Q2 2021 Avalonbay Communities Inc Earnings Call
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Good day, everyone and welcome to Avalonbay communities second quarter 2021 earnings conference call. At this time all participants all participants are in a listen only mode. Following remarks by the company. We will conduct a question and answer session. You may enter the queue and question and answer session at any time by pressing star.
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Session. Your host for today's conference is Mr. Jason Reilley, Vice President of Investor Relations. Mr. Riley you may begin.
Thank you April and welcome to Avalonbay communities second quarter 2021 earnings Conference call before we begin. Please note that forward looking statements may be made.
Made during this discussion there are a variety of risks and uncertainties associated with forward looking statements and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release as well as from the company's form 10-K, and form 10-Q filed with the F.
As usual this press release does include an attachment with definitions and.
Conciliations of non-GAAP financial measures and other terms.
May be used in today's discussion.
<unk> is also available on our website at Www Dot Avalonbay dotcom forward Slash earnings and we encourage you to refer to this information during the review of our operating results and financial performance.
That I will turn the call over to Tim.
<unk>, chairman and CEO of Avalonbay communities for his remarks Tim.
Yeah, Thanks, Jason and welcome to our Q2 call with me today are a bench all Kevin O'shea, Matt Berenbaum and Sean Breslin.
For our prepared comments today I will start by providing some high level comments on apartment.
Apartment marketing conditions, and how the current operating and capital environment shaping our actions, including our recent decision to enter new markets in North Carolina and Texas.
Ben will provide a summary of second quarter results, including a detailed roadmap of results on a year over year and a sequential quarter basis.
Sean will then elaborate on operating trends in the portfolio.
We've seen a robust recovery in fundamentals and performance since the first per year.
Matt will review performance in our development portfolio, including lease up performance.
A review of our first Konzo community located in Rockville, Maryland.
We completed construction in this past quarter.
Kevin will then provide an overview of our outlook for Q3 and the full year and lastly, Ben will provide some summary comments on how ABB is well positioned to deliver earnings and NAV growth as we look forward.
Before turning to the deck I thought I'd provide some.
Perspective, what we're seeing in the markets and how it's shaping our actions in terms of operations and capital allocation.
Since the first of the year the recovery in the apartment market.
<unk> has been dramatic.
Effective moving rents have fully recovered from the trough.
Almost 20% over the last 2 quarters.
Don.
And asking rents grew even faster up over 20% since the beginning of the year and now stands at 8% above pre pandemic peak.
Concessions, which was significantly elevated last year have fallen back to a modest level closer to what we experienced pre pandemic.
As you might.
I guess, the speed and steepness of the recovery has been driven by very strong rental demand and.
In fact, Q2 traffic was up over 40% from last year.
Continues to outpace last year, despite very low levels of availability.
The combination of strong traffic and low inventory propelled rental rates through Q2.
It is a low that has continued through July.
While all regions in sub markets are improving and most are back to or near pre pandemic levels, there's still a fair bit of variability across the portfolio.
Specifically suburban continues to outperform urban.
Class a is outperforming class b.
And regionally southern California in our expansion markets of Southeast, Florida, and Denver outperforming the portfolio average while the Bay area continues to lag average.
In addition to strong apartment markets. The capital markets are also extremely healthy and constructive for apartment investment.
The transaction debt and equity.
Okay are all wide open and are supporting strong growth in asset values as we've seen cap rates fall below 4% across most markets and submarkets over the last few quarters.
Based on the strong market sentiment, we expect capital flows to remain healthy over the foreseeable future.
Okay.
Mark this operating and capital backdrop, we have shifted offense and have increased our planned investment activity for the year by almost $1 billion.
Between new development starts and acquisitions.
In addition in our release, we announced our intent to enter the Raleigh, and Charlotte markets in North Carolina.
Good morning.
Okay.
As we discussed over the last 2 to 3 years, we've been evaluating expansion into markets that we believe will disproportionately benefit from the growth in the knowledge economy and domestic migration, particularly.
Particularly in those markets I figure to see some migration from our existing legacy markets.
We will have more to share with you about our growth plans.
In these markets over the next couple of quarters.
And lastly, as we mentioned last quarter after completing a comprehensive midyear. We forecast we are now providing full year outlook. In addition to quarterly guidance.
While risk remains our outlook, including the impact of the virus and the Delta variant.
These act timing.
So the eventual phase out of victory Moratory across our markets and the receipt of any rent relief payments from state and local governments.
We have enough clarity to provide a meaningful perspective with respect to our operating performance for the rest of the year.
With that now let me turn it over to Ben who will discuss Q2 results.
Thank you Tim.
Slide 4 highlights our Q2 results and activity and while we meaningfully exceeded our guidance for Q2 with core <unk> of $1.98 versus guidance at the midpoint of $1.90 per share our year over year core <unk> figures were down 11, 2% for the quarter and 14, 8%.
Year to date, reflecting the disruption that we've seen in our business over the last 12 months.
Notably and reflecting the strong recovery that Tim emphasized rental revenue increased on a sequential basis turning positive for the first time since March of 2020, with a 90 basis point increase on a GAAP basis and 100.
70 basis points on a cash basis from Q1 to Q2.
As Sean will delve into in more detail rental rates improved during each month of the quarter with continued growth in July.
Our development platform also continues to create meaningful shareholder value, we completed $385 million of development in the quarter.
And close to $1 billion through the first half of 2021.
These developments are primarily suburban and are benefiting from the renter demand and increasing rents we're experiencing across our suburban communities.
For our completions in the second quarter, the initial projected stabilized yield of 6.4% providing.
<unk> 250 basis points of spread to the sub 4% stabilized cap rates, we're seeing in the asset sale market today.
These completed projects along with others that are in lease up also provide a meaningful incremental boost to earnings growth as Matt will discuss in more detail.
We also started $580 million of new.
Roughly in Q2 and are on track to meet our target of $1.2 billion of new starts in 2021, which we increased last quarter from our initial target of $750 million of new starts.
During the quarter, we raised $540 million of capital through dispositions at an average cost of capital of 3.7%.
The development by match funding our development activity, primarily with these disposition proceeds we in turn are able to reduce the capital cost risk associated with the earnings and NAV accretion as we execute on our development pipeline over the coming years.
