Q3 2020 Avalonbay Communities Inc Earnings Call
Ladies and gentlemen, good morning, and welcome to Avalonbay communities third quarter 2020 earnings Conference call.
At this time, all participants no listen only mode.
Remarks by the company, we will conduct a question and answer session.
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Your host for today's conference call is Mr., Jason Riley Vice President of Investor Relations Mr. Reilly you may begin your conference.
Thank you Rob.
Well the communities third quarter talking talking earnings Conference call. Please note the sport.
During the call.
[music].
Actual results.
[noise], that's going to be equally.
He said yesterday optical properly.
It was probably 30.
Probably.
As usual, we doubled kudos to touch the definitions and reconciliations of non-GAAP.
[noise] maybe.
You touched on the bulk of available on our website at Www Dot <unk> dot.
Fourth wash.
We encourage you to refer to this information for your property.
With that I'll turn the corporate sales.
Chairman and CEO will not want that.
Oh, yeah yeah.
Yeah. Thanks, Jason with me today are temporary say, Sean Breslin and that there Bob.
John and I will provide comments on the slides posted last night.
All of us will be available for T.N. afterward.
Our comments will focus on providing a summary Q3 results.
Okay on operations itself.
Perspective on the transaction market and our financial position.
Oh, maybe just a few comments before turning to the deck.
Oh several trends are unique to this downturn and had them.
Well that we discussed last quarter played out in our core market Q3.
Well the appeal of urban living is for the time being.
Manish due to health concerns of living intense environment.
Oh, that's right downs effect on retail entertainment and cultural values that have long been a the draw for urban centers.
So on routes that occurred in many of our cities over the summer and early fall.
Well no flexibility has been extended through year end by many if not most employers.
Particularly those heavily weighted to knowledge based jobs like many businesses in our coastal markets.
We've experienced a significant reduction in student corporate America.
As a remote learning modalities are being deployed at many urban University and business travel has dropped off substantially.
And finally, historically low interest rates are stimulating demand for existing and new home purchases.
Particularly for younger age cohorts worship breaks up we've got the color.
All these factors have resulted in a unprecedented reduction that apartment demand.
<unk> urban centers beyond what we typically experience in an economic downturn.
And while we believe the reduction of demand, it's mostly temporary nature.
He also believes that it wont be restored until we substantially resolved the public health crisis.
From what I've ever.
[noise] a meaningful recovery in our business will not occur until employers with it because they bring their workers back to the workplace [noise].
And sales and business leaders are likely to err on the side of caution before reopening their workplaces.
Which is ultimately what will need to happen before many of their employees retire two apartment.
Oh I suppose if there's anything so I didn't get any that's it's a it's a third Asia struggle to respond effectively to the pandemic.
Could ultimately lead to improvements in our response to the teacher public health crises.
Looks like we saw in the aftermath of 911, and the great financial crisis or National response, what a building a more resilient systems to address the threat of terrorism and financial market dislocation respectively.
We have done that in the future our nation and our cities will be better prepared to deal with the public health crisis are more resilient and less disruptive way.
But for now.
Way that we've had we've been dealt a little endeavor to provide as much transparency and disclosure. That's the actions that we're taking on spot and the ultimate impact on the business.
So with that let's let's turn to the resort results for the quarter of starting I'll start on slide four.
Q3, that's certainly a proved to be a challenging quarter.
<unk> growth was down by 12%.
Driven by same store revenue decline of just over 6%.
On a sequential basis.
Q2 same store revenue was down about 2.2%.
We're about half the sequential decline we saw in Q2 as bad debt in Q3 leveled off relative to Q2. After the big increase we saw it keeps you during the early months of the of the pandemic.
[noise] I terms of capital allocation for the year. So they have to Q3, we break even.
7 million through the debt issuance and dispositions.
We repurchased about 140 million of shares.
We started only one development so far this year and that was through a joint venture of opportunities out there in the Arts district of L.A., Oreo just 25% of the venture.
Importantly, our liquidity balance sheet and credit metrics remain in great shape, we manage through the current downturn [noise].
Turning to slide five.
I like we saw in Q2 the decline year over year same store revenue in Q3 was primarily attributable to a loss of occupancy.
Uncollectible lease Robert as well or bad debt.
Please see a package or about 80% of the drop in same store revenue in Q3.
Over the next two to three quarters, we expect to see if it's any declines in same store revenue growth.
Recently acquired will be driven by pressure on rental rates.
But they saw effective rental rates fall by almost 6%.
Last quarter.
Oh.
These declines will have a more pronounced impact on revenues over the next few quarters as those leases or to get a little through the portfolio.
At a shuttle sure his remarks about the decline in effect of our rates. That's been great is in high cost in urban markets like San Francisco, New York, That's there today.
And with that I'll turn it over Shaw, who will discuss operations and portfolio performance in more detail.
All right. Thanks, Tim.
Turning to slide <unk>.
We experienced a year over year increase in prospect visits to our community each month of the quarter.
In total visit volume was up about 20% year over year during Q3.
There are roughly 10% increase in net.
As you can see her chart two on slide six let's significant increases nothing so I'm occurred in September which is up about 35% year over year.
And as of yesterday traffic and leasing volume for October was up roughly 25% and 20% respectively.
Moving to slide seven.
The first time in more than four years resident notices to vacate our communities increased by a meaningful amount on a year over year basis.
During Q3 notices increased by roughly 17%.
Primarily as a result for the spike in lease termination and urban Submarkets, which is depicted by the hash bars on chart. One that's slide seven and a topic I'll touch on in a minute.
Our leasing volume exceeded the pace of notices however, starting in August and has continued through October.
As a result, if you turn to slide eight you can see that beginning in September movantik, They did move out.
Physical occupancy has increased in the low point at 93.1% in September, but 93.5% for October and stands at 93.9% for that.
Moving to slide nine.
Suburban portfolio continues to perform substantially better than our urban assets charge.
Charts wanted to at the top of slide nine reflect notices to vacate our vacate our communities and lease terminations by Submarket type.
Notices to vacate our urban communities increased by roughly 40% during the quarter driven by an approximately 70% increase at lease terminations.
