Q1 2021 Avalonbay Communities Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Avalonbay communities first quarter 2021 earnings conference call. At this time, all participants are in a listen only mode.
Following remarks by other company, we will conduct a question and answer session.
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Your host for today's conference call and Mr. Jason Reilley, Vice President of Investor Relations. Mr. Riley you may begin your conference.
Thank you Anna and welcome to Avalonbay communities first quarter 2021 earnings conference call before we begin. Please note that forward looking statements may be made during this discussion there on a variety of risks and uncertainties associated with forward looking statements actual results may differ materially and there's a discussion of these risks and uncertainties and yesterday afternoon.
Press release, as well as and the company's form 10-K, and form 10-Q filed with the SEC.
As usual. This press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion.
Catchment is also available on our website at Www Dot Avalon day Dot Com forward Slash earnings and we encourage you to refer to this information during the review of our operating results and financial performance and with that I'll turn the call over to Tim Naughton share D O.
That one day communities for his remarks Tim.
Okay, great Thanks, Jason and welcome to our Q1 call.
With me today are Ben Shaw, Kevin O'shea, Matt Berenbaum, Shawn Brazilin bench on and I will provide comments on the slides that we posted last night and all of us will be available for Q&A afterwards.
For our prepared comments today I'll start by providing an overview of Q1 results.
Sean will elaborate on our operating trends and the portfolio fundamentals have improved materially since beginning of the year.
And I'll also review our Q2 outlook.
And then Dan will provide some thoughts as to why we believe we are positioned for outsized growth as the recovery and expansion to take hold.
Now, let's turn to the results for the quarter starting on slide four in terms of operating results. It was another tough quarter and clarify pro growth was down by over 18% of Q1.
Same store revenue declined by $9 one per cent on a year over year basis.
Given the timing of the pandemic, which began towards the end of Q1 'twenty. This past quarter will be the toughest year over year comp will face this year.
On a sequential basis the decline in same store revenue leveled off at a one 5% from Q4.
Which compares to a sequential decline of one 6% on Q4, 'twenty and Sean will touch more on us.
On the sequential trends and his comments.
And then lastly.
We completed almost 600 million of development and Q1.
And our projected initial yield of five 6%.
Well above prevailing cap rates, we're seeing on the transaction markets.
Where cap rates are drifting down to or below 4%.
Given the improvement that we've seen and fundamentals.
We're ramping up the development pipeline and expect to start $650 million.
This quarter Q2.
Much of that can be match funded with expected dispositions of approximately $500 million and the second quarter.
Turning now to slide five as we did last quarter, we thought we'd provide a little more detail on the components of the decline in same store revenue that we've experienced on a year over year and a sequential basis.
Sorry on slide five on a year over year basis.
And this past quarter about two thirds of the decline in same store revenue was a result of lower effective rents driven by a combination of lower lease rents and higher concessions than.
And then we saw Q1 of last year.
The rest of the decline was mostly a function of elevated bad debt.
Well revenue was just over 3% or.
Or roughly 230 basis points higher than last year.
The impact of bad debt on a year over year same store revenue basis will be much less over the balance of the year as bad debt. Initially spiked in Q2 of last year at the onset of the pandemic.
Turning to slide six.
Sequential same store revenue was down one 5% in Q1 from Q4 as you can see it was driven mostly again by lower effective rents, but partially offset by a 120 bps and.
Improvement in occupancy.
Turning to slide seven.
And we saw meaningful improvement and like term rent change during the quarter.
And continuing into April.
With average like term effective rent improved by 270 basis points versus the Q4 average.
And approved and another 310 basis points above that acute and in April versus what we saw on Q1.
And you can see on this chart the pace of improvement that has been steady.
And it's quite healthy since the beginning of the year and again, Sean will provide more color on what's driving these trends and his remarks and just a moment.
But let me let me just share one more slide on this.
Development performance first before Sean turning.
Turning to slide eight slide eight shows that.
Despite the many challenges faced by our business over the last year or the lease up portfolio is actually performing quite well with average rents costs and yields roughly in line with pro forma and is delivering meaningful value with yields well above prevailing cap rates.
As a result of this performance and improved operating fundamentals, we are reactivating the pipeline and expect to start six communities totaling about $650 million and.
Q2.
And so with that I'll turn it over Shaw and discuss portfolio trends and more detail Chuck.
Alright, Thanks, Tim.
Moving to slide nine we've seen an acceleration on the trends and you spoke about on our last call with physical occupancy continuing to increase during the quarter now approaching 96%.
And average move in rent value growing steadily over the last four months.
For April our month to date average moving and ran as roughly 5% above what we experienced in January of this year and approximately 8% below the pre COVID-19 peak rent, we achieved in March of 2020.
One point to note when looking at moving Rins value and this slide and the next couple of slides is that it reflects leases that were signed roughly four weeks prior to the move in date. So it does not reflect the asking rent and each period, which was higher and something I'll address and a few slides.
Moving to slide 10 and <unk>.
<unk> portfolio of performances and broad based with every region experiencing gains and both occupancy and average move in rent sales.
And California is the one region, where we're essentially back to pre COVID-19 occupancy and rent levels supported by relatively stable la market.
And rapidly improving conditions in Orange County, and San Diego.
And northern California performance has steadily improved over the past few months, particularly from an occupancy standpoint, but it suffered the greatest rent decline during 2020 and recent move ins are still 17% below the pre COVID-19 peak.
The average April moving and Rev and our other regions is generally 7% to 8% below the pre COVID-19 peak with the exception of Seattle, which is about 11% below its pre COVID-19 peak rent, but it has demonstrated very positive momentum for the past couple of months.
Turning to slide 11 to address suburban and urban and performance trends.
Suburban portfolio was essentially a pre COVID-19 occupancy now and the month to day average April move and rent is only two 5% below the pre COVID-19 peak, we achieved in March 2020.
The urban portfolio. However, it's still early and its recovery with expected gains in both occupancy and rents still to come.
