Q2 2020 Avalonbay Communities Inc Earnings Call
Good morning, ladies and gentlemen.
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Second quarter 2020 earnings conference call.
At this time all participants are in English.
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Question answer session.
Your host for today's conference is Mr., Jason Riley Vice President of Investor Relations Mr. Riley you may begin your conference.
Thank you, Matt and welcome to Avalonbay can either be second quarter 220, 20 earnings conference call before they get please note that forward looking statements babies need during this discussion there Brian.
He is associated with forward looking statement.
Actual results may differ materially there's a discussion of these risks and uncertainties and yesterday afternoon's press releases welcomed the company's form 10-K and form 10-Q, four would be happy.
Beautiful. This press release doesn't include actually with definitions and reconciliations of non-GAAP financial measures another term, which maybe used in today's discussion.
Hi, it's been it's awful avail available on our website at Www Dot Avalonbay Dot Com sports flush earnings and we encourage you to recoup information during the review over operating result in financial performance and with that I'll turn the call it depends.
Permanent Ceos I want thank you for his remarks.
Hi, Thanks, Jason and welcome to that keeps you call.
Good day or whatever I say.
Onbrez, one and the Mapcare bomb shark, Kevin and I will provide health care and slightly towards the last night and then all this will be available for you and hey afterwards.
Congress I will focus on providing.
Some risky to result, so an update on operations.
Some perspective on development and the balance sheet now that we've been hurt and economic recession.
But before you start on the deck I thought I'd offer a few general comments about clean environment, where currently pacing.
I'd, just say things change over the last one box is certainly an understatement.
We are in the middle of the largest global health care crisis in a century.
The economic downturn is the most severe we've seen since the great depression.
And on the heels of along its expansion on record.
And social unrest is that Oh, we haven't experienced since Vietnam and civil rights agreement there was a few years, though.
It's been said that said these aren't either in person that there are times.
And he's rents are just having an unprecedented economic activity.
But also they tell me well distribution across industries and the broader population.
For those companies and workers leveraged to the hurtful comedy, they're actually doing quite well and summaries of driving.
Oh for those properties the workers that operate in a real economy of bricks and mortar like maybe.
We're certainly feeling that the normal effect and then some of the downturn.
And that's because those companies and workers in the travel leisure and entertainment sector as among others.
They are basically a truck down the road.
These sectors as well as others will undoubtedly needs to be restructuring over the next few years.
Many companies a lot survived and their employees, it's evenly temporarily furloughed for now I will joined the ranks of the permanently on a quarter it other than that several quarters.
All right and unfortunately, a those are impacted by visa Baxter most affected by these beds are those and lower paying service jobs.
Nothing to worry population.
As a result, this spell check carried not just the normal economic risk of prior recession.
After a professor Hell social political risk.
There are likely to shape delaying since it shake the lake and of the economic recovery.
So all this was a sudden a quick downturn, a the timing and shape of the recoveries hard to project.
<unk>, Charles and managing our business, it's amazing communicating our expectations that you are our shareholders.
Having said that we'll do our best to be a transparent direct as possible as we all try and as I understand engage how the current environment will play out in our business.
Two quarters ahead.
Now, let's turn to the results for the quarter, starting and on the slide four.
As expected future wasn't Charlton corridor that core FFO growth was down almost 2%.
If you ever by same store revenue decline of almost 3% or 2.2% of retail is excluded.
And on a sequential basis up from Q1 same store revenue was down 4.5% or 3.9 exercise excluding retail.
Oh, we had no development completions or new development starts this quarter.
We've had no starts so so far year to date.
Lastly, we raised over 700 million in capital this quarter.
The average initial cost of 2.8% with most of that coming from a 600 million dollar long tenure bond deal at a rate of around three and a half for said.
As a catalyst during his remarks, our liquidity balance sheet and credit metrics are very well positioned today heavy heading into this balance right.
Now turning to slide five.
I wanted to drill down a bit more on the decline in same store residential revenues this past quarter.
I just like demonstrates a the decline was primarily attributable to a loss of occupancy uncollectable reach gravity more bad debt.
Economic occupancy was down a 120 basis points not a while back that was 200, that's higher than normal.
A higher than normal Baghdad is likely to continue given the breadth and depth the downturn a coupled with the victory mortuary at many of the markets in which we operate.
Well, we also experienced fire concessions in the quarter and lower other income as a way various fees. This past quarter for our residents excluding late payments common area, notably in credit card convenience fees.
Average lease rate for same store portfolio Q2 was actually up 1.8% over Q2, 2019, I, reflecting embedded rent growth of leases entered into a 2019 through in Q1 of this year.
Turning to slide six as I've mentioned in my opening remarks, I'll just out there of course is a unique risks relative to other recessions.
In addition to the household contraction in consolidation that occurs do the job losses and any downturn.
A pandemic is driving other trends that are impacting rental demand.
Are these includes our work from home flexibility that shifting summer demand from higher cost an urban infill markets.
Many renters are relocating perhaps always temporarily to lower cost markets are submarkets.
Our leisure areas or even back on what their parents.
A second a record low mortgage rates under the desire for space is accelerating demand for single family homes.
Many homebuilders reported strong orders and sales this past quarter, particularly towards the back half of the quarter.
As homeownership rate is on the wrong.
And lastly, our we're sitting reduced demand from two important executive director of corporate and students.
Most temporary corporate insights to the canceled.
Higher education has adopted remote learning models and living on campus activities for the fall.
Are these factors will likely where performance since all the public health crisis has abated.
On the other handle also likely to secure due to a more robust recovery what's employees begin to return to the workplace.
Now I'll turn it over so I'll discuss our operations and portfolio performance in more detail Shaw.
Alright, Thanks, Tim.
Slide seven.
The fact that Tim highlighted on the previous slide impacted leasing volume throughout the quarter, which is down roughly 10% year over year [noise].
[noise] turnover for the quarter fell about 5% to the volume of resident notices to leave our communities exceeded leasing velocity.