Let the 340 basis point decline in physical occupancy from Q2 to 90.2% and double digit decline in rent change.
So our suburban portfolio the increase notices to vacate with more modest supporting better physical occupancy and rent change.
The performance of our urban portfolio has been impacted by a variety of factors, including those mentioned, but said in his prepared remarks.
The combination of extensive work from home policies and the civil unrest that occurred during the summer months, which impacted the quality of urban environments.
Factors driving residents to break leases during Q2, Q3 and leave urban centers for housing options and other geography.
Shifting to slide 10 Trust regional performance.
Increased turnover in northern California committed Atlantic.
And New York, New Jersey in fact, the physical occupancy more than in other regions.
The New York, New Jersey region. The increase in turnover was primarily a function of elevated turnover in New York City.
It was 87% on an annualized basis during the quarter.
For the mid Atlantic, we experienced increased turnover in the district of Columbia, and other urban or clause like urban sub market like the Rosslyn Ballston in Tysons corner Submarkets in Northern Virginia.
In Northern California annualized turnover during Q3 was 85% driven.
Driven by elevated turnover across all three markets, San Francisco, San Jose and the East Bay.
Well, it's most pronounced in San Francisco and in Mountain view, where Google is headquartered.
On a positive note turnover was relatively flat in new England, which is a testament to our primarily suburban Boston portfolio.
Well, it's kind of both Pacific Northwest and Southern California.
Physical occupancy in all three regions exceeded the portfolio average.
And then lastly, the slide 11 same store like your lease rent change was down 3.3% net effective rent change was down 5.8%.
Metro New York, New Jersey, Northern California few of the region's identified on the last slide with elevated turnover and therefore available inventory to lead.
The weakest rent change during the quarter.
Brett change and no bank lender held up the path against the border, but supported by our suburb of Boston portfolio, which in many cases offers differentiated products, including larger unit sizes to those departing urban environments.
So with that I'll turn it over to math to address our development portfolio.
All right great. Thanks, John turning to slide 12.
We are starting to see a remarkable recovery in the transaction market ultra low interest rates have started to bring buyers back into the investment sales market for properties that can support reasonable levels of debt service, primarily suburban assets, where operating results have been less impacted by the pandemic.
To take advantage of this shift in buyer sentiment, we increased our disposition plan over the summer and brought several communities to market in the past few months.
As of today.
Communities are currently under contract or letter of intent at very attractive pricing with cap rates averaging 4.4%.
This compares to four communities that we sold earlier in the year at an average cap rate of 4.7%, putting us on track to complete nearly $700 million in dispositions for the year.
Turning to our development portfolio Slide 13 shows the rents we are achieving at the nine communities currently in lease up for.
For the past several years, we have shifted our development focus to more suburban locations.
We're starting to see some of the benefits of this strategy now as our lease up rents are only about $45 per month below our initial underwriting allowing for continued.
Creation on these assets as they are completed and stabilized.
We have highlighted three of our lower density northeastern communities on the slide which feature a rental handheld and what's your showing a nice increase in rents compared to pro forma.
This product, which featured larger floorplans private garage is and directly with no problem corridor is particularly appealing in the current environment and serves as a good substitute for single family rentals, which are enjoying very strong fundamentals.
On slide 14, we show the future earnings potential of our development.
At current projected rental yield we expect to generate nearly a $140 million in annual stabilized NOI with only $14 million that reflected in our Q3 results and with more than 90% of the capital needed to complete those out that's already funded these.
Development should contribute significant incremental cash flow over the next several years.
And with that I'll turn it back to Tim for some closing remarks.
[noise] well, thanks, Matt ill turn it to the last slide slide.
It was another challenging quarter, driven by the suddenness and continued strength of the pandemic.
Same store performance is being driven mostly by our urban portfolio stock, let Jen I pick them up.
San Francisco, New York, that's perfect varies with larger units have performed much better.
While pricing pressure if it stays intact rental rates occupancy has begun to modestly improve and stabilize on a 93% to 94% range.
Oh, the Transmode action market as Matt mentioned has picked up dramatically after having been frozen earlier in the year, but.
But those assets they have taken to market values are generally holding up at levels close to predictably valuations.
We continue to be cautious on deploying your capital, particularly for new development.
Where economics are challenging and construction cost has not abated in any material way.
Lastly, the balance sheet is very well positioned as much stronger than prior downturns, which should give us plenty of financial flexibility to address the challenges posed by the current that Sir.
So with that the abbey, we'd be.
We'd like to open the call for questions.
Thank you.
There are minor just I wanted to ask a question. If your question has been answered or you wish to remove yourself from the queue Press star two.
We'll take our first question from Nick Joseph with Citi.
Thanks, just on the transaction market.
You bet your kind of urban versus suburban, but that's kind of blended transaction Oh.
Just values are pretty similar to <unk> can you bifurcate that between the two both in terms of Oh your interest.
Mileage values for urban versus suburban and what you're seeing today.
Hey, guys. This is Matt.
I wish that I could but the reality of it is that there's very very little kind of urban high rise assets that are in the market right now and it's kinda makes sense. When you think about where the occupancy is ours, where the rent changes on those assets as Sean laid out in his remarks, so the assets that are too.
Rating both were trading in that we're seeing others trade in the market tend to be more pass.
Assets it can support strong.
Service coverage wherever the buyers can take advantage of the rates. They are incredibly high grade and those tend to be more of a suburban assets more maybe 100 million or less in general asset size, although not universally.
As you mentioned I know that that's what we're seeing is the values are pretty consistent with where they were pretty crowded.
You know in some cases, the cap rates are down the analyzer down a little but the value is pretty much the number a little higher some are little lower end of the year.
Good on those has been incredibly strong you know there's a lot of capital that was raised.
He went to NMHC in January this year, there were a lot more people, saying they were going to be buyers and sellers. So there was a lot of money on the sidelines and that money was frustrated in the first half of the year was very little transactions to shoot at so.
Yeah, you're seeing a little bit of a pent up demand there but.
But again, that's all focused really on the assets that are being brought to market.
And I'm not aware of hardly any kind of downtown urban core Mark.
Market assets being brought to market in this environment the value on those assets.
It's really anybody's guess.