Slide 5 breaks down the components of our rental revenue change on a year over year basis.
With lower lease rates over the last 12 months and the amortization of concessions being the largest drivers of the decline.
As it relates to concessions at the end of Q2, we had a total of $29 million of previously granted concessions still to be amortized in our same store pool over the coming quarters.
However concession usage.
Declined by roughly 85% since Q4 of 2020 from $900 per moving to just above $300 in July.
Slide 6 provides the factors leading to our increase in rental revenue from Q1 to Q2 with a turned to the positive being driven by higher occupancy and an improvement in uncollectible.
Lease revenue.
At a portfolio level uncollectable lease revenue remains elevated with bad debt at roughly 3% versus a more normalized 50 to 60 basis points with the expectation that we'll continue to see elevated bad debt levels until eviction moratoria are behind us.
Before turning it over to Sean for further context.
Context on our operating performance slide 7 illustrates our strong momentum in the form of like term effective rent change, which turned positive in June and now stands at 5% in July with that I'll turn it to Shawn.
Alright, Thanks Ben.
I thought I'd share a few slides on portfolio rent trends, both overall and across different mark.
In Submarkets.
Overall, we've seen a meaningful acceleration in the positive rent trends you spoke about during our Q1 call on slide 8 you can see that our average move in rent value has grown by roughly 18% since the beginning of the year, including a 13% increase since just April and is now consistent.
<unk> current levels, we achieved in mid 2019.
Moving to slide 9 improved performance has been broad based with every region experiencing a material increase in average move in rent over the past 7 months.
If you look at our July move in specifically <unk>.
Rents are now equal to or greater than the 20.
With the peaking peak in every region, except northern California, which remains.
Roughly 11% below peak.
Timeline for a full recovery in northern California will in part be based on when major tech employers call people back to work.
Hybrid work policies adopted by major employers will have will certainly have some impact on where.
9 tech workers want to live.
Silicon Valley will very likely remain 1 of the world's leading innovation centers for years to come.
Turning to slide 10 to address suburban and urban performance trends.
Average July move in rent for our suburban portfolio was roughly 3% above the peak.
We're <unk> in 2019.
In our urban portfolio, while demand has returned in a meaningful way.
The average rent in these submarkets fill the most throughout 2020 and it is still down about 7.5% from peak 2019 rents.
As it relates to the urban portfolio, we expect performance to continue to improve as people.
I'll call back to the office.
Urban universities resume on campus learning and the quality of the environment starts to look and feel more like pre pre pandemic conditions.
Turning to slide 11, our average asking rent, which is representative of the published rent per available inventory has increased 24%.
Since the beginning of the year is current and is currently about 8% above the mid 2019 peak.
<unk> suburban submarkets, which represent about 2 thirds of portfolio of revenue are leading the recovery.
The average asking rent in our urban Submarkets is basically back to the 2019 peak and as I mentioned previously.
Elected to continue to grow as those environments from our fully reopen over the next few months.
And moving to Slide 12. This chart depicts the trajectory and spread between our average asking and move in rents.
As I mentioned in a few slides ago. The average portfolio moving rent has increased roughly 18% this year.
It is <unk>.
The trails the increase in average asking rent, which is up 24%.
The average dollar spread between the 2 whichever 12% for the month of July is wider than the 4% to 5%. We've seen historically and is representative of the capacity available to grow move in rents.
For the next couple of quarters.
Additionally, if we see a seasonal adjustment in asking rents in the last few months of the year something we have not yet experienced this year, there's plenty of room for asking rents to soften a bit and still grow moving rents.
With that summary, I'll turn it to Matt to address development and portfolio trading activity Matt.
Over alright, great. Thanks, Sean.
Turning to our current lease up communities you can see on slide 13, the same positive trends that we're seeing in the stabilized portfolio.
We're seeing rents of $155 above initial underwriting on the 7 communities that are currently in lease up which is lifting the stabilized yield on those investments to $6.
Net percent Jeff.
<unk> substantial value creation relative to current cap rates, which are at or below 4% across our footprint.
This is really a remarkable turnaround in our development portfolio, which just a few quarters ago had rents and yields modestly below initial underwriting and continues to demonstrate our long track record of delivering outsized risk adjusted.
<unk> returns from our development and construction capabilities.
1 development that we wanted to highlight this quarter as shown on slide 14, which is the first completion of our latest brand caso located at the Twinsburg Metro station in Rockville, Maryland.
Console was born out of customer insight research, which was telling us that there is a.
1 large underserved segment of residents that are looking for a new high quality apartment in a transit served or infill location, but without all of the extra bells and whistles provided in typical class a new construction.
By focusing our investment on the apartment home itself and removing common area amenities that these customers do not value like pools fitness centers and lounges.
Laura we're able to save on both upfront capital and ongoing operating and Capex costs, which in turn allow us to provide a meaningful discount on the rent as compared to a fully programmed by Avalon offering at the same location.
<unk> Leverages technology to provide a primarily self service experience for residents and prospects with very limited.
<unk> staffing supported by our centralized call center, and a design with low maintenance need to deliver on our brand promise to lift simply without sacrifice.
We're excited the market has embraced the concept condo twinbrook leasing up successfully at a strong pace at rents above pro forma and look forward to growing this new brand via.
Additional development opportunities in the future.
Turning to slide 15, we continue to see tremendous demand in the asset sales market and completed 6 wholly owned dispositions in the second quarter at a weighted average cap rate of 3.7%.
The assets sold were predominantly in the northeast region with more than 60%.
Net of the proceeds coming out of the Greater New York area and were older than average for our portfolio with an average age of 25 years, allowing us to continue to further our portfolio allocation goals to reduce exposure to some of our legacy markets.
I'll also minimizing our capex profile and by redeploying this capital into new development starts of $580 million this quarter.
Our projected yields of 5.7% were match funding new growth at highly accretive margins and.
With that I'll turn it over to Kevin to go over our earnings guidance from.
Great. Thanks, Matt on Slide 16, we provide our financial and operating outlook for the third quarter and for full year 2021.
For the third quarter.
Quarter in the midpoint of our guidance ranges, we expect core <unk> per share of $1.96.
On a sequential basis, our third quarter estimate reflects a sequential decline in core of the flow of <unk> per share from the second quarter.