Generally in May when we experienced about a 25% leased right for a variety of reasons, including corporate apartment, operator, shutting down operations in certain markets as a result, but about it exceeded move and for the quarter.
As of yesterday net lease volume for July is roughly on pace for the volume of notices to vacate our communities.
It should help stabilize occupancy as we move into August.
Moving to slide eight we experienced a 120 basis point decline in physical occupancy from April to Jim what most of it occurred in May as a result of at least break Blaine mentioned a few moments ago.
Turning to on slide eight to pick for at least an effective rent change for the quarter.
As detailed in our earnings release blended lease rent change was down 40 basis points in Q2, well effective rent change was down 3.1%.
Rent change for July has improved slightly from Jan.
Nature of the health crisis, and economic environment will dictate the ongoing demand for rental housing and our pricing power as he moves through the balance of the here.
Turning to slide nine you see the regional distribution at both lease and effective rent change for Q2.
Northern and southern California, where the most challenging regions for a variety of reasons, while the Pacific Northwest performed the best.
Moving to slide tend to look at performance metrics by Submarket type.
Submarkets deteriorated more materially during Q2 as compared to suburban Submarkets.
From an occupancy standpoint urban Submarkets declined by 270 basis points for me to pull the Jan Wald suburban Submarkets fell by almost 50 basis points.
From a rent change perspective, urban Submarkets trail suburban by roughly 200 basis points.
Well the weakness in urban environments, it's pretty broad based across our portfolio most pronounced in San Francisco, Boston and parts of Ella.
Unfortunately demand in urban Submarkets is suffering from a variety of factors several of which Tim mentioned in his prepared remarks, including a desire for more affordable price point.
Extended work from home policies across corporate America, a lack of short term and corporate to ban.
Certainty regarding on campus learning at urban universities, and a general concern about population density.
Shifting to slide 11, so that's our development portfolio construction delays at the beginning of the pandemic weighed on both deliveries in occupancy is during the second quarter.
As noted in sharp one on slide 12.
Hello, written occupancy is the first half of the year fell short of our expectations I, roughly 450, and 650 units respectively.
Which translated into an it off and I like shortfall of approximately 2 million.
Fortunately following some initial shutdowns at about one third of our construction sites for a short period of time.
The currently underway.
Yeah, with a slower pace to deliveries expected across certain assets.
I'll now turn it over to Kevin further address development Hearts funding and the balance sheet Kevin.
Thanks, Sean turning to slide 12 in response to the current environment, we have chosen not to start any new construction projects. So far this year.
Despite having initially guided in the beginning of the year to about $900 million construction starts for 2020.
Looking ahead, we expect lower construction costs will benefit many of our future plans starts and we're prepared to wait for the expected correction on hard costs before breaking ground that we can walk in lower basis on these investments.
Although we'll sign construction cost data are difficult to combine.
Initial indications suggest we are beginning to see a soft for labor market and a reduction in overall construction activity make their way the subcontractor pricing.
As for development that is currently under construction as you can see on slide 13.
We're in a remarkably strong position from a financial point of view.
Well done under construction is already 95% match funded with long term capital.
Which not only mitigates the financial risk the development, but also means that we had walked in the investment spread profit on these developments, having multiple entrepreneur expected would turn.
Projects in equity and debt price when we were selling these projects.
Finally, as shown on slide 14, we continue to enjoy an exceptionally strong financial position today.
Particularly evident when comparing our key credit metrics for today to those from the fourth quarter of 2008.
Let me answer the last recession.
Specifically since late 2008.
Net debt to EBITDA ratio has improved 4.9 times.
Five times, our interest coverage ratio has increased to 6.9 times from 4.5 times.
Our unencumbered and a lot percentage has increased to 94% from 77%.
Our credit rating has improved to 83, a minus from APW, one it will be plus.
The strong balance sheet position provides us with great flexibility to pursue attractive investment opportunities that may emerge as this downturn unfolds battles for FX test.
Hi, Thanks, Kevin just certainly last five and walk a few summary comments.
It wasn't challenging quarter driven by the sudden this is a pandemic them adapted to the downturn.
So far the impact on same store performance has been.
Driven by lower occupancy and elevated bad debt.
Contributions.
For mental and you develop that lease ups were less than expected due to construction delays and weaker absorption.
We have curtailed development dramatically.
Got started a new communities so far this year.
Spike that strength on the Purcell market, we do expect construction costs to fall over the next few quarters, and we'll incorporate that into our capital allocation plans.
And then lastly, the balance sheet, it's very well positioned broken absolute.
Sense and relative to prior downturns, which as Kevin that I've, just gives us plenty of financial flexibility too.
Yes challenges or opportunities as they arise.
So with that Matt will open the call for up for questions.
Thank you and as a quick reminder, for those on the phone to star one if you'd like after the Q first question will come from Nick Joseph with Citi.
Thanks.
Appreciate the color in the rationale behind pausing new starts.
Here's how long do you.
The label being tell you actually start you projects again nimble signals are you looking out before actually making that decision proceed.
Oh, Hey, Nick this is that.
Yeah, I mean, it is we have deals with the could start.
And we are you on a fairly high degree of conviction that hard costs should start to correct here.
So that's the main thing we're looking at is kind of where were hard cost trending.
What's the subcontractor big coverage look like.
There may be one deal that we would start here this kind of gotten exceptional circumstances, it's actually in an opportunity down and we're looking at starting with selling third party joint venture capital, which is as you know very unusual for us touch her.
For wholly owned balance sheets on to start that's really what we're watching.
It's not I interplay between potential.
Production hard cost and frankly reductions and then alive on Amazon.
And kind of looking at what the total basis looks like what cost look like relative to their long term trend line and then what rent NOI look like relative to their long term trend line as well.
Nick It's it's hard to know exactly.
I just looked at last cycle with Boswell four or five quarters.