Okay. Thanks, and then just in terms of your own appetite for sales.
440 million, Matt. Thank you cite here.
Behind that that.
That if you could tie that to the share repurchase program and expectations going forward.
Well yeah. Nick this is Kevin I'll begin with the share purchase.
Yes, there's obviously a lot of number of uses that we fund with asset sale proceeds as we always do including development.
And on the way, but in terms of the share buyback.
As you saw we were active in that program in the second quarter.
Really the fundamental thesis behind the share repurchase program hasn't changed.
We expect to be active on it and the third quarter.
Yes, I believe it is an attractive opportunity to take advantage of the disconnect between private and public market values for investors like ourselves you can see thing through to the other side of the pandemic.
The balance sheet strength and liquidity to pursue a modest share buyback that's cute it in a measured way, which we believe that in the second quarter was intended and so going forward in one of the funded primarily with asset sales in size and manage and manage that preserves our strong credit profile. So.
All those things are two last quarter. They remain true this quarter and so looking ahead, we will continue to plan on a measured buyback funded primarily with asset sales with an eye on preserving our financial strength and flexibility. So we have plenty capacity to sell assets overtime.
They'll feel thats going to be.
Right.
Well its important.
Yep.
We will take our next question from rich Hightower with Evercore.
Hey, good afternoon everybody.
In terms of the in terms of the move outs that took place during the third quarter.
And.
Predominantly within the urban portfolio can you give us a sense. If you track that sort of thing you know where they're moving to in terms of forwarding addresses because you've heard commentary on interest city move, let's say, where it's more bargain hunting than anything but are you seeing a a structural shift outside the city from your urban.
Obviously urban inhabitants going elsewhere.
Yeah Rich this is Sean very good question and we do track that just based on 49 addresses I'd say, there's probably.
Two or three things I'd highlight as it relates to you know when you look at the data what sort of stands out.
And.
Really it three points first is we classify a big move for a rather than is that they're moving more than 150 miles somewhere.
And in that category, New York City this percentage of move outs.
Q3 at 19 that was about 17% of the population that increase to about 30% of the population in Q3.
In San Francisco.
Good for last year was about 23% it moved up to about 27% this year and.
And then two other categories I'd highlight a regional level, which we define as between 50 and 150 miles away from the party location.
New York City that moved from 6% of moved up to about 20%.
And in San Francisco from 7% to 10%.
And then probably the last one it highlighted all they consider a market, which is between credit and 10, but less than 50 miles and the one that really stood out as a meaningful increase.
Boston.
Urban Boston, where it increase your best at 10% to 20% so about double.
One thing you have to keep in mind in some of these things where a a local move is obviously less than that that allows letting go through it but yes 10 mile. It's going to be you know when you think about some of these urban environment and mild but yeah. It feels like a long ways.
Separately, the San Francisco 10 miles to be going down into that's left or places like that but in terms of sort of the larger load.
That's the data that stood out.
Okay. That's helpful staff.
And then just maybe a quick housekeeping question, but for the on the asset sales side the properties that are.
In the market or under contract can you expect those to close by year end or what the timing here.
Yeah.
Hi, This is Matt I think most of them will close by year end, it's possible one or two might slip into January.
But we would expect most of those proceeds to come in by the end of the year.
Okay perfect. Thank you.
We will take our next question from I will ask her back with bank of America.
Hi, everyone. Thanks for taking the question just going back to.
Focusing specifically on the Bay area.
Hi, good northern California, but kind of where do things stand today.
I could see them move that's moderating.
The winter months.
And do you work with presidents offerings like suburban much options to keep them within that.
Yes.
Your your question broke up a little bit in terms of residents. The party in San Francisco, I think you said or whether we're seeing that accelerate or decelerate with that's the first part of your question.
Yeah I was just wondering if like move outs are starting to moderate as we head into the <unk>.
Yeah, I mean as.
As you can see on the chart regarding the move and move out or will be posted up there. We're starting to see volume is as we move into the fourth quarter. In October specifically that is you know relatively typical seasonal patterns.
But in.
In terms of whether that's sustainable or not.
Not a lot of different factors and many of which 10 mentioned in his prepared remarks, so it's probably too early to conclude.
That it's a definitive downtrend other than seasonally that would normally be the case.
And then I think the second part of your question was around transfer is and whether we helped facilitate that for residents and we do.
And as it relates to transfer activity transfer, it's we're up about a roughly a third year over year.
So we are seeing increased activity both within the same community and to another community is that like with entity within a reasonable distance of the community their department, so definitely an increase in activity there.
It's not a meaningful percentage of total move outs, if want to think about it that way.
Got it and then just one other question on so some people start to get creative urban markets by transforming MKM partners.
I would say so.
Building in Dallas.
Next in the apartment and south to track record have you guys done anything different I tried renters in your urban markets have Rogers and asking for different amenities like that.
Yeah no good question.
We're spending a lot of different things that we've done a fair bet as it relates to some people who are looking for in this environment a short term say it a different geography. It may not just be an urban environment. It could be a suburban environment, where they have left.
The urban environment, but they're not sure when they have to return to work and that urban environments and therefore, they have like around a furnished department at a suburban location.
That's not fair sort of normal home location, so we're doing a little bit of that.
And then.
Certainly as it relates to amenities were trying to facilitate.
You know through delivery and things of that sort of steps, we can given the constraints of the building itself. The physical standpoint trying to facilitate does best we can so for that our customers that are home in urban environments and trying to make sure that they have access to the amenities that they would normally enjoy just in a different way.
Great. Thank you.
And well take our next question from Rich Hill with Morgan Stanley.
Hey, good afternoon guys.
Let's come back to some of the October updates that you had you had put in your presentation you discussed in your prepared remarks.
It looked like there was some pretty.
Healthy improvement and occupancy so the question I'm trying to maybe get to understand a little bit better.
Do you think rents have come down enough in your markets whereby demand is starting to come back up and you're going to start to see less bad.
Yeah.
Call it leasing.
Leasing spreads going forward. So it's really a question of velocity here going forward and do you think that you're starting to see some stabilization in that demand.
Yes. Good question, Yes, your thoughts and then others can join in.