The sequential decrease in core <unk> per share is driven primarily by an.
An increase of <unk> <unk> per share and same store residential revenue and a <unk> <unk> per share increase in lease up NOI offset by seasonally driven increase in same store residential operating expenses of <unk> <unk> per share.
<unk> per share decrease in community NOI as a result of recent disposition activity.
Using a year over year basis for our same store portfolio using the midpoint of our ranges, we expect NOI to decrease by 3% for the third quarter driven by an 80 basis point reduction in same store residential rental revenue and a 3.5% increase in same store residential operating expenses.
For the fourth quarter, our full year earnings guidance implies core <unk> per share of $2.13.
Which would represent a 17 or 8.7% sequential increase from the third quarter estimate.
This expected sequential increase in earnings in the fourth quarter is primarily driven.
Even by a continued increase in same store residential rental revenue.
Seasonally expected decline in same store residential operating expenses and by further NOI growth in our lease up portfolio.
For our full year 2021 guidance, we expect core <unk> per share of $8 <unk> at the midpoint of our range.
Yeah.
And for our same store residential portfolio again, using the mixed changes in looking at growth on a year over year basis, we expect NOI to decrease by 6.2% for full year 2021, driven by a 3.2% decrease in revenues and a 3.3% increase in operating expenses.
Range.
Turning to our updated investment and capital plan the combination of a strong recovery in revenue and earnings growth and attractive access to the capital markets has prompted us to pivot to offense and pursue increased development and acquisition activity as reflected in our current investment in capital plan on slide 17.
Core development, we now anticipate starting $1.2 billion in new projects. This year up from our original plan of $750 million and we expect NOI from new development communities undergoing lease up to be about $50 million. This year at the midpoint, an increase of $5 million from our original outlook.
For.
For capital activity, we now anticipate the busier year with total capital uses for development redevelopment acquisitions and debt repayments of $1.8 billion in 2021.
This represents an increase of nearly $1 billion from our original outlook and is driven by increased acquisition activity for the year.
And unexpected early repayments later this year of $450 million in unsecured debt that is scheduled to mature in September 2022.
In terms of capital sourcing our current plan contemplates meeting our capital needs through a combination of unsecured debt issuance and additional asset sales, although the sources.
Ultimately tap are subject to change based on changes in capital market conditions, where our actual capital uses.
Turning now to slide 18, and our continuing efforts in the area of corporate responsibility or ESG. We are pleased to report that we recently released our 10th annual corporate responsibility our ESG report.
Reflecting our longstanding commitment to this part of our business.
As highlighted in the report and measurable progress on our science based emission reduction targets <unk>.
Primarily due to our investments in onsite solar generation and efforts to improve building efficiency.
We're also proud of our commitment to the communities in which we do business.
Increased funding to our nonprofit partners.
Those in need during the pandemic.
We continued our important national partnership with the American Red Cross focused on disaster preparedness and response and.
And we initiated a new partnership with the National Urbanely designed to engage them on our diversity and inclusion efforts and provide support.
<unk> to their mission.
All of these efforts continue to be recognized externally with the CDP rating us in the band and the global real estate sustainability benchmark, our <unk> rating US number 1 in the multifamily sector, both globally and in the United States.
In addition, NAREIT awarded us their highest.
On our sustainability performance.
Further our associates remained highly engaged as reflected in our engagement scores that are in the top quartile on this important metric.
And finally, our customers weighted in and we are pleased to be number 1 in online customer reputation.
And with that I'll turn it back to Ben for his concluding remarks.
Thanks, Kevin turning to our key takeaways on slide 19, we are very encouraged by the continued improvement in our operating fundamentals and believe our portfolio is well positioned for additional growth as reflected in the growth assumptions incorporated into our second half guidance.
Near term trends in our suburban portfolio continue to look very strong.
And we are hopeful that our urban communities, which have been lagging the rest of the portfolio should benefit over the coming months with a fuller return to offices and universities as Tim mentioned at the start we also expect that our class a communities will continue to outperform as higher income residents and prospects benefit from the economic recovery and seek out high quality living environments.
<unk>.
As discussed our development acumen and pipeline continue to be a differentiator for us are projects and lease up primarily in the suburbs are benefiting from strong renter demand and we've been able to quickly scale up our development activity at attractive yields relative to stabilized cap rates.
As we look forward, we expect the breadth of our development expertise.
Expertise will allow us to shift capital to growing markets and evolve our product offering to meet the needs of our targeted customer segments.
We also see our operating platform and our investments in innovation as a differentiator.
In addition to the expense reductions and the margin opportunities, we discussed last quarter, our technology forward approach.
<unk> positions us to be able to create de novo offerings, such as konzo, bringing together the best of our operating innovation brand and development expertise as we evolve our offerings and create a better way to live.
As we head forward, we're excited about our new growth in Raleigh, Durham, Charlotte Dallas and Austin In addition to our.
Continued growth in southeast, Florida, and Denver, bringing us to a total of 6 expansion markets.
We're actively negotiating on opportunities in these new expansion markets and expect to grow through acquisitions, our own development and through the funding of other developers, where we own the asset upon stabilization similar to the growth strategies, we have successful.
<unk> will utilize to grow our presence in southeast, Florida and Denver.
This multi pronged approach also allows us to invest capital over different time horizons with acquisitions of existing communities being naturally the most immediate and.
In our own development being medium term in duration.
We look forward to sharing our long term goals and portfolio allocation objectives for.
These markets with investors over the company.
Finally, thank you to the entire Avalon Bay organization for their commitment and leadership on ESG, where our recently issued <unk> 10th annual responsibility report highlighted our continued ESG leadership position across the wider REIT sector and with that we'll open it up for questions.
Yeah.
April if euro per great questions.
Sure.
And if you'd like to ask a question.
And again its star 1 if you'd like to ask a question. Please release your mute function.
To allow your signal to reach our equipment, we'll hear from Nick Joseph of Citi.
Thanks, a bunch.
All right the comments on the new markets, how large do you expect each market to be once you get to scale so either.
From a unit perspective or as a percentage of total NOI.
Hey, Nick this is Ben I'll take that 1.
We're not putting out a specific target at this point.
As I mentioned, it's part of what we'll discuss with investors over the coming quarters.
And then also how that ties into our overall portfolio.