Part of my introductory comments around what this economic downturn might look like it maybe different from or is that we see where others may then sort of maybe drifted a little bit more into the into the recession. This is this was quite sudden.
And others, where it may have been are quicker bounced back to think this could be a.
More drawn out bounce back and likely to be.
More more you've heard certain certainly the Nike solutions more people more and where are you hearing sort of the K, great shape recovery, where it's going to be very uneven depending upon.
Even demographic and.
And the population so.
Just given.
The public health.
And you know.
Economic accessing aspect to this one it's it's hard to know for sure but.
As we as we just as we.
Sure on that one slide we're just starting to see construction costs Brecken last last cycle there correct on the order of 15%, maybe a little bit more.
And.
The required on agency the kind of double digit corrections before we start to have a little bit more phase that we're fine buying deals out of the basis that yeah. We'll look good sort of next cycle.
Thanks.
That's the 500 million dollar share repurchase Chlo Grace.
Think about actually executing on that blurred as it currently.
In terms of the use of proceeds.
Relative.
Oh man or any other kind of acquisitions or redevelopment kind of other options they got for that capital.
Yeah, Hey, Nick this is Kevin I'll jump in here and May want to add a couple of comments.
Yeah, you're right as we as you saw there actually if you didnt have to share repurchase program.
$500 million I really the Genesis behind that as we believe our stock is as you alluded to trading at a compelling value both absolutely.
Relative to other investments including development.
The only because we have the balance sheet strength and liquidity to pursue program.
Yes, I think so.
So as we indicated the earnings release, we're likely to define that on a long term basis with asset sales and potentially some incremental debt, but we do intend to proceed and probably will do so initially and then measured based weve clarity on those sources, but I think at this point, that's probably our most attractive investment that we have today.
Yes, I, maybe just add a little bit Kevin I agree I think you got two things working that's the best serve us attractive investment and you've got the disparity between what equities costly and wed certainly like that's caution as Dan supportive artificially level by the fed right now so we know and.
And.
Our bullies all there's not a lot of lot of visibility on asset pricing.
Yes were you feel pretty similar that asset prices on a corrected near what the what equity prices of correctly we've seen.
30% on the equity.
Probably we think probably.
Less than 10% on asset sales, so that informs our conviction as well in terms of what the alternatives are in terms of the terms of capital sources.
Thank you.
Our next question will come from rich Hightower with Evercore.
Hey, good afternoon guys.
So I'm I'm on the the second chart on page eight just on the the blended like term rent change chart.
Just help us understand some of the details there you know across new and renewals and what you're seeing currently urban and suburban and maybe some of the weaker markets you mentioned, Boston, San Fran and Allied just help us understand some of the what goes into the mix there.
Yeah right to Sean.
Happy to walk you through at a little bit.
As we noted on an effective basis.
Great and goes down about 3% for the quarter. If you looked at it on a lease basis. It was down only about 40 basis points and certainly based on what I mentioned in my prepared remarks, we're seeing and they are the greatest weakness in northern and southern California.
If you double click through those regions.
Probably the softest spot so our San Francisco and throughout L.A., particularly in some of the entertainment oriented economies around the L.A.
Think about Hollywood West Hollywood, Burbank, San Fernando Valley et cetera.
And then the other markets, we're basically anywhere from zero to utilize 2% and across the other market that's off the spot to probably in New York City.
And throughout the urban Submarkets within Boston.
As I mentioned in my prepared remarks, he has generally across the portfolio what we're seeing in there have been submarkets.
Brent changes trailing suburban by about a couple of hundred basis points.
And as you probably another going to chart talk economic occupancy and physical occupancy or both trailing.
What we're seeing on then that's the purpose of markets as well. So certainly it's off a place to be as it relates to both rent change in occupancy in those in those environment and as it relates to kind of where things are today. If you look at it.
The context of July effective rent change is down about three and half for side, a little bit better than June.
And lease rent change is down about 2%.
And in both cases renewals to remain positive right now sort of in the 50 to 70 basis point range.
Slightly lower than what we experienced in Q2.
So positive in July at this point.
Okay, No Sean that's helpful and then I'm.
Just just thinking maybe a little more broadly.
Some of the some of the bullets.
Highlighted in the prepared comments you know about the work from home shift and the fact that suburban is outperforming or Dan and I would also it's Jim you know with respect to home purchases I mean, given the price points and Avalons markets, maybe you're a little more insulated.
From that effect and then the average apartment landlord out there. So so at what point does that sort of mix start to start to help Avalon and the sense of having a highly concentrated suburban portfolio. When do when do you think we'll really see that show up in.
In the numbers there as you know positively thanks.
Yes. This is Sean I can provide a couple of comments.
Yeah, Tim can chime in I mean, it's really a function of how some of those factors evolve over the next few months here.
I mean urban Submarkets, we mentioned several factors in a sort of driving Thats I think what I mentioned in my prepared remarks business or the nature of the health crisis, and economic environment will dictate yeah, when people sort of come back to the urban Submarkets.
And at least some more material way and on the suburban side, it's really a function of.
Sort of portfolio mixing in some places it certainly is very helpful.
Submarkets, where even though its suburban it's a little bit painful right now I'll pick one specifically like nothing view in northern California, where alphabet headquarter given their extensive work from home policies.
Tends to be a week or submarket or even though its technologically considered suburban.
I'm not sure there's a one size fits all answer here as it relates to that.
At least that's a general thoughts as this morning.
I think you ought to have just maybe just.
I mentioned suburban had been outperforming urban different parts of a pandemic than we had been seeing a trend upon the on the demand.
Yes.
And I have spent year urban supply to outpace suburban by a fair amount in our in our markets, but also of the demand side, which last cycle supply and demand was strong in the urban Submarkets. This cycle, it's probably going to be the opposite where both suburb you get beyond sort of 21.
I see where you're likely to see stronger demand and some of the suburban submarkets and and more supply and that's partly because.
Over the coming of age is more economic activity starting to occur.