Occupancy has increased by more than 500 basis points from the 2020 low point, but we will need to pick up another couple of hundred basis points to reach historical norms for stabilized occupancy.
Additionally, the average April move in rent this trend and get roughly 18% below the pre COVID-19 peak rent driven primarily by New York City, which is about one third of our New York, New Jersey portfolio, and San Francisco, which represents about a quarter of our northern California portfolio.
The average April move and rent and each of these two markets was roughly 22% below the pre COVID-19 peak rep.
We expect a more rapid recovery and moving and rents over the next couple of quarters as people are called back to the office urban universities and out and so on campus learning and the quality of the environment improves when the right retail restaurant and entertainment and other services reopened for in person and experiences.
We're starting to see some of that demand already which is reflected on our asking rents and a point I'll touch on on a couple of slides.
Moving to slide 12, the improvement and average effective moving around and has resulted from both and increasing average lease rent as depicted on chart one.
And declining concessions shown on chart two.
And as you have leases with a concession exceeded 50% last fall, but has trended down to less than 25 per cent for April.
And as of this week only 13% of our available inventory includes the concession.
Which will support continued growth and our average move in rent value and future periods.
Turning to slide 13, our portfolio is well positioned heading into the prime leasing season.
First as I mentioned earlier, we're in a solid position from an occupancy standpoint, and almost 96% today.
Which provides a solid foundation to push rents and absorb some turnover if needed to achieve those higher rents.
Also importantly, our average asking rent has increased about 13% since the trough point last November and roughly 5% and just the past four weeks, which is quite strong and substantially more than historical seasonal norms.
Additionally, if you factor and the reduced volume of concessions I mentioned on the last slide day.
The increase and the average net effective ax asking rent since the trough point is.
And that's about 15%.
If you look at this relative to our pre COVID-19 peak rent levels. Our current average asking rent is only down about 70 basis points and if you factor and concessions net effective asking rents are only about 2% below the pre COVID-19 peak.
Moving to slide 14 to address our second quarter outlook, we expect core <unk> per share of $1 90.
And for same store performance and Thats, one of our outlook for year over year NOI growth is minus 11, 5%.
Driven by a five 5% reduction in revenue and an 8.25% increase and operating expenses.
They're a relatively substantial operating expense growth rate is primarily driven by a very difficult comp from Q2 2020.
And when activity, including move ins and move outs maintenance et cetera, with severely limited and we constrained spend including hiring at the onset of the pandemic as shelter and place orders took effect.
In terms of the sequential roadmap from Q1 core <unk> per share of $1 95 to the Q2 outlook of $1 90, and we expect a 5% deterioration and same store NOI all of which relates to the sequential change in operating expenses as we expect sequential revenue growth to be zero.
We also expect to send a proven and commercial and other residential NOI, which will be offset by a <unk> <unk> increase and overhead and other.
Now I'll turn it depends who address the outlook for our business over the next few years.
Thank you Sean.
Supported by this backdrop of improving operating fundamentals, we believe that we are well positioned to generate outsized growth as the economy recharges.
As we look to the composition of our existing portfolio each of the sub segments highlighted on slide 15 have been impacted and varying degrees during the pandemic and each have their distinct growth opportunities as we look forward.
Our largest segment at 40% of revenue.
It is and what we've called out as other suburban to differentiate it from more densely populated job centers and suburban markets. This 40% of our portfolio was the least impacted by the pandemic and our current asking our current average asking rent of 6% above the pre pandemic peak rent and we achieved in March of last year.
We continue to push asking rents and these submarkets and concessions have largely been eliminated.
Our next largest segment at 28 per cent of the portfolio represents communities and job centre suburban markets, including our transit oriented development.
This is like Redmond, Washington.
Tysons corner, and Virginia, and Assembly row and Massachusetts.
Operating fundamentals and many of these suburban locations have been more significantly impacted with asking rents still 3% to 4% below pre pandemic levels and with the continued use of concessions in certain markets.
Our expectation is that as people increasingly returned to the office and nearby restaurants and as other amenities start to reopen more fully and we will increasingly see prospects that seek out these environments for walkability user transportation and the array of services provided.
For our communities and urban environments, we have a mix of core urban effectively central business districts and secondary urban locations like Jersey City, New Jersey, and the Rosslyn Ballston corridor in Northern Virginia, which make up 19% and 13% of our portfolio respectively.
As Sean noted occupancy and our urban portfolio has climbed more than 500 basis points and rents are trending upward and pretty much all of the urban environments.
And this is a curve with urban office usage still at very low levels of less than 20%.
As a return to office and it starts to gain real momentum this summer and leading up to labor day, we do expect a significant rebound and our urban portfolio as in prior cycles.
So the thing that we expect to be true across much of our portfolio and <unk>.
Shown on chart, one on slide 16 class eight communities, which represent approximately 70% of our portfolio has historically outperformed early and cycles.
We expect similar trends and this recovery, particularly as the traditional higher income ABB resident is poised to benefit financially as the economy heats up.
And while our resident standard benefit from the recovery.
It is also becoming more challenging for those interested in buying a home so afford one given the acceleration and home prices and many of our coastal markets.
Chart two on slide 16 shows this long term affordability trend and the growing attractiveness of renting versus owning a home and our markets.
Turning to slide 17.
On the development and we currently have underway is also poised to deliver strong future earnings growth as these projects are completed and stabilized.
In total we have $2 3 billion of development that is not yet and stabilized and is projected to generate $134 million of NOI and a five 7% yield.
And total the development communities only contributed $22 million and annualized NOI as of Q1 of this year. So it was another $112 million and annualized NOI still to come.
These developments are primarily and our suburban markets, where we expect to see strong fundamentals as these communities open over the next couple of years.
And has been our standard practice. This development activity are substantially match funded reducing the capital cost risk associated with the earnings and NAV accretion yet to come.
As we anticipate a recharging economy, we are adjusting our capital allocation our cash.
Capital allocation strategy to ramp up new development starts.
As Tim noted, we expect free ground on as many as six new development projects and the second quarter, representing $650 million and new accretive investment primarily in our suburban submarkets.