Allocation approach.
But we do we do see this announcement is a meaningful 1 we are actively engaged with speaks with specific opportunities currently on both the acquisition side and on the development side.
We've been just for some context here, we've been growing in southeast, Florida, and Denver, where we set a target of 5% for.
<unk> market as a goal for our overall allocation and our rough user that Texas and North Carolina have the potential for a similar type of allocation.
Overall, we're excited for opening up these new growth opportunities in these new 4 markets and leveraging our skills across investments development and operations.
<unk> over the coming years.
Hey, Ben it's Michael Bilerman speaking it sounds like you've been pretty active in these market sourcing can you just sort of provide maybe just.
How much is under contract or in advanced stage.
It's like a $1 billion already that you've sort of almost circled in.
For each of opportunities, whether they be acquisitions or development just to give us a sense of how quickly you've been able to.
Work your way into these markets.
Hey, Michael it's Matt.
I can speak to that 1 a little bit I mean, you know things are fluid until they close so I don't want to get too specific.
In term.
We do have we're active we do have active deals working in 3 of those 4 markets that Ben mentioned.
Those 3 deals together, probably add up to maybe half of what you are saying, maybe it's 500 million non 1 billion yet at this point, but we're continuing to look for more as well and certainly we expect some of that activity to close here in the third quarter.
And then just finally I know a couple of you have talked about the growth opportunities in those markets in terms of people coming from your existing legacy markets as well as just the job growth in those markets.
And so how should we think about sort of the initial funding of these is this going to be at a dilutive exercise.
You sell assets or raise equity or other forms of financing that youll benefit from the growth going forward or do you think you can do this on a sort of non dilutive basis, maybe even accretive.
As you go forward.
Hey, Michael This is Kevin I think from terms of our pacing.
<unk> into these new markets I think number 1 it's likely to be measured as Matt alluded to and similar to what.
You've seen in terms of the rollout some of our other markets, maybe a little bit more less obviously, we'd like to be to make some progress on that front, but then relatedly the capital impact in terms of how we as per.
<unk> also likely to be measured.
And.
So we've got unlike.
Some others because we are so active in development you have that as a tool in our toolkit, neither the debenture with partners.
Or to eventually start doing development, our own and to the extent, we engage in those new markets and that way that obviously.
The cases out the capital deployment.
And also match that against investments that are generally pretty darn accretive to our cost of capital so our.
Our intention would not be to do so and any dilutive way.
From a from the standpoint of acquisitions as you know from what we've done so far we've been leaning pretty heavily into our gains.
Honestly by selling assets in non core markets or non core submarkets in our legacy footprint and then.
Putting them into southeast, Florida, and Denver, and I think we will likely continue to do that and that's that's something that we think actually.
Is marginally accretive because we're kind of moves.
Moving and as you can see from what assets that we're selling now in sub 4.
<unk> rates and to asset into markets worth maybe similar cap rates, but hopefully a better growth profile. So I think what you've seen us do in the past is probably a good indication of what we might do in the future and probably from a funding point of view and looking to do to do so on accretive basis.
Alright, thanks for that color.
Okay.
And next we'll hear from Rich Hill of Morgan Stanley.
Hey, guys. Good afternoon, I wanted to maybe just build off of what Michael just asked.
Is there any day you see any opportunity for you to maybe do a bigger.
Acquisition of our private apartment.
Copies are private apartment owner in these in these markets or maybe even a public apartment REIT, obviously not trying to put anyone in play but it seems like you know, there's there's would might be some interesting synergies both on a G&A basis in a portfolio basis, if you're really looking to make a move into these markets curious if you've thought about.
About that and if so.
What what might make sense from what might not make sense about it.
Okay.
Yep.
M&A is always a possibility it's not that's not it's not hurt our main strategy in terms of entering these markets I guess sort of step.
We're not necessarily looking to.
As Kevin mentioned, we're looking at sort of pace.
<unk> our way into these markets, we are making these decisions as we see these markets as having great fundamentals over a long period of time.
Certain structural advantages are going to make them appealing market over the next 2030.40 years much like our legacy.
Markets are better over the last 2030 years, so they need either through M&A or to do.
Our highly disproportionate level of transaction activity in these markets was not is not what's driving that's motivating to also recognize we're learning as we get into these markets and so.
There is obviously, a big risk either do an M&A or.
A high level of volume in the first year or 2 as you start to as you start to gain market intelligence in the markets, which are you, Jeff and so very much the strategy as Kevin mentioned that we deployed.
Lloyd in Southeast, Florida, and Denver.
How we look to deploy capital here as well.
Very fair I appreciate that response.
Maybe come back to this concept a base effect versus earnings power for the apartment Reits obviously.
From our perspective the recovery.
It is yeah.
Is it happening.
Sooner and faster than we were anticipating.
And I think we were pretty constructive over.
Over the past 9 months or so.
But I do I am curious you know as you speak to your tenants and you think about supply versus demand. It just strikes me that occupancy is at a really healthy level theres a tremendous amount of demand.
Coming back and you mentioned that all of your markets I think except northern California, we're sort of back to 2019 levels.
How much do you think you can push rents in this market and this sort of market and are are we are we facing.
A relatively elastic demand profile just given.
Businessman demand that's coming from Gen Z, It's engine wise relative to a limited supply of housing how does how do you think about that.
Yeah Rich this is Sean I'll take a first shot at the other than anybody else can jump in in terms of the kind of demand profile on how it plays.
About how long it could Ron yeah, that's a function of a lot of different variables that would take us quite a while to get through but yes. There are a lot of the demand side things have been quite robust as you noted.
The trajectory of the recovery, whether you look at asking rents you look at moving value as you look at occupancy all of them quite.
<unk> healthy.
Even by historical standards in terms of coming out of a downturn.
Terms of the speed of the recovery in the order of magnitude.
Both have probably been a little bit surprising for everyone.
When we look at where we're clearing the market today on rents, we kind of put that slide in the deck that shows.
Those were asking rents are relative to moving values.
In the near term I guess, what I would say is that demand has been quite healthy we have not seen signs of weakening at this point whatsoever and have seen very healthy week by week growth in both of those moving values and asking.
Rents.