In the and the software as part of Whats affordability. So.
Are you see more economic activity.
Yeah, that's all their drive more rental renter demand in the in the suburbs as well but.
We're already starting to see see that trends a little bit.
For the pandemic, but it's just the longer secular trend that we expect that.
It will continue over the next few years.
All right. Thank you.
Our next question will come from John Mccluskey Green Street Advisors.
Hey, Thanks, a lot shall I want to go back to your comment about you see signs of stability and leased occupancy heading into August.
Is that comment holds for the current pockets of weakness that you alluded to la Boston San Fran.
In the sharp John Yes.
And we are starting to see some student demand come back and some of these urban submarkets.
Based on an outside of the made to date as it relates to hybrid learning environments.
Both on campus and distance learning and.
Just anecdotally getting a lot of feedback from some of the student population.
You know had enough time at home and even if they're only could be I guess, that's a couple of days a week they want they want their harping back so.
Well that holds or not obviously as a function of the health crisis in the decisions that are made across the University system.
But in general I would say, if we are seeing that relatively a sort of stabilize a little bit.
That being said you know between now and your AD as I mentioned in my prepared remarks health crisis in the economic environment will dictate whether things kind of shift up or down in terms of demand as we look forward here.
Makes sense, and then HM 200 basis point drag from bad debt in the quarter on the residential portfolio with the opening remarks for something that affect that remained elevated data is that a reasonable betting line just to get the trajectory of these are these coming months or will it.
That means the worst means that usually better I guess I don't understand I don't I don't know how to simply saying true markets like in L.A., where this is actually more toward and keeps getting kicked down the road. So just curious at CIT comments around the trajectory of bad debt from here would be a they'd be it helpful.
Yeah, John Ethicon, and then Kevin it's Andrew can chime in as well.
I mean at this point in time, it's obviously difficult to predict.
Given the nature of.
What I mentioned to health crisis, the macroeconomic environment.
I would say theres been a federal support for people.
To date in terms of being able to sort of subsidize their incomes.
And then cancerous more in terms of personal income growth.
So I think you know assuming it's a relatively static environment for you at year end.
I expect to sort of collection rates to hold within reason, but to the extent there is significant shifted anyone of those variables in a meaningful way, obviously that could pick it up or down.
As a result, but I think those are the primary variables will all be monitoring.
Trying to determine whether we think it's kind of tick up and were down so.
Yes.
Okay. Thank you.
Right.
Our next question will come from Jeff Spector with Bank of America.
Thank you good afternoon.
Just wanted to go back to some of the Big picture comments, Tim that you've discussed so far including some of the comments during the Q1 day and.
Very much appreciate how difficult it is to figure out the medium to long term.
Just thinking in your comments about the lower costs options elsewhere southeast increasing home ownership.
I mean can you talk a little bit more how this is impacting let's say avalons medium to long term strategic plans whether that includes new markets. I. Just can you share some share some thoughts on that.
Yeah, I'm not sure Jeff I think we've spoken to this.
And the fast.
You know some as many of says I mean, I think the pandemic is you know there these trends aren't necessarily new there a lot of them are being.
Dan accelerated.
Each other you thinking about their big Tech and.
Employers in places like New York, and California, there already diversifying their workforces.
In other markets, whether it's Amazon in DC or.
I haven't bases in Austin, or Denver, and and so yes, we want to be leveraged really to the innovation and knowledge economy and.
So that means kind of going where those workers are growing.
And to extent jobs employers continue to chase jobs, rather jobs sort of the.
The jobs shaking their employee rather than the the employee Jason job then.
The.
Those those markets as those words, we got into the Denver and Southeast Florida.
Whereas things of that you look at the.
Just the fiscal situation of some of the Blue States you. There obviously are.
Yeah.
[laughter] are being exacerbated as well.
And so I think that probably forms or our thinking.
Also in just the this overall affordability driving driving.
Populations as somebody's market, we want to be in a sort of spillover spillover markets. We think what's happening is good for the innovation economy. So I don't think it's bad necessarily from San Jose and in San Francisco in Boston, but recognize that some of that some of those benefits are going to are going to spill.
All over two to some other sort of secondary innovation markets as well and those will be good markets for us to be and then and so we look to do a few things one is the kind of reallocate or recycle capital some capital in New York certainly.
And that probably in the future some out of California to both expansion or existing expansion markets as well as markets like a DC Seattle in Boston.
And then also potentially some new markets that were not into that.
And is that you know.
And I appreciate the comments I mean, I guess to your thoughts on work from home and the permanency of work from home does that impact the decision process at all or do you feel like you know that is it just the temporary adjustment right now, but you don't need it'll be more going forward, but not.
To the extent that some some of the media portraying or some on the street at the true yeah.
Yes, sorry, I know that's the office guys. You did take that question a lot I can sort of speak from our our our own experiences. We would expect we'd have more work from home.
Activity kind of going forward with there are certain jobs are there that are more kind of individual contributors, where they can be efficient at.
Working away from the office space that is not quite close to maturity other jobs and this commentary most most companies and so we view it is kind of a more of a marginal effect. It gives people a little bit more flexibility about where to live this.
If if.
They want to work from Robyn exactly you're probably not affect that focus on career growth.
They're probably not going to manage off people work out from at least over the next the next few years and in my view.
I would say.
Does it really affect our our view in terms of where we want to be probably less so than the fact that.
You know big employers like the Googles apples of the world are already diversifying their their their workforces.
In other markets.
With satellite operations there are so whether it's a satellite operations are people working from rounds are likely to go.
Some of the same markets over time.
Thank you stay well.
Yes that can use well thank you.
Our next question will come from Rich Hill with Morgan Stanley.
Hey, good afternoon, guys wanted to follow follow along those lines just bigger picture question Big for quite a bigger picture questions and go back to some of your prepared remarks.
[laughter], specifically about homeownership, we've seen some similar trends with the homeownership, particularly under the age of 35 cohort.