I mean, I'd say, obviously recent trends, particularly September and October were favorable in terms of demand.
Absorbing some of the inventory we had obviously we had more available inventory given the the turnover and the lease breaks that I mentioned, particularly in Europe it environments.
Which did put some additional pressure on pricing, but you.
No. It really is sort of a macro question as it relates to.
Particularly in urban environment people coming back into those environments, because they feel comfortable about it they need to go to school. They have to go back in the office although.
All those macro factors really drive that ultimate decision as to whether to return to that environment and prices were just right what am I going to choose within that environment and as long as your competitive you should get your fair share of the market overall, but I think the macro factors are really the things that will tilt that let's say either stabilized.
People are positive going forward or deteriorate.
Those are really the key drivers here and I think thats yet to be told that whole story until we move into it a little bit further here towards year end.
Yeah, So I'll, maybe I'll just add to that a little bit I think what we're seeing a little bit as what we would normally see in a downturn, which is sort of the housing market is dynamic and kind of resetting resetting its level. If you will so we've lost about 300 basis points occupancy.
We've had to reach down a little bit if you will into the rental pool.
And.
As part of that you've got a you got to adjust pricing in order to in order to sort of attract your sort of fair share. If you will we.
For the poor as I think all play in terms of whether it stabilizes. It's just a it's going to be a question I think at the macro environment as Sean mentioned, but also just what's happening on the public health Health manager said, it's a that's really impacting urban centers in particular in a very unique way fix that we get a vaccine or.
Our therapeutic it starts to give employers profits of activating employees back into the workplace, they're going to start coming back into the answer. These urban centers in terms of in terms of their living delivery arrangement and that's going to that's going to create some some net new demand for us and helps I wasn't to the extent the thinking there is to get protracted the vaccine is just out.
Get approved or don't appear to be as effective as the as we hoped or don't have the penetration. Then this will obviously today to be a bit more protracted but.
I think that could that could really help you know sort of stabilize if not not improve the the outlook, particularly for the urban centers.
So just so I understand.
Are you.
Is it.
Are you, suggesting that that the improvement in October that was noted it is more.
Seasonal or would you or are there other factors that are driving that.
Well I think a lot of it's just price driven honestly rents have good data to come down sequentially and we've got to apply which we've been able to attract sort of our fair share of the market.
93% to 94% range in terms of in terms of occupancy. So that's I think that's where that's what's driving it initially into as to whether it stabilizes I think or it's a function of some of the things such as much as I mentioned.
Got it helpful. I think that's it for me guys. Thank you very much.
We will take our next question from Rick Skidmore with Goldman Sachs.
Hi, Thank you good afternoon, just thinking about the development pipeline the future development pipeline pipeline both of new starts how are you thinking about that.
I know you talked about not doing any new starts yet other than the one JV. How are you thinking about it as you look forward and then also as you think about mix both from a geographic mix and I guess your urban suburban.
Oh, Yes, hi, this is Matt I guess I can take that out of him they may want to add something as well.
Yes, it's really a combination of I'd say go to bottom up in terms of the deal.
Ill pencil in terms of the value creation.
And are we seeing an attractive cost basis as well as top down you know just what our other options for our capital availability as Kevin was talking about so we.
We might start a deal or two this quarter.
The deal that are more likely to start sooner identity somebody suburban northeastern deals where even from my prepared remark you saw some of those lease ups are actually beating their pro forma it's pretty significantly.
Some of those locations.
Are are benefiting from somebody out migration from some of the urban sub markets and those are markets that you tend to be much lower beta in the first place they tend to be less volatile in terms of rent. They haven't seen the same run up in hard costs over the last 10 years or five years, certainly so maybe there's a little bit less get back on hard costs and some of those.
Market.
So that's probably where we're more likely in the short term to start you know we are still looking to grow in our expansion markets. So that's another place that we don't have anything we're going to start there in the next quarter, but at some point next year, we may have some deal to start there.
And then the other piece of it that's what's going to happen with with hard costs, and we had not been hard cost come down.
You know, David maybe flattened out in some of our markets.
Yeah lumber is still sky high although starting to come down some and.
And Ah you know weather.
The reaction to this downturn if you go back a few cycles go.
The recession there after the great financial crisis part costs did come down quite a bit but prior cycles. It was more that they kind of flat line for a while.
And inflation surpass them, so they kind of fell on a real basis, but not a nominal basis. Then you know I I don't know that we're still waiting to see how that plays out in each of our regional markets.
Yeah, Matt I I agree with the with all that maybe just to kind of step back a little bit in terms of volume. Yeah. We were probably running at about a billion for kind of mid cycle last year, we always sort of downsize. It. So the 800 $900 million over the last three years or so called 17 to 19.
We could start anywhere between zero and probably a billion and a half next year, depending upon the factors that that Matt mentioned, just the visibility around the middle markets and construction markets.
And then certainly.
As it relates to the capital markets as well as other options that we buy we might have with our capital, including including repurchasing the personal care. So it's a it's a it's a mix of all those all those factors and that's ultimately.
Our views on those are going to kind of formal totaling how we how much capital we decided to call it somewhere between zero and the ability to have.
So it's probably over the next 12 to 15 months.
Thank you.
We will take our next question from John Polaski with Green Street.
[laughter].
Thanks, a lot.
Sean just just one question from me could you share economic occupancy in October for Northern California, and Washington Metro I guess, just curious there's two there's two markets how pricing power is trending how could trend into the winter.
John you can give us a.
A little bit you said occupancy in northern California and October economic economic.
Yeah, [laughter] physical like.
Yeah, I'll take it yes.
Sorry say it again.
Yeah physical occupancy side, if that's all you had in northern California, and Washington DC.
Yes, so in northern California overall, I believe we're running today I believe today running around 92.
Which is a pull down by the really the lower occupancy that we're experiencing in the 90 91 ranch in San Francisco and pockets of San Jose, How we define San Jose, which is primarily mountain dew and central San Jose pulling down those numbers.
So those are the two areas where.
Fiscal occupancy is is weaker so it's a and then as it relates to Washington, DC District itself.
To see at least around 91 today physical again.
Okay based on current trends today do you expect a stabilization or improvement in those markets are continued can teach slide.