With a total development rights pipeline of $3 1 billion, we anticipate further increases to our development starts and future quarters and are increasing our guidance for total 2021 starts from the $750 million. We had indicated on our February call. Two 1 billion to $1 $2 50, as we have the ability to move quickly to capitalize on the <unk>.
<unk> outlook for fundamentals and our markets.
As we look forward and we expect the breadth of our development experience, particularly in the suburbs from denser wrap developments the garden communities to townhome and direct entry homes will allow us to shift capital and adjust our product offering to meet the evolving needs of our targeted customer segments.
Switching gears to innovation and our operating business and turning to slide 18. The team here is now about three years into a significant shift and our operating platform, having generated $10 million and annual incremental NOI from our initial initiatives and with the expectation of another $25 million to $35 million of annual NOI from.
Our near term operating roadmap.
One meaningful example of an initiative already deployed as our early adoption of and artificial intelligence for the management of prospective residents are AI leasing agent Sydney is available 24, seven 365 days, a year and interacts with prospects regarding their questions about our communities schedules and rescheduled.
Stores follows follows a postwar and facilitates the application process.
Sydney and sent more than 4 million messages to prospects that would have been handled by an on site our call center associated and the past and in addition, Sydney as scheduled almost 100000 tours at our communities.
We continue to invest in and operating platform and our focus on the use of digital platforms and data science to drive operational efficiencies and optimize revenue from our assets through initiatives such as the search application and lease process on a revamped website that we're already launching later this year.
The increased rollout of smart access to allow for more automated and self serve activities, including full self touring and public access for revenue opportunities.
Use of data science to optimize our renewal results.
And next steps and mobile maintenance to improve efficiency and service.
Collectively we believe will enhance operating margins by about 200 basis points through these various initiatives, while also providing a more seamless personalized experience at our communities.
Finally, as we look forward, we're excited to further advance Avalon base position as a recognized recognize ESG leader among all Reits and within the multifamily sector as highlighted on slide 19.
In addition to setting science based targets to reduce scope, one and scope two emissions by approximately 50% by 2030. We're also one of the first real estate companies to complete and extensive climate resiliency analysis across our portfolio evaluating each asset across 11 key risk factors.
From this analysis the team is developing asset specific action plans and we are also now incorporated the resiliency framework into our go forward investment and development decisions.
We've also established measurable inclusion and diversity goals focused on achieving gender parity for leadership by 2025, and increasing minority representation and leadership to 20% by 2025 and 25% by 2030.
And we are now incorporating these goals into our business unit and planning to drive results.
And more to come later this year as we release, our fulsome and industry, leading corporate responsibility report in June and as we continue to reinforce ESG as a differentiator in the eyes of our residents communities and stakeholders.
We're very excited for where we're headed and the growth in front of us and with that I'll turn it back over to Tim.
Great. Thanks, Ben and just turning to the last slide and to summarize some key points for the quarter on.
Slide 20, Q1 was a challenging quarter in terms of results but.
But as I mentioned before it is expected to be the toughest year over year revenue comp we see this year.
In addition, the recovery and fundamentals is taking hold and our markets as Sean discussed and many.
Suburban submarkets are now at or above pre COVID-19 levels.
While the early improvement, we're seeing on urban Submarkets share gain strength mid year and into the fall as workers return back to the office.
And lastly is as Ben mentioned in his remarks, we believe we are very well positioned over the next few years.
Due to a number of factors, including our coastal market footprint a portfolio that is heavily concentrated in urban and job Center urban.
Jobs, and our infill urban infill suburban markets excuse me.
Rising costs, if I'm ownership.
Healthy performance and a ramp and our development pipeline.
Margin improvement and our stabilized portfolio due to innovation and the operating model and then lastly, our leadership position and ESG, where the investment we've made over the last several years is paying off in terms of opex savings and stakeholder engagement.
So with that operator Anna.
Be happy to open the call for questions.
Yes, great. Thank you and if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
And you are using a speaker phone please make sure you're on mute.
And your.
And I'll just reiterate.
Well once again.
On Star one if you would like to ask a question.
And we'll now take a question from Nick Joseph with Citi.
Thanks, maybe just starting off with guidance and I was wondering if you could talk through the decision to not to issue full year guidance. At this point just given that we already on <unk> results and the operating trends that you've walked through what held back that decision to institute on 2021 guidance.
Hey, Nick this is Kevin.
Yes, I mean as we've.
Indicated before providing quarterly guidance.
What we've done this week this quarter is consistent with how we have been managing the business.
As we move through a pretty dynamic environment and and certain period of time.
But given the stability and the growth.
That we're seeing in April as we head into May as Sean pointed out we do expect to be able to provide guidance for the balance of the year and connection with our second quarter call.
After we've had a chance to complete our customer and maybe re forecast, which is a lot more fulsome than the Q1, we forecast process that we do for this call.
Okay. That's helpful and then for the $650 million and starts this quarter.
Our.
Initial yield on those and that is that on in place rents are trended rents.
Hey, Nick it's Matt.
Yes. It does those deals the yield is kind of very consistent with where our current development underway as it is kind of high fives.
And that's pretty much in every case and when we quote yields were quoting based on today's rents today's cost and we don't trend it so.
And in fact on and our development attachment, we don't Mark those rents to current market until we get it leased about 20% leased.
So that's why we see.
Most of the rents in the and the attachments are still what we were carrying and when we started the job. So my guess is given where we are today and given the ones that haven't started.
At today's market, there's yes, there's probably pretty good chance that we will exceed the underwriting on those by the time they stabilize.
Thank you.
Well take our next question from rich Hightower with Evercore.
Hi, good afternoon guys.
Nick took two of my question. So let me, let me fire a different one.
But just to follow up on on the development question.
We could we probably said the same thing for the last five or 10 years, but market cap rates can't go any lower than they are and so.
Tell us how you think about the possibilities and market cap rates.
Standing from here and perhaps that yield differential.
Narrowing and as you think about that high fives development yield target how much how much cushion do you sort of bake into the way you think about that.