Do you think those are just near term given the decline that we've seen interest rates.
Or do you think there's more secular shift going on there.
Yeah, Rich I can speak to you and others may have a view I think part of it. It may be if you just look at the composition of the millennials.
Little bit as a big talk through the pipeline so with a lot more there's a lot more.
Of those that are under 35 in that 30 to 35 cohorts in there weren't five years ago.
Yeah, so that starting at our entering into this kind of prime homeownership, Yes, I think a lot of I think a lot of this again stimulated by demographics and and really the accelerated by what we're seeing.
Threats Register if we're not seeing it yet with our with our residents.
I read for who actually went down through the purchase but homeownership is going up actually and has an impact on the overall rental pool that affects all of us as as landlords that at some level. We may be a look we think require less at the start of the epicenter of it.
It's probably mostly coming from single family rental and.
And other other demographics in other markets, but.
It does have an overall it does have an impact on the on a broader sort of rental pool.
Got it that's that's helpful.
A little bit surprised there hasn't been more focus.
This earning season.
On.
The election coming up.
Couple of months potentially.
Regulation, depending upon.
What parties.
Power.
I'm wondering if that is something that you're focused on obviously the biden plan has housing as a big focus and affordability on the other side of cool. The 19 is obviously more challenged how are you keeping about that maybe over the medium to long term.
Richard factors there I mean, most of the regulatory risks we face is really at the local and state level I'm not as much as the national level up a good idea a little bit more concerned if there was another nominee or that was that was a crack nominee started at the national level, but.
You are markets have always been more regulators and then that other markets we are blue states.
It's always you know to part it's part of what's been the appeal of our markets is sort of the the barriers to entry has created some some supply constraints.
A new housing, which has helped elevate reds and.
And rent growth over time, I think the issue.
You are starting to touch on is the key one which is where it starts. So we came to price controls and write control that becomes the issue for us.
And the type of rent control.
Certainly in New York and parts of California, you have vacancy we control that gives us that's usually pretty manageable and in terms of a a as an owner.
As there are over apart we have continued.
Did you lose.
Control pricing on big Kansas, They become available that's the kind of right controls of industry, we have to absolutely avoid and it is it'll be all for the housing markets.
That occur so that's something we're going to can you to watch where it gets paid a fight as an industry because.
It's a lot effective for us is landlords for sure, but it's not good for the housing market long term and it's a it's a it's a long way to solve any housing crisis that have any local level could as politically expedient, but it's for a policy standpoint, it's it's absolutely more costly.
Understood and then one more question if I may in the past that you've done really good job thinking about how.
Your development and your land development is really under option that you don't have to move forward with that so I'm wondering you know as you survey the landscape so stupid 19.
Are there any are there any land that you have under option and maybe high barrier Blue states that.
He might want to not move forward with Dan You mentioned, Florida I think earlier in your remarks are there any of those markets where you'd prefer to.
Maybe focused on development going forward versus some of the marks that you're in right now.
Yeah, Hey, this is Matt.
As it relates to our current development rights pipeline, you're right. We only on two of those 28 field our land on that we bought from a third party, we give a lot of Optionality and it's really deal by deal you know they may do deals in there that are not going to work with that type of restructuring. There are other deals that are probably.
We'll work and there's some deals where we make things Atlanta is a good price and a we may close on the land and carried for a while wait for hard costs to come down. So it's a little bit of all the above it doesn't really factor into the geographic mix here, it's really bottom up in terms of whatever finding the best opportunities and you know.
We have a couple development rights in some of our expansion markets, including two in Denver and one in Florida that are working their way through the system, we have development rights in our legacy markets as well.
I don't think we've seen any particular try and yet in terms of.
You know kind of any impact to the landmark at or development economics more so in one market than another I would and where are you seeing obviously you know when taking the biggest kits so far.
Got it alright, guys. Thanks for your time and I appreciate the a that the answers.
Next question will come from West Cavaday with RBC capital markets.
Hi, guys at another development question for yet I was wondering if you could frame up how the development pipeline as active is positioned relative to the headwind you site on slide six and then basically kind of get us into the potential volatility around your 5.7% projected development yield.
Yeah, I'm, sorry that adapting development underway, where the development right yeah find a future Sir no yeah, sorry, Seattle pipe I I mean, I believe you guys pivoted a few years ago to more of a suburban footprint I don't know if they technically qualify and give us more the infield that you side of the headwind on page six.
Yeah, I mean, when you look at the 2.4 billion in development underway.
Ladies and catalog entrant like the current get over five seven.
Those deals are still there's only five of those 19, where we've actually done enough weakness as market rents to market, yet and I know, it's five actually the rents are slightly ahead of pro forma inside that family dollar. So now they build there a little bit falling because there's been a cost over runs on a couple of deals.
Generally speaking so five of the 19 or more or less mark to market. The other 14, Yeah you can handicap.
A lot of and our end markets that have seen left.
Downward rate pressure so far it is a predominantly.
Suburban portfolio in fact, looking I think the only deal in a in that is even consider urban other than probably wouldnt, which is under construction would be one deal downtown Baltimore.
Okay, and they've got their outlook.
Yeah.
And then what about with the work from home trend are you noticing any demand for your larger units people looking for and they've been other room for an office or a baby rooms with a view.
Yeah West this is Sean.
I mean, we've been thinking into that and at least based on sort of early returns I would say it appears as though suffer event direct entry product, which off as a townhome is.
Doing a little bit better in the current environment.
And Oh, there is little bit mix, but overall that appears to be positive trend for us in terms of that product type.
Across the portfolio.
And I would take it to add to that this is Matt that when you look at our development I you know have an industry average unit size has been trending down really for the last cycle, probably came down 10%.
What we've seen at least the last year to our development starts the average unit side, it's starting to move the other direction a lot of that had been are shifting more suburban asset side, but also even before the pandemic. You know we were starting to see just the demographic heading where they were greater demand for three bedroom units, which we didn't get started to go at all now almost every project rebuilt.