Based on recent trends.
They stabilized a little bit in terms of occupancy and have started to trend up consistent with the same store portfolio pattern that I described earlier in my prepared remarks, how quickly. They come back is just a function of visible.
There's a velocity that we see in terms of notices.
Which is primarily a function at least price recently and then on the van side in terms of the velocity of leasing that comes through but as I look forward over the next six weeks or so based on availability and such I would expect both of those to drift up some.
All right. Thank you.
Yeah.
We will take our next question from Nick Yulico with Scotiabank.
Hi, guys.
Yeah.
Oh.
<unk> <unk> <unk>.
A quick update or with a weak area is try to pick up a little bit wanted that you again, we can't hear you click or Nick so.
So sorry this is Nick in for Nick.
Speaker phone problem.
So.
Maybe if you could give us a quick update on the sales pipeline that part no. Jeff I think you guys sold about 59 out of the 172 condos on understanding it I'm interested in understanding if you're seeing any uptick in b and like the sales market or.
They went to market weaknesses sort of filtering in there as well.
Sure I don't know that I can give you an update so as of today, we have 65 units that have closed.
Getting there's 172 units total in the building we closed 65, that's 207 million in sales prices were about 3.2 million per unit. We also have nine units under contract today.
And we have another step in contract out for signature. So we have another 16 15 16 deals that are pending.
Many of which are would close in the fourth quarter I guess I would say on the last couple of months traffic. Some pretty good interest has been pretty steady we're running about three new deals a month, which would put us at probably the top are among the top two or three performing condo buildings at all in Manhattan.
So there's a lot more supply than there was.
Kind of when we open the building for sales, but Oh, we're still continuing to get well more than our fair share. So I'd say the sales and sales activity has been pretty steady since I'm kind of the initial lockdowns were listed in mid summer and we're continuing to get you know pretty pretty good traction.
Great. Thank you so much and I'm just.
It's kind of more longer term question I guess, you know with the independent making everything and how is it sort of change your development plans in terms of the you know outside of the five times today.
What should we be thinking off when we think about you ought to give us I'm glad.
When you shift towards suburban and urban or even the unit mix.
Does that does that shift you would do with three bedrooms or more.
More in line with you a classical kind of.
The unit mix.
Yeah, I I don't know.
Try to speak to that again, you're you're breaking up a little bit but in terms of your.
Long term in terms of development, it's a it's an important capability and that's a distinguishing.
Competitive advantage that we've had in the in the public markets you notice as well as the markets stabilize and start to strike and we think we have a development will be economic again, and I think we've said many times in the past that we're relatively agnostic between urban and suburban we're trying to go where we think fundamentals are the best.
An important time, and where you know there's greater that's greater value, having said that for all the reasons. We've been discussing you know we pivoted we had already started pivoting, maybe three or four years ago to suburban in part because there was this better value. We're starting to see the suburbs start to start to grow as the leading edge of the law nails, you know, we're approaching sort of a.
The time realize were.
Where there maybe buying homes are starting to move.
Double back to the suburbs. So we're just seeing more economic activity. That's only been obviously exacerbated by a by the tandem bikes I suspect you know suburban demand would pertain to outpace urban for a little bit yeah. We just talk about sort of product mix on the last call I do think there is a.
Let's take a look at what the work from home flexibility that it is going to translate into some so you didn't make some program changes.
That's a bedroom that doubles at office.
Providing dedicated work spaces within the unit.
Survey data that suggests that yeah majority the resin so it sort of worked within the unit, but they also about 20% to 25% are very interested and co working space as well pretty much everything we touch either.
Redevelopment or new development.
There was two or three years.
Co working space for the types of spaces are likely to likely to change more sort of dedicated versus just kinda open table.
Format, but giving people an opportunity to either meet or have you.
I'm more sort of shape for spaces are confined space. So that we expect we expect we'll see that.
So those are those are some of the changes we think are likely to come as a result of the work for bone flexibility that we think is a real there's already a trend it's only going to be greater kind of got Florida, our portfolio ready to lead to respond to that.
Thank you very much.
We will take our next question from Juan Sanabria with BMO capital markets.
Hi, Thanks, I'm here with John can I, just took a couple of questions first just on the on the pricing even though we did it in October.
But is there a change strategically.
Either dropping off the ranch or increase your concessions in October which is the previous previous month in the third quarter just to stimulate that it could be in the occupancy.
Yeah, Juan this is Sean.
Yes, Fairpoint as I noted in my prepared remarks, obviously, we had additional inventory.
Become available as a result of increases or whether that's occurred during the quarter, particularly in July and August in those urban environments as I mentioned and you can see that I think it with the.
The second slide where showed notice to vacate tenant lease breaks and obviously that put additional pressure on pricing. So that for example in [noise].
Kind of an all leases signed in the third quarter. If you look at July and August as an example in urban environments across all leases that average concession was between a half and locks three quarters of them.
As you look into September and then in October.
Getting beyond Q3 that increased to about a month on all these hassan.
Certainly a price response as it relates to the additional availability of the came through could.
Could we at least some of that faster probably yes, if we had been even substantially more aggressive as it relates to price.
But we have that kind of it already delivered to you quickly because their lease breaks as opposed to having 30 to 60 day advance notice.
You would have had that discount price pretty heavily to try to absorb the incremental inventory that we received that's more quickly. So our strategy was to absorb the inventory a reasonable pace, but not not put out a fire sales so to speak to.
So it's a very very fast if that makes sense.
Yes. Thank you and then I was just curious on the relative pricing between.
Urban core it's what does that translate.
Close to Serbia.
Assets and come out are we getting closer to parity to maybe where you could see a flip flop between kind of the people in the in the suburban markets switching back to the urban Division.
Relative pricing and proximity to work against Ticky tack convenient for whatever we choose a true.
Offices.
Yeah, I mean, good question I'm happy to comment on that notice and jump and if you think about the markets are talking about is New York City. As an example, I'm thinking about the grandmother than New York City as opposed to kind of go into.
The Westchester long island, or northern and Central Jersey.
Pretty big trade, even though rents have come down quite a bit in New York City, It's still a big trade.
So I think it's really more a function of the macro factors that we were talking about earlier in terms of peoples.