Rich Tim here I mean, as you know as Kevin's mentioned plenty of times of the past.
It is something we take into consideration.
Informs how we think about match funding the development book and.
And we showed this quarter, it's largely match funded and we expect as if they're if we believe that those capital market risks that we're going to be closer to 100% match funded which which means essentially at the time, we start construction and is making the big capital commitment. The permanent capital has already been raise either in the form of equity debt or dispositions.
Okay.
And sorry, Thanks, and then on just on the expense guidance I know that we are.
And lapping a tough comp in <unk>.
And theres, a little bit of detail and in the slide deck on this but maybe just break down some and the categories where.
You expect the biggest year over year growth.
And expenses.
Yeah Rich this is Sean.
To say it but it's pretty broad based EBITDA. If you think about what happened in Q2 last year and take its really shut down so turnover decline, we dropped back to strictly essential maintenance only.
For our resident customers.
Pulled back on marketing and given sort of the demand shock, we adopted a hiring freeze. So if you think about all the various sort of maintenance activities payroll et cetera. We're expecting you know all of those to look more normal as compared to the depressed levels that we experienced in Q2 of 2020.
So its relatively broad based most of it is on the sort of what I would call the controllable side of things.
And it's a more modest increase and taxes and insurance, but all the activity based costs.
And payroll really are coming up pretty materially on a year over year basis.
Alright, Thank you Sean.
Yes.
We will now take a question from Rich Hill with Morgan Stanley.
Hey, guys good afternoon.
And that's been maybe a little bit more time talking about your suburban versus urban portfolio. We're right. There with you on the urban portfolio and.
And they were inflections that we're seeing and we think they're there.
Very real.
But as you think about the urban portfolio you and your peers have noted that our rents are above and many cases pre COVID-19 levels.
How are we supposed to think about those those suburban markets going forward is there any chance that they begin to normalize while urban markets or inflect, Inc. Or do you think that that there is more than sufficient demand coming from a younger generation that can support that.
Yes, it's Sean I'm happy to start and anyone else can jump in and I think you said that.
Rents and our urban and portfolio are above pre COVID-19 peak, that's actually not the case right now.
Alright.
Alright and rents.
Urban.
Yeah and in other words.
Asking rents and urban portfolio down about 8% from the COVID-19 peak, but and the suburban portfolio were up a little more than 2% and I'd say, that's still and I will say, a snapback and we've already started to see that and the urban submarkets, but the suburbs are pretty healthy.
If you keep in mind.
The slides that Ben showed there's still a number of these sort of job centers and suburban submarkets that have probably another leg to come because people have not been called back to the office. If you think of just sort of maybe even the kind of the headline thanks stocks as an example.
And people without the call back to <unk>.
And on Facebook and.
And Apple and Amazon and Microsoft on the regimen and so there's some pretty good embedded demand that should be coming back to those environment that should support the suburban portfolio and then additionally.
Also as Ben pointed out if you look at sort of the single family side, you know, it's a very tight market.
Rice's and you look at it kind of home price inflation on a year over year basis, it's up kind of double digits. So the ability to.
And to that product is market strained its just not it is available. So I think there's a number of factors. When you look at the suburban portfolio. They give it a fairly nice tailwind.
You may not see the same sort of.
Percentage gain over the next.
A couple of quarters as people come back to these urban environments.
Just because it is so concentrated but theres still some very good sort of demand tailwind and.
And so for us for the suburban portfolio over the next quarter couple of quarters as well. So Tim do you want to add onto that Richard and I think the other aspect to your question is just the notion that we would expect as the economy reopens and these urban markets, we have and we're going to just see convergence and performance so theres going to be some new.
<unk> I think sean's right and it doesn't mean, we're going to see suburban suburban rents fall, while urban rents are all over and as rates rise because theres. Some theres still some pretty compelling supply to supply demand dynamics going on and the servers, but yes as I mentioned on the on the.
On the last call I do think as you sort of think out you look out over the next few years.
<unk> I think and the urban markets is likely to be quite a bit quite a bit lower than what we see in the suburbs and and in some ways you may see the relationship between urban and suburban.
Flip this coming cycle relative to what we saw on the last cycle, where urban demand was stronger, but urban demand urban supply more than offset that so the suburbs actually outperformed.
You get out three or four years from now and so I think I mentioned this on the last call.
'twenty 'twenty four 'twenty five or would not be surprised if you see if you see.
Urban more than <unk>.
Urban outperforming the.
And the suburban markets. When you look long term at our markets and it's one of the reasons why we've been somewhat agnostic and we want to have a diversified portfolio that really the winners and losers are really kind of at the MSA level and yes.
Performance tends to normalize over time between the urban suburban markets, it's a dynamic market both on the demand.
And the supply side, but I think we are at a moment in time, obviously right now were urban is massively out underperforming suburban but we think we're kind of on the presses precipice where.
Those lines are going to start to converge.
Yes, Tim Thanks, Thank you for that and the reason I reason I focus on it is on.
And I look at your weekly asking rent chart that looks like.
Back to pretty close to back to pre COVID-19 levels, but it just strikes me given this dynamic that you are talking about.
And if youre looking at that one singular short and suburban is above COVID-19 and we're inflicting on urban isn't there a really good chance that and asking rents.
Completely overshoot on a on a weighted average basis as this recovery continues.
No absolutely you think about.
The reopening and combined with the amount of fiscal and monetary stimulus.
And injected and the economy I think we could see a really much much closer to much closer to a V shaped recovery and I think any of us were thinking about.
Three six months ago I.
I think maybe with inside of our case shape recovery, because it's going to be and uneven I think it's likely to be and uneven recovery still but still.
And you're favoring the educated and and and knowledge based jobs, but that one slide that Ben showed.
And it actually broke down the portfolio to the four buckets.
Yes, it's pretty telling right I mean, you had the other suburban at 6% asking rent growth and net.
The job centre suburban.
And down about 3% secondary urban down, 6% and core urban down down 8%. That's those are pretty big disparities from just a year ago right.