Regarding that.
And and worth the you know kind of a one bedroom Dan if you bet in law, Yeah, we definitely see building more of that product in the last five years ago.
Got it thanks, a lot guest.
Your next question will come from Nick Yulico with Scotiabank.
Hi, guys. This is summit Sharma impair Nick [noise].
Question about your bad debt bad debt expense and I just wanted to be a parent maybe you've stated that said the S. I apologize in advance.
Right off the 2.7 twists and have a Uncollectibles then I guess, how much was part of the bad debt provision or because some of you can you guys have have talked about zones.
Cost of do enough.
Yes.
Hundred basis points, and so and just getting a sense of how much went into those how much is deferred how much is just write offs and cash that that bad debts.
So at this is Kevin a shade I'm not I'm, having difficulty hearing you, but maybe just to give you an overview of what we gave with respect to bad debt and then you can ask questions.
Okay stuff that's been enough responding to some of your question. So.
So first of all our policies reserved delinquent they residential ran for three months and other delinquent items after two months.
For residential revenue, we typically take a reserve about 50 basis points of residential revenue and we did so Q2 in our same store portfolio.
In addition in Q2, we took a further reserve about 200 basis points or $10.7 million, including for residents, who didnt pay anything during the quarter that resulted in a total of reserve for the same store residential revenue.
Portfolio of up to about 250 basis points or $13.6 million.
Yes. So of course, we continue to fluctuate from our collective collection efforts similar certainly encouraged by leasing collection trends would show questions against on paid April and May reference improving about nine 7% for about 90, 394% a month and.
So that's that's the story and residential.
Revenue.
That's helpful that was positive.
Yeah I know that's that's great. Thank you so much in the fall is used to be a for the bad sound quality. Another question following calling out the a different kind of.
Hey, I'm just wondering in terms of the concession activity actually quite a lot of information opened with a suburban trying to understand where what kind of started types are being if I've seen the biggest concessions or two bedrooms bedrooms. I think if you want to that someone is talking about developing and how Jamie.
Got it makes im just wondering from a concession standpoint, where are you seeing the biggest drop again grant.
Where you have to give a largest symboda concession.
Oh, Yeah. This is Sean I give you some general thoughts on that first.
As you might imagine from what we described in our prepared remarks concessions are generally greater in urban environments is compare the suburban environments to start with that within urban environments. We tend to see if you're a concessions on the more affordable price points, which tend to be the studios in one bedrooms and.
Those are some markets as compared to the larger units.
You know initially we thought there might be a sort of steady or demand for larger given that some people looking to work from home with extra space, but I think he affordability issue sort of wait on that a little bit and we've seen better performance out of the studios and smaller one bedrooms.
And then the suburban environments I wouldn't say, there's a common theme as it relates units type, it's really submarket driven and the nature of the demographic within that environment. We've got very high quality towns in suburban Boston with great schools going on two or three bedrooms are.
Hello to ban and ones.
Not quite as much.
And if you refer to some sub markets and L. A bit more affordable price points and studios and one bedrooms are Ah.
Our shape as compare to Kovarsky, two or three bedroom units given the shut down some of the entertainment studios and stuff. So there's not a common theme as much as it relates the suburban unit types as much as the specific suburban geography.
Great. Thank you so much appreciate all the answers.
Thanks.
Yeah.
Next question will come from Alex comments, so minutes.
Thank you for taking my question.
Looking into bad debt in delinquencies, because you guys running analysis on your resident base to see.
With what age income or concession this is mostly centered on.
Yeah. Alex This is Sean we have to run some data on that.
And I guess, what I would tell you guys. This is more industry specific then it is.
Typical demographic makeup in terms of.
Andrei things of that Stuart I tends to be self employed sort of freelance workers content producers.
Looks like the asset if it impacted most materially.
And does some of our east communities come of that service say sector has put a bit unpack that as well whether its foodservice hotel you know things investor or some of the occupation is that Tim alluded to earlier in his opening remarks. So it really is more occupation driven than anything else.
Got it thank you and just to touch upon the park, where is your sales, though I would the.
The selling on that Oh, this quarter and.
I noticed the average unit price was a little higher so I'm, assuming some of that try to units got sold or was there any discount to February levels that you needed to offer to enhance the sale process.
Hi, Alex Matt.
So the the closings that we saw in the second quarter were almost completely deals that have been under contract or earlier than that not not entirely there were few deals. We did in the second part of that were quick clauses, including I think one penthouse units.
You know so the average price it's settled in any given time period is really more a function of just like I mean, it's happened to settle yeah based on schedule settlement and sell and so you can't draw conclusions I don't think from that with 54 units close right now we have another 12 under contract.
When you add that together it adds up to a little bit more than 200 million.
We have there certainly is negotiation and there's probably more negotiation at the higher price point and that that was a trend even before the crisis hit. So we have not really taking a different approach to pricing post kogut. They just haven't been.
Enough for.
Enough traffic and transaction velocity in the markets it really even even justify it I'm not sure that if we were to drop prices, we see a significant change in volume.
And we were offering a very compelling value, we believe before and it's still pretty compelling value and that was validated by that's pretty strong sales pace, we had before everything shutdown in early March so.
Yeah, there is more supply coming and I would say that.
Varies a little bit more negotiation at that at the higher price points, what we expected that the relative to expectations, nothing's really changed or without pricing yet.
Got it thank you.
As a reminder for those on the phone. It is star one to ask a question and this will be your last opportunity to enter the Q.
Our next question will come from Alexander Goldfarb with 5%.
Good afternoon, and thank you.
Two questions. The first one is do you guys habit have an idea how many residents are living in your apartment, who are paying rent aren't actually bear so they moved away, but they're still paying right.
Yeah, Alex is shop, that's a tough compare to come up with.
So just want to answer is no rebel and let's say voluntarily come to us and say, hey, I'm going to be gone for X period of time can you do something for me.
