marketplace.
And then they are a leasing units from us and many other of our peers and others.
Yeah. It does there yeah think of it I guess I'll call it sort of like an extended stay hotel almost what their bookings.
As we try to us pretty darn quickly.
And some have some longer term stays from people who were there on consulting assignments for three or four months, and though they'll bleed out a little bit longer and there are others to really were running worse no short term thered be they say, they're made evaporated more quickly. So yeah. We're working through the process with that just as we work with other residents in terms of.
Deferrals and plants and things like that but yeah. That's why the collection rate was quite a bit lower than what we see from our market rate apartments.
Which is generally higher quality residents. Good household incomes as indicated in my prepared remarks about the slides we address.
That's helpful. Thank you and so just wanted to be clear the ultimately who is on the hooked to the right that individual or the corporate sponsor.
The intermediary is technically our credit that's who we are dealing with but their ability to pay certainly is a is based on what occupancy rate they have across our portfolio.
And to the extent that there I can never 75% occupied with good corporate clients.
That's what they can pretty much paid not many of these companies have but by almost none of them really have a really strong balance sheet to be able to handle three or four boxes out by payments or 25, 50% occupancy. So the the nature of the pent up making how long it lasts and the effect on.
All of a related sort of their ability to pay over the next few months.
[noise] Yeah, that's Ah so he will also.
Help us understand what percentage of the tours you've been conducting here in April or may have been virtual or how the conversion to wait on those virtual tours composed to more traditional tours.
Historically and are you finding that you talked a bit more incentives to get virtual tourist beside officially.
Yes, good question.
Don't have that right in front of me in terms of the composition of it but I mean I would tell you that yeah virtual towards you know for our business.
You know are not nearly as effective as the self guided tours or an escort into.
But given the nature of a pandemic. It was a it's actually nice to see a rebound activity in April and people are getting more comfortable commercial to work.
But as that was you know online through our website or in some cases, we had committee consultant that but that's because if it's on track to work through individual units and and some of that was really at the discretion of customer where a they didn't want to come to a tool that someone they were fine doing it virtually so I think it's evolving but certainly reflects the nature of the business and where it's going in the future at our view.
Yeah, the technology investments that we're making it where you know we're already made taking that we may accelerate as it relates to a technology to support a lot of the a sort of thought no contact type activity between our staff and our customers and our prospective customers and that includes various things on its worth side on move.
Then you see this packages and even on the maintenance side, where we're doing a diagnostic coffee assays on that other via other tools to try to talk goes tissues for customers to be able to sort of self serve and self help.
In many cases before dispatching someone to go to a unit. So I think this will just accelerate some of the things that we've already contemplating as part of our operating platform that will lead to more efficiencies in the future.
Well, thank you for though.
Yep.
Yes, or no further questions at this time.
The conference back to Mr.
Any additional closing remarks.
Thank you Kathy I. Thank all of you stay with US today I know the that a lot a lot of calls the cover enormously I look forward to see if they read that Oh <unk> I don't think that's going to happen, but hopefully we'll talk to somebody who during that I've heard that leads and maybe even see aneurysm call somewhere so let's take care and.
And Stacey thank you.
That concludes today's presentation. Thank you for your participation you may now disconnect.
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