People have asked about the seasonal effect abandoned pulled forward et cetera, et cetera, we don't see signs of that yet, but what we do feel good about is that spread between moving rents and asking rents being at 12%, even if theres a little bit of seasonality that comes upon us in the end.
In the fourth quarter or at the very end creates some disruption and delays were starting to see a little bit of that there's still plenty of room in the short run to see moving rents continue to grow and maintain.
The recovery in the longer term, it's a broader question around just overall housing demand and supply which is a function of what happens.
But income growth and various other factors associated with the demand side and on the supply side. Just overall housing production in multifamily housing production, specifically at least on the supply side, our markets, we feel pretty good about particularly as the legacy markets the outlook for supply coming down over the next year or 2.
The adjusted by a pretty decent amount will be able to refresh our numbers by the end of this year, but we could be seeing double digit percentage decline across the footprint and supply.
Moving into 2022 would certainly further kind of support healthy.
Demand and rental rate growth as we move through 2.
2022, so that's kind of the near term.
Maybe medium term outlook, and then Tim or others may want to jump in in terms of the longer term outlook maybe.
Maybe just to.
Tag on to what John was saying.
Yes, Sean mentioned.
The supply outlook I do think there's a combination of maybe some 1.
1 time items that are fueling demand as well as maybe some structural things that have been accelerated obviously by the pandemic to have unprecedented federal stimulus.
And excess savings that have been created during this downturn that maybe helped propelling some household demand at the margin a lot of it is a lot.
It is being fueled by the 25 to 29 cohort.
And then in addition.
We believe we've been as we've had a housing shortage that's been building over the last over the last decade.
Couple that with the federal stimulus.
Maybe.
A broader.
Rotter deed tenths of buying of our population and where he may have had roommates now.
They had 1 household and now there are 2 household as people want to have there.
We think thats, probably a stimulating some demand but the other thing I think that is maybe maybe as structural as just <unk>.
The nature.
This recovery as people talk about it as being K shaped and that's very much our view, where our renters in a sense of really kind of on the upper part of that that K are really experiencing a V shape recovery.
I think from our perspective it feels like.
A V shape recovery very steep recovery there are parts.
Parts of the population that obviously are are being left behind and not not participating as much in that as much just given that they're not.
They may not they may be service story that jobs as opposed to technology or financial services or the types of industries, we tend to over index to so.
That may be more structural.
<unk>.
Nature and could help propel.
Some household formation, and particularly kind of within our target segments.
Thanks, guys. That's helpful. I may have some follow up questions offline, but I'll jump back in the queue.
Yes.
Sure.
Next we'll hear from rich Hightower of Evercore.
Hey, good afternoon, guys. Thanks for thanks for taking the questions here.
I just wanted to go back to the day.
Movement into the 4 expansion markets mentioned on.
This earnings cycle.
Maybe help us help us understand.
Obviously, a lot of a lot of your peers have been.
And in some of these markets for a long time and so.
Might've had a view on the different positive attributes some of which I think were mentioned on this call, but maybe help us understand what changed directly due to COVID-19 in terms of your view of these markets if its migration patterns and so forth vs.
What you sort of knew about these markets prior to Covid.
That's led to the <unk>.
A decision to expand there.
Yeah.
Yes, Richard.
I would say from my perspective cope it's not really changing our view of the markets. These markets are really formed by how do we think theyre going.
Over the next 2030 years, obviously somebody Sun belt markets have benefited during COVID-19 as you see some migration.
From.
From.
Some of our legacy markets. So those markets that maybe so maybe some of them may be transitory some of it may be.
Permanent book.
That trend was already occurring.
At some level in terms of domestic.
Domestic migration and.
When we saw these markets what we saw in southeast, Florida, and Denver, There's only there's only so many expansion markets you could take on at 1 time is obviously is a pretty big deal for us.
Moving to South East, Florida, Denver, 3 years ago or so.
Performed add those to our footprint and we've seen some success there and thats.
It made us more confident about how we can enter at some of these other markets as well so I would say probably if COVID-19 hadn't happened, we might've might've enter these markets sooner.
In some ways obviously.
That's the last 16 months.
<unk>.
Re centered our focus on a lot of other priorities, but.
Given where we are right now we felt like we're in a position to continue to grow.
And.
And whether it's through.
Looking at new segments.
Whether it's looking through mix used as we've talked about in the past or potential.
Broader geography.
We're looking at and willing to.
Pursue all of those.
Okay.
Helpful color Tim.
And then I wanted to go back to a comment.
I guess from the last earnings call were.
Matt you Helpfully broke down.
The development costs across hard costs soft costs labor land, and so forth and I guess talking about lumber price inflation is so 90 days ago and you actually explain that that's not really.
What people should be focused on but labor expense.
Could could.
Drive the equation.
As we think about ultimate yield on development and so help us understand what movements are you seeing in labor costs in.
In that context, right now and where do you expect that to be let's say over the next 12 months to 24 months.
Yes sure rich.
We're certainly seeing.
It's definitely good to see the top.
Ridiculous are come out of the lumber market, a little bit, but youre right as we talked about really the last couple of quarters hard cost inflation in general is driven primarily by labor and secondarily by kind of the commodity costs and while lumbers come down.
Steels up dry wells up some of the other things that we buy a lot of our up and.
And certainly there is pressure it's hard for US we don't have a direct line of sight into what our sub contractors are paying.
Their workers, but we see it in the bids we're getting and we are buying.
A lot of activity right now and what I would say is what we're seeing is that the development starts.
Started this quarter last quarter. It was in the release that we're getting ready to start this quarter, probably our total capital costs are up 5% to 10% from where we thought those deals would a price at the end of the year, So and that in turn has pushed our yield.
Yields down a bit I think our development yields on the <unk>.
We expect to start this year is about a 5.7 and a year ago or late last year, maybe closer to 6 so we have seen some downward pressure on yields and again, obviously as we talked about before cap.
Were down that much or more so if anything the margins are just as strong and we are seeing on the transaction side that every month, New records are being broken in terms of where assets are trading.
That's giving us and others confidence to continue building.
Taking that 5% to 10% increase in our basis because the.
The transaction market is giving it back to us and then some and that's still on NOI, which are.
We're starting to see and that's starting to work its way into our underwriting the rent lift that we were talking about but I would say our rental underwriting on developments still pretty conservative. So there's probably still a little bit of numerator lift to come there as well.