I still are tracking mechanism for that that would give you any sensing any real sensitive accuracy there.
Okay. So as your apartment managers are seeing I guess, maybe.
Maybe a male not being picked up or what have you thought a weighted sort of track and understand if the people paying on coming back where they're going to exit you know whenever the term ads.
Not necessarily I mean people have mail picked up for me to think about buildings that are 500. He doesn't have a thousand people that yeah, it's really hard to get a sense for that unless there is something specific related to a male hold that we're aware of or package delivery, but I wouldn't say you can count on that as they work.
Got a sample doesn't give you an accurate.
Estimates.
Okay, and then cabin on that on the development program you guys were planning on doing meaningful start. This year you haven't at what point as you deliver but you don't replace the deliveries at what point do the capital at the current capitalized cost start to burn off and that starts to those expenses start to accrete to the <unk>.
So the income statement like where.
How far would the delays have to go beating before you would see the expensive start to appear on the income statement because they no longer be capitalized.
Hey, I'll spend maybe maybe I'll jump I think Kevin may have something to offer I mean, certainly if we have people working in development or construction that are not actively working on h. job, whether it's a one that's under construction or one that's going to the planning process. They get expense I got to the income statement, but also they don't fit.
No if the cap what they can still to be well. We have started the year to date. We saw are typically under construction of 4 billion, but after the process. So we're still managing a 6 billion dollar pipeline that we are trying to rightsize it.
If you looked at this quarter.
It's about 10% lower than last four quarter average.
Capitalized overhead.
It's been it's running down as we've seen we've got some recent departures and retirements over the last 612 Bucks and some some senior folks as we try to they start to sort of rightsize. It for the sort of the next cycle and where we where we currently I don't remember.
You probably noticed.
Yes, probably about half that groups copies incentive base, so if they're not doing things.
Okay got you are doing as much production, there's sort of automatic that adjusted factors in the and the overhead piece as well, but our objective is really just to be really is well positioned as rightside trying to for the early early early part of that size will be able to flex up if we if we need to see opportunities.
Arrives.
Yeah, so capitalized capitalized, whereas this quarter is about 11 million without six and a half of that is developing that was up three that's construction and about a little over a million of its a redevelopment at the annualized you get about.
25 million in development and to about 12, mainly construction that is a level that supports kind of in the I think we were talking about 808 to 900 million range sort of sort of plus or minus so that's what we're still geared towards so.
We expect we talk over the next three or four years, it doesn't make sense to be doing that kind of volume.
Obviously headcount will calculate adjusted but.
Well, we suspect you know over the next couple of years, we're going to really in a position sort of ramp up back what we want to make sure. We got the leadership the and the right right personnel in place. So they're still managing you know as we go into this recession you had about 6 billion worth of a total pipeline which is.
Probably only about 25% off what kind of where it's at its peak level, probably in the southern happy to know arrangement.
Okay. Okay. That's helpful. Thank you.
Sure.
Our next question will come from Rob Stevenson with Janney.
Hi, good afternoon guys.
What's the positive impact that you'd typically see in terms of traffic and leasing wise in May June July time period from the influx of new college graduates renting for the first time in your core markets on a normal year, what have you seen thus far this year. It seems like very few college grads in your core markets could actually branded apartments this year versus a normal you're given.
Early coal the Kid and so that that might be a big driver.
Oh, Yeah, Rob Sean Good question.
Yeah, a couple of thoughts on that I'm not necessarily a specific data since it's a little hard to capture but at our particular case and we don't have a lot of student oriented asset pre select across certain markets, particularly in it urban environments I would say.
But your broader question really probably relates to the percentage of the market that is.
Really made up of the student population, that's sort of bring the occupancy for the entire market that's something to be honest, we're just trying to get our arms around that I'm not quite there yet in terms of what that represents each one of those submarkets, but there are certain submarkets like we have a property here in the district.
That's pretty tight to eight you that you know what they adopt our plan to have a hybrid learning model. Yeah. We did 80 leases in one week.
So there's some markets, though like that that are highly dependent upon it but I think broader questions. One we're still trying to answer which is sort of collectively what the demand is from the student population.
One segment and that from the short term I call. Her rental market is the other segment. We think the short term corporate piece is probably in the 2% to 3% range.
I would try to understand that in terms of the student population, particularly as universities may shift their on campus housing options.
For the extensive they're trying to sort of death, but some of those communities. So it's a little bit of moving targets, it's probably hard to answer Renesas exact called left but certainly the peak time for that demand is as you describe it as we're moving through the pre leasing fees, but you're going to see sort of from yeah. Basically April through June like you might see.
Some of the student housing rate.
And you want to be pretty late to those buildings and a nice it's not plus range.
You get towards the end of July the for the show up August So we're on track for that at some of the buildings, but there are places in and around urban Boston.
Parkway places like that where they are falling short because of the uncertainty around the a the ultimate learning model.
Well I mean beyond the student Stephanie I was really focused on 21 22 year old to just graduated that have a job with let's say it investment Bank Tech company consulting farm or whatever but you normally get in New York, San Francisco, Boston et cetera are renting for the first time, where they're bringing in offer letter to.
And our leasing off of that means that influx of student.
One of our students, but now and right people entering the workforce for the first time made how significant is that typically a nice big sort of gateway cities.
And that's probably a telephone to answer to that end.
Stuff that's related to people that are coming in for a specific kind of programs like in training program or some other kind of corporate forgotten I guess, 2% to 3% of the market.
Our market.
What you're really talking about us is ongoing demand.
People are graduating from University has moved to answer the rental market, that's a little tougher to quantify overall.
Just want to fly.
Yeah, Rob that that is part of you know it's not earlier in my remarks about the typical household contraction in consolidation that you see in a downturn that as part of it literature described I mean.
You know.
Kids, they can't get jobs, when they get out and again I call to stay at home or you know they did it go onto a house with six guys are six people instead of you have seven getting their apartment. So.