Is there a desire or need to be in those urban environments as it relates to.
Yeah, they're being in the office because they're required to be in the opportunity to be in the office returning to school, if somebody's urban universities or just feel like comfortable that those environments.
It goes into a place where they feel better about.
Retail establishments, Oh, restaurants, et cetera, and part of that will be driven by the health care situation or whether that crisis is resolved in a meaningful way. So I think those are the bigger issues as opposed to just purely price.
Just I mean to answer that it was just they're not having to commute. So obviously that we've tried to take advantage of lowering their lowering their rent.
I guess I would say, we do expect them to come back when there when of course come back to Marco you sort of have that just ask yourself. The question what was your life sort of better before co fit or after go live and all the things that make you know urban living you know great sort of Greek over it yeah whats your.
On the other side as it were still going to be there you know make great makes use in Boston to the markets that we're in and the other dynamic environments.
It's a you know.
Certainly more proximate to the jobs and there's been a lot invested and infrastructure in these ER visits.
Our middle and more sustainable for people that do not care about that I guess.
But you know I think the I think I'd say the one log cabin. It is just.
This work from home flexibility I think at the margin will cause some people to.
I'd say in the suburbs, but they don't have to move call. It two or three days a week versus versus five days, we may be able to tolerate that.
Where they think there would be no or four or five so I'd say kind of at the margin you may not expect to see urban demand as robust as it was critical that but.
I think when you layer on the pricing the pricing changes that we've seen there's every point of people coming back to the <unk> centers.
You noted in the New York MSK.
Oh, I'm, sorry did you say, including the New York I must say.
No I'm, just thinking is northern California different from New York in terms of the relative Brent differential in downtown San Francisco doses.
Oh going there or the South Bay.
Pretty big Delta Yeah, those rent spreads are pretty big between you know the pockets of each day.
Or even moving down into that but that's where a lot of and that's as compared to the end of the city of San Francisco.
That's pretty big spread and I think it really is more around the quality of the lifestyle. All the reasons, we want to be in urban environments, I mentioned, just not necessarily being well too bad.
And you got to be [noise].
Thank you [noise].
We will take our next question from Rich Anderson with SMBC.
Hey, Thanks, good afternoon everybody.
So what I was thinking initially about the environment I thought avalonbay would be in a better spot than its turned out to be because it's the lion's share of your portfolio is in the suburbs I Didnt think people would know from New York to Nebraska, maybe as much as they had in more New York.
I, just want to new Jersey or something but.
I understand transfers are off a little bit, but I also understand that's a relatively small piece of the of the turnover puzzle.
How would you respond to the idea that when people when we do get some sort of resolution here that people want to step back into these urban world not maybe go all the way into a Manhattan, but some place around it and thereby putting avalonbay interesting spot to sort of cheese people like people back.
Getting to these urban centers.
I mean to go full in <unk>.
Do you have a sense about how how permanent these moves away from you have happened and how much flexibility people have to come back as soon as they feel comfortable to do so.
Yeah, Rich I think its a right to that really interesting question and I would say even go back before Creek, you know sort of pre Cove. It there was already I mean, we were already believers sort of in the in fill kind of.
Urban Lite, you know sort of mixed use lifestyle environments.
Yeah, We think you know sort of postcode, that's still a great opportunity or maybe it's even maybe even a stronger opportunity when you sort of add affordability in the index. When you can maybe you know Deanna then fill suburb for a couple of Bucks a foot then.
And Dan Downtown and then you couple that with.
Maybe you know decent transit and I only have to hop on the train two or three days a week courses versus five days a week. So I think kind of that infill suburban is really extremely well positioned.
I think it has it anyway, but you know like like many things as we talked about covered it just seems to be accelerating your kind of these these trends that were already they're already occurring before but he doesn't match it up with a a lot of question. It doesn't make [laughter] urban living it's still very attractive is that when you layer.
Demographics affordability.
And and work from home flexibility that.
You know that that does make that does change your calculus, a little bit for that for that March 11.
Okay and second you know.
Related to the first but.
You talked a little bit about how your future development activity might be informed by this environment and how it might change how does that apply to your you know your fledgling businesses and then her in South Florida do you think.
Those markets are performing perhaps better or feeling more resilient and maybe they begin to become a bigger piece of the pie chart now in the aftermath of because of all this or does that not change you know relatively speaking.
Hi, Hey, rich it's Matt.
So those markets right now are doing better than most of our legacy market.
I think some of that's a function of their lower cost market. There are markets, where initially anyway that was left with the shutdown. So.
Well, that's probably part of it and and the assets we have in those markets to be more.
More suburban as well at least that's definitely true like Denver, Colorado. So yeah. When we went into those markets. We said our goal is to get them to be about 5% each.
Each of our portfolio, which would be about a billion and a half to $2 billion. Each were only not even quite halfway there yet though.
Yeah, what we are looking to be aggressive there will continue to look to be rather there you know overtime could that migrate up to more than 5% I mean, it could buying again like like in the same city than what we're seeing is.
It's a kind.
Kinda covered responses, writing a lot of the trends that we saw pre covet and those were the same trends that have led us to those markets in the first place yeah.
Yeah, Rich, maybe just add to that I I agree if that's without saying I think we've said on prior calls do it might might lead us to go into new markets as well that that are likely to have some of the spillover benefit from whether it's new York or or.
California markets, but also our you know kind of heavily index to knowledge based jobs as you know big Tech and knowledge based industries to pay in kind of diversify their workforces across the across the map, we want to be kinda, where workers, where their workers rns, they're going to be places like Denver Southeast, Florida. We think we think will continue.
Typically those are the places you know we need to be a yes or no allocation either need to respond to that.
Great. Thanks, very much everyone.
We will take our next question from Austin Wurschmidt with Keybanc.
Hi, Good afternoon, everybody and I was wondering if you guys can walk through your effective rent growth in a month to month in the third quarter as well as provide October and do you think now that you are through the peak leasing season, and you can see rates improve.
Improved due to fewer expirations or you more apt to keep branch closure and maybe September and October levels and continue to try and grow occupancy.
Yeah, Shaun good question.