As the economy Reopens, we would just expect things to start leveling off a bit.
Thank you guys. That's very helpful from my perspective.
Great.
Our next question will come from John Kim with BMO capital markets.
Thank you good afternoon you've.
<unk> been a very consistent and seller of assets.
And attractive returns and economic gains in Atlanta.
And throughout your history.
And right now with cap rates compressing and 10 31 on the table for potentially being appealed.
Do you think about expediting sales at all.
So John Good question, because the 10 31 may come off the table.
We've used 30 ones, but we haven't we haven't had to use them.
Extensively.
We typically have a couple of hundred million 300 millions of sort of gains capacity and a typical year that we can absorb on the sales side. So it really it's really a function of how much portfolio recycling, we really need to do we've been pretty aggressive about it over the last over the last few years and.
We've used the 1030 ones on a limited basis to help kind of manage.
Managed and tax impacts, but for the most part.
So we've just absorb the capacity that we have embedded and <unk>.
Embedded in our earnings.
And it's not and that just the 131, but just the cap rates compressing so much and and just a better time today to sell assets and maybe a little bit older and your portfolio.
And then it would be yes.
Yes, no I think that's a fair point.
Something we debate when we look at asset sales, we look at equity we look at that that is still the most compelling source of capital for us.
Asset sales or are creeping closer for share just in terms of where we're seeing the additional compression on cap rates and and asset values and a lot of a lot of the submarkets, particularly the suburban submarkets are actually up from.
And from pre COVID-19 levels. So yes.
Yes, it's a fair point and it doesn't form some of our capital allocation decisions at the margin for sure.
Okay, and then you've had noticeably stronger rental growth in April and southeast, Florida and Denver.
Do you see that outperformance continuing for the rest of the year.
And also how important is it for you to either expedite.
Your exposure in those markets and potentially enter new markets given the validated either strategy to enter them.
Yes, John sharp on our ASIC first of all on and then I'll, let Tim talk about Australia and expansion market strategy.
Just first of all months and one thing to recognize is that.
As president and those two expansion markets represent.
Very small basket of assets.
So noise from one asset to another can create some volatility here. So the kind of growth that we've seen on a year over year basis in Q1, and I would not expect that to be same level moving forward through the balance of the year.
And there's just some unique factors with one or two of those assets and when you only have three or four on the basket. It can move the needle quite a bit within one quarter. So I wouldn't count on that as sort of the run rate for the balance of the year.
Yes, John This is Matt I guess, the second question about kind of.
What our appetite is and we said, yes, we are looking to grow both of those markets to be roughly at least 5% of our portfolio and so I think right now, including non same store. They are probably about 2% each that we still have a ways to go and we do have starts planned and both of those.
Regions and the next quarter.
So we are continuing to move forward with development. There. We have additional pipeline starts that are probably 'twenty two starts and each of those regions and we're out looking for more and more.
We are actively pursuing acquisitions and both of those markets as well and.
And we'll continue to do what we've done in the past, which is we find acquisitions rotate capital out of some of our legacy markets to fund that.
As it relates to other markets beyond those I mean, I think we've said before that we are looking at other markets. We have anything to announce at this time, but we are looking for markets that are going to be over indexed to the knowledge economy and over indexed to kind of the higher income jobs and higher education jobs, which we think will drive.
Outsized performance for our portfolio and.
We do think Denver, and Florida, two of those markets and they're there.
There are others as well that probably fit that description overtime.
Great. Thank you.
Our next question will be from rich Anderson with <unk>.
BC.
Hey, Thanks, good afternoon, so I heard you.
Sort of adjusting and maybe at the margin some of the product that you are planning to deliver.
You mentioned Townhomes and direct entry type product.
And I'm curious.
And if a hybrid office environment is sort of the first landing point for the office business is that actually a good thing from multifamily and your property in particular, because they need to be close to the office, whether you're also going to spend more time at home. So.
More attention spent on having usable space, where they live to do you kind of see hybrid office is a good thing for your business.
Rich I think as I mentioned before kind of agnostic between urban and suburban and that we're generally looking at where we think there is.
We're going to tilt towards where we think there's more there's better value and.
I think it argues it.
The suburban and household formation should be a little stronger this cycle and lifecycle is and people who don't have to commute as many days and it.
And just at a spread the workforce out within and MSA.
And maybe maybe across broader geography, as well as people, yes, there'll be some folks who are going to be able to.
Telecommute and 100% of time, but for those.
More on a hybrid situation.
We think theres going to be some people.
At the margin that are going to be willing to live 10, 15 miles further out than they otherwise would because.
And they only had been the office two or three days a week versus five days a week.
And we are and are positioned to cap capture them and either in either case.
Right right.
And second question is.
And any other sort of post pandemic changes that youre seeing in terms of how the business and the cadence of the business is there.
And any silver lines, such as perhaps you know what.
More and more likelihood to live alone that kind of thing you're seeing anything like that or is it just too soon to tell at this point.
Yes, rich, it's Sean I would say, it's probably a little too early to tell.
I think when we gave today and sort of other side of the pandemic and things stabilize we will have a better sense of it.
As a resident profile really changed in terms of suburban and urban assets and.
And we continue to communicate with our residents and maybe kind of touching on the last question that you had that may inform our product choices and some of those suburban markets and took.
Some of the larger floor plans and what we provide and the way our workspace a work lounges and on the building and pro.
Graham and Morris town homes, and some cases and things like that it's probably just a little too early to peg. This is Jeff.
Okay, Great. That's all I have thanks.
We will now take a question from John Pawlowski with Green Street.
And thanks, a lot and Matt I'm curious if you can give us some sense of the compression and development yields and not on starts and hear about their projects youre about to start but if these construction cost pressures.
Proved more persistent.
Year from now on what kind of and development yield compression will we be looking at.
I'm just net new John.
I do think that.
Cost and cost pressures are definitely rising.
But on the other hand, there is also the numerator right and we're underwriting deals still with rents that are for the most part.
<unk>.