Great. Thank you.
Thank you and call of Scotiabank.
Hi, everyone gets.
I guess a question on development I was wondering in terms of the incremental development starts that you announced and even just thinking.
Thinking about how you're thinking about development going forward, how much is that going to be weighted towards suburban projects I know that there's a lot of the current pipeline.
Little perspective, there would be great.
Sure.
This is Matt.
I'm just looking at the list now so.
Looks like.
<unk>.
We got 10 development starts plan this year and 1 of them is urban 2 of them urban 1 is kind of a residential urban neighborhood in Boston in Brighton relative.
Relatively small wood frame deal and the deal. We just started this quarter in.
Merrick Park, which is in Miami, but really coral gables, so not downtown.
Miami those the only 2 that are urban so it's still predominantly 70, 80% suburban and as I look at what we're likely to start next year. It's more of the same that's where we're finding the development economics are working better and.
More supply coming in urban Submarkets.
Relative to suburban Submarkets again, when you look out maybe 234 years from now that equation could well change in.
We're mindful of that as we look at the land market.
Where that might be in the future, but certainly over the next year or 2 that starts are going to continue to be the vast majority suburban.
Great and then just 1 other question is in terms of.
We just look at let's say Metro New York for New Metro New York, New Jersey is your region for example in.
I know you don't get a development rights page anymore, but if you go back to last year that is where the bulk of your development rights are.
Maybe.
If you can just give us a feel for because it is it's over $2 billion that you listed as capital costs for that Metro.
Those development rights the feel for suburban versus urban and my other question was in terms of the supplemental you lift the average rents right now for New York City and suburban in.
Theyre shockingly almost the same and so I'm just wondering if there is a concession impact there or something we should think about or have suburban rents really almost now gotten to the point of New York City rents in your portfolio.
Yes, I can speak to the first part and Sean may want to speak to the second probably a little bit as.
As I mentioned.
Today, we have about $3.1 billion in development rights.
It looks like about 25 per cent of that as Metro New York, So compared to when we used to have the schedule. It has come down quite a bit and we've been adding more in other regions and all of that so you know maybe $800.900 million of it is in Metro New York and all of that.
At least 2 thirds of it is in the suburbs.
I think we have 1 urban development right on the on the coast in Jersey, but everything else is.
A lot of that is in land, New Jersey long Island.
Type of locations.
In terms of the existing rents in the portfolio, a very different kind of unit I mean, our average unit size in.
The suburb.
<unk> is.
I don't know the number but it's probably over 1000 square feet.
So the whole dollar rents may look the same but the rents per foot look pretty different and frankly, that's why we're seeing a lot of success. So we're trying to add more rental Townhomes for example, in new Jersey or empty nester targeted product on long island. So.
The.
The unit sizes and the target customers are quite different.
And then Nick just in terms of additional context, as we look out over our development pipeline over the next couple of years, we took our sort of our overall starts for this year up to a billion 2.
Bank over the next couple of years in that billion 2.2 billion 5 type of range is achievable.
Plus the opportunity for additional development starts in our expansion markets as we get moving heavier in that direction.
Appreciate it very helpful. Thanks.
Yes.
Brad Heffern of RBC.
RBC.
Yes.
<unk>.
On the expansion markets.
Can you talk about the path towards getting to that sort of 5% number that you called out because obviously south east, Florida, I think it maybe 1.5% Denver has 1% so is that like a.
A 10 year process largely development at this point.
Hey ever went more or sort of whats the timescale.
Hey, Brad it's Matt.
Yes, Youre talking about southeast, Florida, and Denver, I think you're probably looking at our same store portfolio. So our current weighting. If you know kind of by total revenue whereby investments whereby units is actually a little higher than those numbers.
But it's not you know I'd say, we're roughly halfway there were maybe 225% where we're trying to get to 5.
You know over some period of time, so you know it's.
It's a combination of all of that I mean, clearly we can.
<unk> move the needle more quickly with acquisitions and so we are looking to do that and we will.
Point as we did in Denver in Florida and.
In many cases in that.
Those instances, we're actually trading.
So we're taking dispositions from our legacy markets and redeploying that capital their development takes longer.
So ultimately it's going to be all of the above it is going to be acquisitions, it's going to be development is going to be funding other developers.
Each of those 3 activities has gone a little bit of a different timeframe, which does give us a little bit of diversification in terms of you know kind of the timing and the relative trade.
So we kind of like that.
But we.
We certainly are.
Our staffing up in these regions, where we're looking at putting people on the ground.
And as we make those commitments certainly we're expecting to be able to move.
At a reasonable pace, but yeah I mean.
I wouldn't expect either any of them to get to 5 per cent or more of our portfolio within 2 or 3 years, it's going to probably take longer than that.
Yes, Okay got it.
And then maybe for Kevin.
Can you talk free with the sort of federal relief funds.
I know you mentioned in the prepared comments that bad debt had been kind of consistent at 3%. But then there was that sequential 0.6 per cent benefit on a couple of uncollectable lease revenue. So was that relief funds and just any outlook on kind of what's in the guide for for receipts on that.
Sure Brad, Yes, it's Kevin and Sean May want to jump in here a little bit so.
Let's talk about the relief programs, but just to give you a sense of what has happened so far and what is in our numbers.
The current relief programs have been somewhat helpful. So far but only marginally so overall.
The $5 million in rent relief payments.
Of which approximately $4 million in rent relief payments was in the first half of the year.
Including $2.5 million in the second quarter.
For the back half of the year.
We've assumed all received will receive 4 million.
And that includes what we've received in July which is kind of around a million and a half.
And of that 4 million in the back half most of that will be in the third quarter. So that's that's how we're looking at it obviously, we have been involved in and working with our residents and applying where we can on our own for much more but it obviously takes time and it's a process.
We've reassessed that is inherently uncertain and for which is not an awful lot of visibility about what we're going to receive and win so we've been relatively modest and what we assume we will receive going forward from from net opportunity.
Okay. Thank you.
Process John.
<unk> of Green Street.
Thanks, just a few quick questions from me curious from the development pipeline moving forward, how big will the Konzo product line.
As a proportion.
Okay.
I wish I knew John.
We like condo.
I think that it is.