Walking you through the the rent change in order basically removed from sort of mid threes up to the mid eights in terms of the reduction in rent change as you move through each month of the quarter.
In October right now on a blended basis is down about 10%.
And in terms of the broader question.
As it relates to civilization.
Thing I'd say is if you're gonna suburban environment, yeah concessions that got leveled off the past couple of months here, we've got good why I'm I'm sorry.
We haven't necessarily had to do.
D.A. kind of dig deeper into the concession back to to generate that velocity and I'd say, we're reasonably comfortable where the velocity were seeing today, which is what I expressed in my prepared remarks that you saw in the slide so to the extent that we continue to see good velocity and pricing, we wouldn't have to dig deeper into that.
Session back to the extent things fell off but we have to evaluate but based.
Based on what we think the price today, we feel like we're in pretty good shape.
And again I'd say on the suburban side.
It was a little bit tighter than urban such that it'll take a little while longer here to see how it plays out in these urban environments EBITDA that is going to be the right kind of price level, we continue to attract demand.
Base that we need it.
Got it no. That's that's very helpful. And then you know early into your comments going on you know where fundamentals are batched you know as it relates to new investment activity. It does any of the trends you've seen since he decided to enter into the expansion markets change. Your your target allocation of those markets either higher or lower as you kind of look forward.
Over the next several years.
Yeah. This is Matt.
No I mean, I think yeah yeah.
One of the prior question.
We like those markets, we're looking to grow in those markets.
You know like I said our objective.
Jack if you get to about 5% I need some of that is driven by just the size of those markets you know relative to the size of ours.
Imagine you know.
Maybe additional markets that we add into the mix here at some point they would get that kind of total allocation to other markets like that above that 10% over time.
Okay. Thanks, guys.
We will take our next question from Alexander Goldfarb with Piper Sam.
Hey, guys good.
Good afternoon, and thank you.
Two questions.
Jim just going back to development as you know we've talked about this on the last call and you had said that you guys were adamant with your current development program and the team that you have in place no changes, but in some of your answers earlier in the call you talked about starts obviously distributing much down next year.
They have a wide range zero 2 billion I think you said so what do you think about you know where you would be on it.
On that slot with development well.
What do you think the impact would be on the P. and out like would you start to see some of these capitalized costs end up as expenses on the TNL as you try to keep your team in place or do you think that there would be further changes at select especially if you can't do the level of development in the suburban markets that we just have to take that would keep you know.
The level constant where it is today.
Oh, Yeah, I think sort of step last was too too early to know to be honest I think I've mentioned on prior.
Prior call you know, we have actually cut back our development capacity over the last over the last two or three years as a golfer ratably imports about 800 million I'd say the group is is a scale to do around a billion 800 billion <unk> billion, a year, probably flex up or down a little bit from that.
Depending upon the.
Depending on their needs.
You know when you're talking about expensing versus capitalizing it starts to get into a lot of other a lot of other things that probably probably worth of you know maybe maybe maybe maybe another call but.
You know as you look at the past downturns, we suspended development or for four or five quarters. Typically so again, if this downturn and lane look somewhat like those.
I don't think we're talking about what the I don't think there's a concern about the things you're talking about the fact that we're looking at it bounce around where it just doesn't make sense to start a new development for three years, we're going to have to rightsize, the group or or a expense. So those dogs, so, but I think it's premature to kind of know.
I'm not aware of that so where that's likely to fall okay that the the four to five quarter pause actually as a helpful. Reference. So thank you on that Tim the next we'd be odd.
Okay. So if you maybe for Kevin just thinking about you know the operational whether it's at the property level Gionee run the balance sheet, where do you think are some cost saves or efficiencies that you guys could eke out that would help mitigate the.
The revenue drops for as we look forward.
Next year.
Well I mean, maybe just to put some context out Kevin.
I think the experienced year over year, and a lifetime 38 $39 million this past quarter if.
If you add the quarterly.
Property management costs or costs, and junaid or there about that number. So proportionately you know our overhead costs represent a small part part of the puzzle in terms of how we you know relative to the overall business and the revenue structure and so forth.
So, it's it's not particularly acute too I would submit in terms of how we can manage it we manage it you know throughout the cycle.
There are potentially some opportunities one of the biggest opportunities.
Simply is just up a fair bit of overhead costs are incentive costs and those are going and actually correct. Here. This year. So there's a little bit of self correcting piece and then in terms of kind of property manager overheads, you know Sean do you want to add stuff [laughter], Yeah, Alex Sean you know one thing I think that's fair to address is yeah, we were already.
He on a path to create more operating efficiencies throughout the portfolio based on sort of the things we talked about I.
I think it was you know one of the calls last year is.
As it relates to automation and digitalization.
Various things like that as a good use of data centralizing different things, whether its leasing or windows and the size and we're still on that path and if anything I would say, it's accelerated certainly as a result of what's happened to the pandemic as it relates to the operating model and we were talking about you know something on the order of magnitude here, though.
Approaching $20 million to $30 million of operational savings through.
Through those various initiatives never still ploughing forward on that and I.
All right, we'll be investing more into those technology initiatives over the next couple of years to help offset what were seeing at least at the property level piano.
Yeah right at the pilot.
I just have outrageous I find it doesn't mean they have several is matching it. So it's a pretty efficient. This is small they're talking about yeah, suji and egg costs or maybe 15 to 20 basis points of total assets I think that he can pair that I mean, there's a business, it's pretty DNA efficient and that compared to.
Our other business models pick on the on the private side, it's sufficient again. So there's just there aren't a lot of opportunities on the DNA sites on the self correcting for the incentive system is as Kevin mentioned, that's performance weekends incentive pay is it less but it's.
There's not a lot of extra bodies.
Let's look to it and DNA is it's 80, 590% bodies you get down to it.
Yes, that's exactly the point I was I was after and I think at the property level. The bulk of the expenses are you know insurance real estate taxes, and payroll and those categories would seem like they'd only go up so it seems like you know the the expense savings are sort of on the margin. It doesn't sound like there's anything big picture. It sounds like it's on the margin, but a lot of the Ics.
Seems like our sort of sad, it's actually been a fair take like.