Less and maybe they were and the prior peak because a lot of our suburban development as job centers and suburban.
Maybe and some of the other suburban category from Ben Slide maybe some of that rents are higher than the prior peak.
And what we're underwriting so I do think there is still some left to come on the numerator.
And I guess, what I would say is on the denominator and what we've seen so far.
And the deals that we're lining up now in many cases, our total capital cost for those deals isn't any higher than it was a year ago, maybe it's higher than it was six months ago as lumbers come up some but there were some other trades costs, which came down a little bit soft cost may have softened a bit so.
And certainly there's going to be some cost pressures going forward.
And we're mindful that if anything the margin right now is wider than it was on deals we started a year or two and I would just because of what's happened and asset values and cap rates on the on the other side. So.
There's probably a little bit of room there.
Yes, John I guess, I guess I would say I think the market.
If I had a guess would be betting on NOI is outpacing that.
Total development costs over the next 12 months, there's clearly some some inflation pressures because of supply chain issues I think as your question implies and the real question and how transitory versus sort of permanent.
Those cost pressures will be but.
There is some pretty good pressures, there's pretty good pressure is building on the rent side too and.
So I think Thats I know you all have written a lot about the supply the supply side and sort of saying standard sort of stubbornly and that $3 50 to 400000 range and I expect that's going to continue because I think as people are looking at economics and the people that do trends.
Things are probably looking better today than they were maybe even maybe even a year ago.
Okay makes sense understood last one from me, Sean and markets, where you've had to pool, the concession and lever harder as we anniversary that vintage and leases signed with concessions do you expect occupancy and the decline in the next few months due to just lower retention.
Yes, no good question John.
And I think it speaks to sort of the.
Yes, you want to call it sort of the durability of the customers that have allowed us to build occupancy and they will say I mean, if you look at our portfolio income levels.
Our residents are down about 6% on a year over year basis.
So.
There is.
Based on what we've seen and I'd say theres, some theres some embedded capacity there to pay.
What other people want to pay or not will be a question that we will have to come across here. So.
And in Q1, we are starting to see pretty good lift.
Or was up but not for financial reasons just for other reasons in terms of people wanting to move for.
And with his roommate situations or all the other sort of typical stuff. So it doesn't seem to be based on what we're.
Realizing from our customers today, much and the way of financial pressure as we move through the second and third quarter, particularly in the urban environments. We will have a much better sense for that so could there be a little bit of pressure there. Yes, I mean, the other thing that I think we're going to see is right now Tim talked about the bad debt and kind of lapping the bad debt side of it at some point as we get it on the.
Other side of the eviction moratorium and some of that that's just going to convert to just physical vacancy.
You'll see a little bit of that start to trickle in and the back half of the year, just depending on what happens and the overall regulatory environment. So maybe a little noisy in terms of physical occupancy as it relates to that one issue along on a couple of markets, particularly at places like La as an example.
Okay. Thanks for that Todd.
We will now take a question from Oscar Schmidt.
And with Keybanc.
Thank you and good afternoon.
A question on development given the positive outlook that you have in your markets and some of the benefits you spoke to from from the stimulus entering the system. How are you guys thinking about just sizing up the development pipeline overall and the next the next couple of years.
Okay.
Yes, I can back and start and then maybe Brad or Matt wants to wants to jump in.
And as David mentioned, we are kind of up and our outlook here.
<unk>.
Over $1 billion this year and as we've talked about sort of years past.
The middle of last cycle and the development pipeline was probably.
Probably about 1 billion and 4 billion five in terms of kind of how it scales and we can.
Re sales as we got the later part of the cycle and in a downturn to something is more on the $800 million to $900 million range. We think we can flex that up pretty pretty easily to a $1 billion to without without too much trouble and probably 2 billion and a half. So I think kind of the kind of range as we're looking at right now.
Absent.
Actually entering some new markets and and.
Expanding the footprint.
Got it and then as far as some of the initiatives you guys outlined.
On the $10 million on from from some of the things you've already deployed on the technology side, and then you outlined and another $25 million to $30 million, what's the total investment that goes into it.
Generating net incremental incremental NOI.
Yes, good question.
<unk> laid out for you is that the technology.
<unk> initiatives around the digital platform, the AI that Ben described and and things like that that will be roughly around $30 million.
And then beyond that the smart access and smart home component is the pieces up and there is a little bit of a TBD based on customer adoption and what they are willing to pay with features they want and is it just the smart access component for our guests or is it more along the lines of thermostat control.
Lighting various other things so that's a little bit of a TBD on the investment, but the foundational elements to have the infrastructure the digital platforms and all of that is around $30 million.
Okay. Thank you.
Yes.
Our next question will be from Brad Heffern with RBC capital markets.
Hey, everyone just circling back to the development question and I am curious.
Last cycle and typically it did at the beginning of a cycle you've seen a big trough and supply and that's part of the reason that you ramp development at the beginning of the cycle.
Certainly we haven't seen as much of that this time around so I'm curious does that moderate your expectations as to how big the program could go.
On versus how large are gone and kind of 2013 and $14 15 in that timeframe.
Yes.
It came off at a profitable rate last cycle, particularly for the first three years.
And we're.
Developing and value creation margins that we hadn't seen really before probably and the 40% to 45% range and some cases site.
I think the range I talked about is right.
Kind of a to b and a half range is probably a little less as it relates to enterprise value maybe maybe.
And what's driving that but.
And then I think it's about $1 billion.
She is about right just in terms of the opportunity set within our markets and kind of where the where the platform a scaled and and what the balance sheet and kind of handle.
You know without without sort of.
Over relying on the equity markets being continuously open.
Okay got it and then you touched on bad debt, a little bit, but I was just curious.
And the 3% range for several quarters now has there been any movement on that in April.
And.
Have you seen any impact from the federal funds at this point.
Yes, Brad this is <unk>.
Shawn and happy to chat.
Sorry about that and then Kevin can jump in if you'd like but yes, I mean, I think for us, we're not expecting a meaningful shift and.
And bad debt until we get beyond.