A lot of potential we don't have a lot of <unk> opportunities in our pipeline right now frankly.
Frankly, seeing how it performed helps us understand how to underwrite it going forward, so and they probably will tend to be smaller deals. So 1 of the things we like about it actually is that it opens up.
While our sites, where it's pretty hard to make the numbers work on 100 or 150 unit Avalon. When do you think about the cost of the amenities and staffing and amortizing that over over a relatively few apartments. So.
Yes.
It may.
Hopefully we're going to get.
A number of new kinds of opportunities into the pipeline.
What day.
Some small because they are likely to be smaller.
I would expect that it would be a relatively small percentage of the pipeline at least in the next year or 2.
Okay.
And then on the operations side the disclosure answers most of my questions, but Sean could you help me understand.
Total fee.
Income call full year, 2019, and where we are today.
Given the debit and then when we can get back to kind of a normalized fee income.
Absolute dollar run rate.
Yeah.
Yeah. Good question John.
I want to give you some some qualitative answers.
We can follow up off line with detailed because there was a from a detail.
Details associated with that but.
For the most part I would say at this point in time, we're back to a pretty high percentage of recurring fee income.
Across most of the footprint with a few example few exceptions.
In Washington State, we can charge from much of any.
Nothing.
As a result as.
You may recall, some changes in New York State, we had to change some fees from upfront of monthly it is still working its way through the system. So it's not a simple answer but I would say that for the most part we're back to sort of what we expected stable.
Stabilized basis, with a little bit yet to come.
Thanks.
But I can follow up off line with a little more detail to help you kind of roadmap.
Okay alright. Thanks.
Yes.
Rich Anderson of S M.
From BC.
Thanks, Good afternoon.
So with regard.
Come to the kind of the geographic Pie chart and how it's changing I know you've made some comments that COVID-19 really isn't influenced some of the decisions you've made but I am curious about what kind of reversion to the mean, it's easy to see that some builders the winter right now but.
When you think long term are you equally enthusiastic about your legacy gateway.
Mark. It says you are in these new markets that you're entering did do they kind of there.
All different but have maybe at a similar level of upside to them. When you think maybe 345 years out.
Hey, rich, Tim and others might want to join.
I think the simple answer is yes.
Wayne.
<unk>.
And if it wasn't we should be exiting those markets right.
Okay.
But.
We're always and we have exited some market. So it doesn't mean, we're not going to we're not going to either reduce our exposure from our exposure to certain markets, where we think there may be more risk or a little bit less upside.
Or.
Potentially potentially exit the market.
We're not prepared to do that today, but.
We are trying to be intellectually honest in terms of what we see.
The next 4 or 5 years of opportunity, but the next 20 or 30 years as we look at.
Both demand and supply drivers.
Business in some of the some of the risks that.
Whether it be regulatory or immigration related that might affect <unk>.
Certain markets more than others. So.
It certainly certainly supply I mean, the markets we're talking about are.
They are less supply constrained as we know.
But.
But.
We're out there they are massive job generator generators at the same time, particularly in some of the businesses in parts of the economy, we want to be.
Do you want to be exposed to so I would say this is more about diversification and growth.
It is about.
And it is about not liking what we're seeing in our current markets today okay.
And then.
Second question on <unk>.
Mentioned, the 3% bad debt.
What are the assumptions that you have in the sort of the various state and local.
Headwinds.
More tourism issues about those.
Kind of going away do you can you kind of.
Got you off.
Those that are affecting you the most and what you think is going to happen in terms of time line.
Yes, rich this is Sean.
So long answer to that 1 based on the various.
Thanks, Jim Mortara and other things that are out there.
In characterizing it.
So we're in the early stages of seeing the.
Various eviction moratorium rent caps et cetera, et cetera, beginning to phase out.
But we do think that process for a number of different reasons will be sort of a slow.
Earned if you want to call it that.
Over the next couple of quarters as opposed.
All of a sudden it's kind of open game everywhere and you're already starting to see that in terms of what's happened in various regions, whether it's Washington State ended June 30th, but Theres, a transitional period for 90 days.
California extended through September local jurisdictions are prohibited.
Pivoted from doing anything subsequent to that until March.
Bottoms requests obviously on the CDC side of what the government can do so I think people are trying to find the right way to transition it.
And therefore, I think the impact of the bad debt kind of getting back to normal levels.
A multi quarter process.
To us to get there as opposed to flipping a switch and it happens in 1 or 2 quarters just based on the way things will bleed in across not only at the state level, but at the local level as well.
Okay, great. Thanks very much.
Sure.
Aston word Schmidt of.
So the bank capital markets.
Great. Thanks, everyone. So.
Did hit on 1 of my questions with respect to kind of future new starts it sounded like of up to a $1.5 billion and the current footprint and maybe some upside from from the expansion markets, but just curious what's the latest thinking on on how larger.
We plan to grow the total size of the development pipeline today.
As I know you've moved that threshold over the years, just as a percent of EV and so how youre thinking about that given the various risks and opportunities.
Hey, Austin, it's Matt.
I guess, there's a number of ways to think about it you can think about it in terms of the size.
Youre with Almond rights pipeline, which typically represents.
3 years of future start activity you can think about it in terms of the size of development underway.
In terms of the latter we are well below kind of.
We've talked in the past about having a target range of 10% to 15% of development underway.
Or at this point in time as a percentage of our total enterprise value I think we are at 5 or 6% right. Now. So if we can find the opportunities I think from a balance sheet point.
Okay.
Sure.
So.
As Ben mentioned, we're feeling pretty good about it over the next couple of years at any rate in terms of the development.
And this pipeline.
If you think.
Even if you take 10% of TD underway at <unk>.
Whenever mid $30 billion ish 35 billion, maybe go into 40.
It would be $3.5 billion underway at any given point in time that would say you probably want to have our development rights pipeline of $6 billion or so in 6.
<unk> so.
We're looking to grow it.
A couple of a couple of things I'd add to Matt's comments, 1 obviously depends on the opportunity you said we've been on in our prepared remarks, we look at our.
Our spread to where were developing to market cap rates today.
And our ability to buy match funding.
We think.
Pretty attractive.
Net profits right that'll drive activity.