Yeah, <unk>, you'll see I pass recession as you've seen you know occupancy followed by a couple hundred basis points, you may still be seen a little bit a new supply. So that's all unusual city contraction of household demand.
In order of a you know million too many and housing.
Housing units across the country in a normal downturn and a big portion of that is I think exactly what you're getting folks.
Okay, and then lastly from me what do you guys seem today versus at the beginning of the here in terms of construction costs, both hard and soft I mean, how meaningful is been the the delta where where's the whereas the greatest amount of slack today and you know is there any of these buckets that are.
Now that you're seeing you know more Oh, you know pressures either up or down on now given what's happening in single family or whats happening elsewhere, the falling off of new construction in other sectors.
Yeah, Hey, Rob this is Matt.
And we are starting to see it but it is early.
So where we started to see it first is really in some of the smaller contract Capex work, though if you think about it those are the types of.
Jobs that are short in duration so.
You know if you're a car subcontractor that skewing that facade.
Restoration project for us or some concrete repair work that might be a two or three month or six month job.
And if they finished one off they don't necessarily have stuff to replace it. So we are starting to see it there and in some markets we've seen.
You know mid single digit buyout savings on that work, which.
And all that make meaningful, but given where we can coming from where we've just been seeing constructor top growing much faster than inflation for the last four or five years. It's it you know it is a significant change on the new construction, if it's probably still too early in almost all markets because everything is underway and there's a lot underway is gonna have to get finished first.
So again, where you're going to see it first is gonna be any early trades Earth work pipe work.
Demolition, maybe a little bit concrete.
And then regionally, it's kind of area as well so what we heard others say is maybe we're starting to get a little bit in south, Florida, because a big part of what drives that is also.
There's no wood frame construction there for one thing, it's all concrete because of that because of the hurricane code and there's a lot of a cruise ship restoration work and hospitality work is not happening that's been canceled so.
The topic, there as more excess capacity hadn't really work its way into most of our market yet Oh, yes. Some commodities are down lumber is up lumber is up quite a bit right now.
So that's probably a spots what's going on in the single family market and just a home renovation market.
So there southern cross currents there, but it generally takes a while construction pricing is a lagging indicator and it's kind of take awhile for it to work its way through the system.
Okay. Thanks, guys.
And our final question will come from Rich Anderson with SMBC.
Thanks, Good afternoon, Oh Berlin swell.
So.
Ken mentioned or maybe somebody else like kind of stuck in this on what happened to make a lot of decisions for you, particularly as it relates to development postpone it.
From our certain Oh, Ido nine timeframe you can't have beside the whole write off related to your development pipeline and how long I apologize.
Gone memory.
Curious, though if you fast forward to 12 years later today is there anything about what happened then that you talk from a lesson learned and it is sort of allow you to.
Well I grew up here without having any sort of disruption like that.
Just wondering.
How that experienced during the great financial crisis has manifested itself and how you look today I know you mentioned you know the difference from balance sheet in your prepared remarks, but I'm. Just wondering just in terms of how you approach to business, particularly on the development side. Thanks.
Yeah, Hey, rich as Jim I'd say, it's largely been and land then when you said we had.
Like we wrote off her head impairments on the order of about 80 million total and a good portion that was in land.
I would just say relative to the size of the development pipeline.
You know that deals were profits have been larger than that.
In terms of value, we create a site and whether we werent I mean homebuilders are were taken impairments of end ability and we took a right I think we took an impairment of the order of 60 minutes. This probably just done on land and so we've been really very disciplined about maintaining optionality and Ah yes some of the.
I was talking earlier some of the deals may not make in you know we may have cells that are unwilling to restructure to the extent restructuring sort of could closes to close the gap.
And could have some sense if they did you write offs i. I suspect, but it's really out of the pursuit costs, which is pretty cheap capital relative to the size of the pipeline that we control so.
So I would say the biggest issue. It's just we just don't have land inventory.
Any of any significance. So this decide compared to last one and the only thing I'd add to that this is Kevin lets just obviously as we've discussed many times in recent years.
One key lesson, we took from that downturn was to be a whole lot more match funded.
With respect to the development away in terms of having the long term capital places to you see that that lesson being apply here.
And it very visible way with respect to.
Two and half billion, we had underway right now with 95% already match funded so that that obviously leaves us a lot more foot forward at this time around how to pursue opportunities and I may pop up.
Right and then secondly, you know a lot of talking this call about summer feeding the urban core you guys are I think pardon me wrong on this one I take your 16.
Thanks.
Suburban one for urban and perhaps you're still expensive option I noticed up or do you think that.
But that sort of break out could ultimately help you out long term here is there sort of situation settles and that people maybe talk all the way back in but they come back close enough work and benefits you and your suburban portfolio.
Yeah again, Richard I think it's talking earlier, we they're already was a trend.
We already we're sorting.
You know started itself the portfolio a suburban that and if you look kind of at our history, probably where where we created the most value at least to develop I sort of some of that suburban infill and and I think is that you know silvadio's get a little bit old or you see more economic activity. So I think you kind of this kind of urban light.
You know lifestyle mixed use kind of and fill suburban areas is probably.
Provides offers one of them more attractive opportunities that's less dense.
Urban environment also has a as a generally is more affordable.
Look we delivered an urban area, so you're already kind of moving in that direction and maybe this just pushed us a little bit little bit harder, but I'm. A you know so I think the demand factors that were already in place or just you know probably just being magnify, what's what's happening to us who knows.
Great. Thanks, very much appreciate it.
Thank you.
And with that I'll now turn the call back over to Tim Naughton for closing remarks.
Okay, great. Thank you, Matt I know a and they're all you have a number of a number calls need to be out today. So just want to thank you for been yeah with us and.
Enjoy the rest yourself towards the buckets you said.
[noise] once again that does conclude or call for today. Thank you for your participation you may now disconnect.
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