And of the Moratoria, that's in place today, which is likely and the second half of the year. There's a number of orders that are right now set to expire in June to June 30th.
Suddenly they extended from May not it's a little too early to tell so we're not seeing a lot of movement right now sort of month to month in terms of.
A significant shift one way or another.
And that I suspect as customers see the light at the end of the tunnel in terms of you know.
And the eviction option and becoming available to us we're going to see some greater movement and then on the on the stimulus side, Yes, we are.
And we're heavily involved in that and some places that we can apply sort of and bulk on behalf of our customers and other locations, we prompt them with emails and where they have to sign up and then we ultimately received the funds. So we were seeing some funds, but I would tell you. It has been very slow and it's been sort of a trickle tripling as opposed to the avalanche of funds. So I just.
And thank the agencies that are within these states and counties and set up to most of the funds and they just weren't set up for that and therefore, it's taken us quite a bit of time from time to figure out how to develop a process to make it work at resident and certifications and always get the funds to the landlord the palisades right, Oh, and all that kind of stuff.
This has been painfully slow.
Okay. Thank you.
We will now take a question from Alexander Goldfarb with Piper Sandler.
Hey, good afternoon.
Just going back to the to the development.
Saw that you guys.
But on the stuff that you're having the pipeline and our only 20.
And 20 basis points, lower but just help me walk through I mean, two by fours lumber.
And recall.
Yeah anything involving construction.
Yeah.
He is just through the roof I mean double digit increase.
Daniel.
Brian.
Hey.
And the <unk>.
Your margin given Kathleen congrats on that but just help me understand why the development yields really unaffected given that.
Rents are softer construction costs are through the roof.
Labor is still a challenge and what's the offset just help me understand.
Hey, Alex its Matt.
So on the stuff that is currently underway that's all bought out so yes.
And in fact part of again.
And I'm thinking that actually savings there because there was some.
And that there was pretty strong momentum and construction cost inflation and many of our markets pre pandemic.
Yeah, a lot of it has to do with it.
Tim was saying is that going to be kind of transitory based on.
And supply chain bottlenecks or not but I think.
There is there is a little bit of an under appreciation about how and.
How our cost breakdown actually works I mean, if you think of a typical development deal and you say for every dollar.
And a total development budget <unk>.
15% to 20 is land.
So that and.
And everything Thats in our pipeline for the most part is land that we contracted before the pandemic and some cases, there was an opportunity to re cut some of those land deals in some situations based on the slowdown we saw last year.
And then you probably have anywhere from.
15% to 20, <unk> that is soft cost, whether that's architectural engineering fees permits capitalized interest which has come down.
And so theres, a little bit of and offset there and then.
And then you have maybe 60% to 65.
And the actual hard cost and then when you drill down on that piece.
Two thirds of that is labor and one third of that is materials.
And actually even on the materials when you Peel it back further a lot of those materials. It's not on appliance that you are buying it's it's a roof trusts, which is lumber, but it's also labor to put the roof trust together so.
The key is is the pressure on labor costs, that's what would really move the equation more I mean, we can see lumber has doubled and it probably increases the total capital budget of a job by 3% for example, two and 3%, which is which is something but.
But probably that's the thing I would keep an eye on would be labor costs, because if that starts to really move that would start to.
Yeah.
Okay.
And I'm.
And just add to that real quick I think and reality.
We underwrite on a current currency basis as management for our current cost current current rents current current opex I can rally.
Yields have deteriorated a little bit so the deals that Matt talked about we're going to start and the high fives and when we first put those under contract and went through due diligence. They are probably low sixes and reality. So if you think about over the last two years.
Maybe there maybe they're flattish overall, particularly in the suburban markets given that's where the focus on the development pipeline is and costs are up the denominator is up a little bit and so I think you probably have seen some deterioration of I don't know and I don't know that bracket, but somewhere between 25, and and 50 basis points of yield erosion, but you have.
<unk> seen DC and cap rate compression, that's more or less offset that.
Okay. That's helpful second question.
Think about the new markets that you want to enter.
There's obviously a cost and <unk>.
And see you know critical mask and a platform how do you guys weigh straight up acquisitions and I'm, not saying that you guys go out and sort of bulk purchase a bunch of communities, but how do you weigh.
<unk> not and just buying some existing deals even if the yields are a little skinnier than you'd want versus using your development partnership with like local landowners to get better yields but understand it and that's going to take a longer time to establish that critical mass as you enter new markets. How do you balance those two.
Alex.
And I mean, basically what we've been taking the approach is all day. So we're looking to buy existing assets, what we found and the expansion markets. So far has been.
And it's been an opportunity to buy and general brand, new or very young assets.
And not necessarily pay a premium on a cap rate basis versus older assets.
That's where we've tended to buy so far just because of relative Val.
Value.
But ultimately we'd like to own some.
Yes.
Older communities and those regions as well just from price point and diversification. So we're looking to buy we're looking to build and we're also looking to capitalize and third party developers, which we've done.
Excess fleet and fact that deal we just completed last quarter in <unk> and the Miami area was a partnership with a local merchant builder, there, where we funded it and.
And we worked together on the deal so that's kind of and expansion of our model a bit.
<unk>.
I think we're leaning on and these expansion markets that gives us another way, we can get capital into these markets and grow our portfolio more quickly.
And so I don't think we view it as an either or we viewed as on all of the above and I was here.
One other thing I would add to that and also gives us an opportunity.
To allocate capital over a period of time, because they don't they're not all on the same time horizon right. So you buy assets today, if you are funding a.
And third party developer that maybe capital it goes out over the next one to three years, if youre developing for your on account, where you're having to go through the entitlement process yourself and that's maybe more of a three to five year time horizon and so it allows us to.
To diversify across time as well as.
And as well as.
Sort of by product and end market.
Okay. Thank you.
And well now take our next question from Lula.
And I'll go back with Bank of America.
Hi, everyone. Thank you for taking the question I'll just be really quick I wanted to ask a little bit more about Pike Plaza. So it seems like you guys had some good traction on the commercial leasing this quarter can you tell us who the tenants are and what box sizes. Our last day you guys have to lease and then I think a while ago you guys mentioned that it would be about 10.