Yeah, I would say on the payroll side of it the other property level. That's that's where the opportunity is those are some of the those are some of the.
Yeah activities that we think we can automate or centralized get the benefit of some scale and the benefit of some automation as well where there could be where there could be real savings in terms of in terms of number of bodies.
Not as not as clear on the on the overhead side DNA side. When you you may have a group of two people within a particular particular function. That's a that's that's working across the three major unit that's radically portfolio. So.
Okay. Thank you.
Sure.
Ladies and gentlemen, this will be your final opportunity to ask a question. So if you do have a question. Please press star one to join the queue at this time.
And we will take our next question from Zack silver back with Mizuho.
Hi, Thanks, guys just a couple of.
Close on can you talk about the profile that is entering the portfolio today. Some of your more chilling some markets like New York and Boston their concessions appear more prevalent I'm wondering if that income and credit profiles are any different and if there's any concern older feature when payments, maybe just you know.
Yeah. Good question, you know, we haven't really changed our credit standards other than to be probably even more diligent as it relates to detecting fraud, particularly in certain markets I would say like L.A. It tends to be one that comes to mind, but we have not relaxed our credit standards.
As it relates to it and we are still qualifying people.
And diligent manner, so that as we look to the other side of this.
Got lease rent started changing materially.
That weekend.
They have customers that can afford a renewal rent increases.
Events, you know pick a timeframe that you're comfortable with you know like 2021 or whatever it may be.
So is there a risk there's always risk, but a different not relax standards, if anything they're a little more stringent as it relates to the fraud detection.
Gotcha, and I guess piggybacking on an earlier question about polar Keurig Green diesel with Q2 season around the quarter you guys get any commentary are presented at same trade measures you made a comeback is spread within the communities.
Given the potential uptick that flu season around the corner.
Yeah, and we've done a lot as it relates to a you know kind of front loading a healthy environment of here.
If you look at our operating expense table. You know we noted that we send you know couple of million Bucks already this year as it relates to P. E. And then beyond that for Ah, you know cleaning and disinfectants and various other things we have a reservation system, where people have to reserve a met any time, but then a gym or a chill space whatever they.
They and so we're doing a fair bit took about LP environments.
And for the most part I think we're getting very good feedback through our net promoter score comments from people appreciating our effort is certainly some frustration that attention walk into the gym ever they want.
Very understanding as it relates to the need for a professional protocol to limit the impact that the community and so far knock on wood, we've been relatively lucky in terms of.
Well seeing that community. So we feel good about what we're doing.
We continue to look for ways to promote that healthy environment.
Thank you. Thank you guys.
Well take our next question from Dennis Mcgill with Stelmi.
Hi, guys. Thanks for taking the time.
Question is on slide nine as we look at that split between suburban and urban I think it's easy to understand that pressure on the urban environment.
A change in living condition, and so forth when you analyze your suburban portfolio, though it looks like rents there down maybe three 4% based on the charge RC move outs.
Notices out because while where where are those tenants gone. If you were to sort of clarify or speculate the weakness in the suburban markets. What do you think the leading factors are there and what are the causes of turnover that you're seeing the weakness in pricing.
Yeah. Good question I mean on suburban sorry did you say you're right. You know rents are down you know call it roughly 3% or so.
Okay. It's a variety of factors really depending on the market ought to get a couple of examples.
So we would consider you know various pockets of San Jose as an example, including mountain view Central San Jose to some degree.
With that.
The northeast San Jose that suburban but I can say it just based on the current protocol for companies like Apple and Google and others. There is not a need for those residents to be in that location. As a result, we've seen pressure from turnover in some of those pockets where.
Yeah. The demand is just a thought off obviously not as much as what we'd experienced in San Francisco.
Because of those policies as it is pressure on demand there.
And some of those pockets, particularly central San Jose Mountain view.
A little bit in northeast San Jose There is supply. So we're seeing a compression there in terms of what you separate the higher end of the price per minute coming down to compete with other assets in the existing inventory of sort of a minus to b type assets, which are representative of what we have in those markets. So that's the kind of pressure you're seeing that.
Type of environment, that's similar to what you might see in certain pockets in Seattle like in Redmond, and then there is other pockets in the northeast say Boston is holding up relatively well I'm a.
Alan filling up relatively well, but you still do have you know we are in the midst of a recession and.
And people are making different choices to some degree as it relates to living environment.
Some people are moving into those environments from Tencent thoughts related urban environments, but others are making different decisions as it relates to stay in there or moving elsewhere. So you know demand overall as you know we're seeing you know just household contraction so that will impact suburban environments, just not nearly as much as what we've seen an urban.
Yes.
So that's kind of the macro view and as Tim said in part as far as your Sudan, I'm, particularly younger age or so or something other than I know I'm. So number percentage of the you know 35 of them back on 625, you know contained.
Sort of historical historical highs I'm sure you have sort of a normal consolidation you get with any any downturn, probably or we haven't seen yet is it a doubling up with anything people are trying to get away from their crewmates. If a third so trying to work a little bit less than the same space. So, but we definitely think people get moved back home and.
At cap it out of the base, but we're just going to have more room to the whatsoever. We mentioned earlier sort of the parents arms or or more more fully occupied self storage is more fully occupied and apartments will put a lot of talk about that so let's just say to park some of the trends that we're seeing.
That's helpful perspective, actually I was going to your second question I missed maybe continuing on that if you think about the demographics of those early terminations are vacates it isn't.
That skewing more to the younger cohort that can be more mobile versus the families are you seeing it fairly stringent crusher.
Yeah, that's a fair point I mean, if you look at a sort of occupancy and you know there's related lease spreads there's definitely more pressure in the studio floor plans.
Urban environments Studios during Q3, I think the average occupancy was 80, 788% as an example.
So people.
So more flexible you don't live in homes a demand for.
For sure.
Okay.
Okay well. Thank you good luck guys.
I do.
And with no additional questions I would like to turn the call back to Tim Naughton for any additional or closing remarks.
Thank you Abby I know everyone says a lot of calls today, but Ah. Thanks again for joining and we'll see you in the virtual World I suppose maybe at the end they read in November take care.
Ladies and gentlemen, this concludes today's call and we thank you for your participation you may now disconnect.
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