And NOI annually once and stabilized are you still on track for that.
Sure Matt.
Just to give you an update on the retail as we mentioned and the earnings release and good lease the remainder of the second stage second floor space last quarter. So we're now about 87% leased on the retail.
500 square feet remaining on our growth.
Groundhogs Broadway funds.
And our sense is for that remaining space.
We're going to we're going to be patient.
Find wafer kind of activity to restart in New York, which hopefully will start to see pick up and a more meaningful way and the next couple of quarters.
That is high dollar space, but the.
And the second floor space and the release is linked to a medical user and so on the second quarter. We have them, we have fidelity, which is open and operating with a financial services office and on the ground floor, we have spectrum.
For a small portion of the ground floor.
Target with their entrance and then they have below grade space there.
And then we have the kind of the remaining available space on the ground floor. So.
And we'll see where it settles out in terms of long term does it generate the amount of NOI that we had talked about before obviously street retail and New York.
And softer than it was but a lot of it is going to depend on what we wind up getting for that remaining ground floor space.
Okay got it thank you.
And from a reminder, that is star one if you would like to ask a question.
And we will now take a question from Brian <unk> with UBS.
Hey, Thanks, given the return to office and expected to extend through the fall how do you think that might impact the usual seasonal leasing trends as this year plays out.
Yes, Sean good question.
Not sure we know the answer just yet in terms of how it's going to play out.
Other than that I would say based on the data that we're seeing from prospects on new leases and certain markets that are seeing some people come back to some of these urban environments from more distant locations than normal.
And so like in New York City, and the past quarter. When you look at the distribution of the.
Leases that we signed and where they came from more people from locations that are let's just say greater than 50 miles away. So we're starting to see some percentage come back.
How it plays out and it's hard to tell obviously.
And as companies further announce what's happening with their return to office space and.
And the trend for universities in terms of on campus learning and the fall has been pretty positive. So far I think for our business, where most universities or planning for full on campus learning, which should be a benefit as these major urban markets for their bursaries.
And even if we pinpointed out office occupancy is less and 20%. So it doesn't take a lot and start to move the needle even when we get to <unk>.
50, 60, 70% of what it was previously that's a pretty good movement from where we are today.
So I think it is going to be a pretty positive trend between now and labor day, it's hard to say exactly how it's going to play out in terms of.
Getting back to what we would think of as sort of pre pandemic normal levels really.
We really won't know that until we get past labor day.
Yeah makes sense, Okay, and then just one other on new leases and urban markets what true.
And so are you seeing in terms of demand by unit type of price point.
Yes, the only thing I'd say is and the urban pockets that we're still seeing some difficulty with studio units in terms of single households.
So if you look at overall occupancy they are trailing the portfolio average couple of hundred basis points.
Most acute and the places you would expect New York City DC San Francisco.
Urban Boston and places like that that's really the difference, we're seeing and in terms of sort of bedroom type.
At this point is on.
And just not that much Samantha single yet.
Okay. Thanks, guys.
Okay.
We'll now move to Dennis Mcgill with Zelman and associates.
Hi, good afternoon, and thank you.
Next question just goes back to the margin potential from some other technology investments.
Should we think about the baseline for that 200 basis point improvement.
And we look pre COVID-19 kind of and a 70, 172% range, but that's sort of more peak of cycle.
How would you think about maybe a normalized margin and then what.
Savings would go down.
And two on top of that.
Yes, no good question, Dennis and what we looked at it as kind of a stabilized base years, what we call it and so.
So for the most part it's kind of a plan.
And if you use 2019 as cash.
From a proxy.
For controllable NOI margins, excluding taxes and insurance.
And how we think and where the pace here is and let's move on from there obviously thinks it's stored and during the pandemic given what's happened.
That'd be kind of other way, we're looking at at least.
Essentially just controlling for property taxes versus pre COVID-19.
On the taxes and insurance, which pushes those margins. If you will look and look at it carefully and.
And go back there for example, like 18 19, and those same store margins excluding net.
Got it and 80%.
And.
You can map out each one in terms of what you've got out there in terms of 18 and 19, but thanks again is really kind of a base here.
Okay, that's helpful and.
And then.
And this is probably tougher, but just wondering how you think about it.
Good day.
Hi, Dmitry reopening and so on these urban environment and particular and you have a lot of young adults that are moving back and we're back home are doubled up and some fashion and theres, probably a pent up demand element.
And the markets are experiencing right now.
And you get comfort around what that next leg and.
And might look like whether there's a continuation of pent up demand or whether there is going to be an air pocket at some point and once you get through sort of.
Satisfying that first level of pent up demand.
Yes, good question on that.
Sure exactly how to answer the air pocket question.
And we certainly expect people that left these urban environments to come back and Thats, not a higher percent but.
It will come back.
What percent is sort of pure speculation would be hard for us or anyone else and say, what's the number is in terms of their pocket beyond that it really just is a function of sort of the macro economy, and whats happening with jobs and income growth and sort of more of the normal factors that drive the business in terms of demand characteristics.
On the supply side, we talked about that a little bit we expect that to be relatively cost.
And I have a little bit of a tailwind from the single family market has been pointed out just given on affordability issues on our legacy markets.
And so I think really I was just sort of pause and look at it is what other.
The macro environment looks like from a demand supply standpoint, and how does that support the business going forward once we get to the other side of the pandemic.
Got it and.
Hard to quantify but.
Appreciate the thoughts.
Thank you guys. Good luck.
And it appears there are no further telephone questions and I'd like to turn the conference back over to Mr. Naughton for any additional or closing remarks.
Great. Thank.
Thank you and thanks, everyone for being on the call today and that's a.
So busy day and busy week, we look forward to cash.
Cash up with you in early June at least virtually I think and they rate so enjoy the rest of your day.
And once again that does conclude today's conference and we thank you all for your participation you may now disconnect.
Okay.
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Yes.
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Okay.