And then the other part there is our own development, but then Theres also our funding of other developers and that's a that's a method we've been using and are looking to use more fully in our expansion markets and partially from a time perspective, right, we're able to partner up with.
There is some peppers, who have sites that are entitled and ready to go and lets us to get activation slightly sooner than if we were going and pursuing our own development right.
That's all very great color.
You mentioned the match funding piece and the attractive spread versus dispositions clearly we saw you use that this quarter.
<unk> developed with the new starts and level of disposal.
<unk>.
That occurred so I'm just curious historically, we have seen you use the forward ATM as well as a funding mechanism. When you had kind of good line in sight on future development starts.
Wondering given where the stock is and maybe some of the uncertainty that's out there today.
Is that something that you'd look to us to.
Lock in an attractive cost of capital the day to fund maybe potentially growing size.
Size of the overall pipeline.
Hey, Austin, it's Kevin.
Yes, you asked an interesting question, but it's.
Unfortunately, it's 1 that's inherently speculative.
It's sort of as you pointed out begins with users what do we intend to do with what's the return profile on that and then and then it comes back to sources and as you know.
This could potentially also be a long answer, but we have 3 primary markets. We have unsecured debt, we have asset sales, which lately have been suburban asset sales.
Thank you Lou.
And common equity, which is what youre alluding to there today right now.
All 3 of those markets as Tim alluded to in his opening remarks, our <unk>.
Practice.
And.
That's 1 of the main factors when you think about how we might gather our sources.
Lend factors clearly pricing and right now all 3 are relatively.
Tractive from the standpoint of funding accretive developments.
And then you get into the debate about which 1 is more attractive and you can add a little bit of a debate there.
My own view right now is things where things stand today is probably based on their own.
Our own historical pricing metrics.
Probably rank unsecured debt.
Suburban asset sales second and then common equity third the reason our minds can differ in circumstances matter, particularly with regard to the assets you might sell in the east as you might put them too and where we are.
From a balance sheet point of view second factor is.
Capacity to increase leverage in and the good news is there right.
Revenue and NOI growth growing and with modest leverage right now 5.3 turns we do have capacity to increase our leverage.
Somewhat to support investment activity and so that allows us to tap that market. If it makes sense and the third factor is our capacity absorbed capital gains.
Before we get to make a special distribution and we tend to like to lean into that capacity.
Quite a bit lately, that's helped by assets in our expansion markets, but also to fund development as we're doing here with that that activity. So.
A lot of choices on the menu for us today.
So I don't know that we need decided anything right now.
Now in terms of our capital plan for what's in front of us for the back half of the year, what we what we're planning to do and what I alluded in my remarks is tap the unsecured debt markets and the asset sale markets to fund what's in front of us and sort of the but if we get more users beyond that which we have in front of us that's a little bit of how we think about and I would say.
The good news is.
Having kind of attractive access to capital and the opportunity to deploy it accretively and development is just a wonderful situation to be in and it means we're kind of legging into it.
Very strong part of the cycle, where we can enhance earnings growth through accretive investment activity. So.
And that's an important differentiator for Avalonbay.
That makes a lot of sense I appreciate the thorough and thoughtful answer Kevin.
April.
Yes.
Thank you.
Yeah, Thanks, everyone, if everyone's doing well.
I was just looking at.
Your slide deck page 10.
Pretty pretty interesting the suburban versus urban kind of communities to move in rate any thoughts on when maybe the urban communities, where you get about their 2019 levels.
And maybe just what's built into guidance for the rest of this year from where those.
Okay got you.
Yes, Josh.
Jeff This is Sean good question.
Yes.
Question I am not sure that has a completely novel answer, but I can tell you the factors that would relate to it.
The urban environments.
Whats dragging alright at this point in time.
Places as you might expect so places that are below the 2019 P from moving values or like New York City, The district, a little bit in some of the.
Urban sub markets within Northern Virginia, and then.
Urban Submarkets in Northern California, and I think all of those are a function.
Various stages of reopening that they're in.
And as.
The major employers call people back to work what does that look like in terms of.
When it happens is around labor day that thereafter is that everyone or is it partial.
What happens with the University campuses.
As in there their housing.
1 of the things that we don't know for sure in every case as some of the universities that usually pacman pretty tight and as Tim referred to if theres some.
He testified that occurs that should help support local demand outside the university campuses.
So their dorm housing and various.
Sure and factors like that really will influence what happens in these urban environments. We should have a much better sense of that as we get beyond labor day I would say.
Thank you.
A number of us expect pretty good demand through labor day.
It looked like and how much does that boost asking rents and therefore lagging behind.
So they'll be moving values those would be the factors you'd want to think about in terms of where you can get back to.
When you get back to sort of those peak levels of above in moving rents.
In terms of what's in guidance.
We have better day and continued growth across the markets.
<unk>.
Net with zoom with what we have been seeking and right now urban has been lagging and we do expect it.
Continue to lag the suburban environments, but catch up over the next few months is the way I would describe it as sort of general terms.
Yes.
Okay Super helpful. And then maybe just thinking about your strategy.
<unk>.
Obviously, you're kind of on your.
Lease up period.
Probably longer and more all at once and probably a lot of other leasing periods.
How are you thinking about kind of pushing rate into fall and then is there anything you might have to adjust as far as your revenue management systems go as we kind of get.
GE next year because.
I guess the timing of your leases is going to be changing just maybe their border in August July than they would normally be.
Yes, good question couple of different.
Actually a couple different questions in there so first on the latter part around lease expirations lease explorations domo.
Net interest.
Sure.
Do the 1 piece thats different today based on the eviction moratorium on some of the rent increased caps that exists is very little incentive for residents in some jurisdictions to actually go onto leases. So our month to month percentage is higher than it normally is normally around 1% is about <unk>.
Turning to around 3% so in terms of lease expiration profile, what's not too concerned about that and given lease breaks that occur a month to month as we move through the year, we're always kind of resetting lease expirations as we offer new leases to make sure that stays in check. So that's just something we normally do all the time as it relates to the first part of your question, which is more around.
Net right now.
As I mentioned in my prepared remarks, we really haven't seen any.
Seasonal softening this year that would typically occur if you go back to sort of normal times rents rise pretty much asking rents rise pretty materially from January through say mid July and then you start to see some seasonal.
6 months.
Downward slope as you move from the back half of the year, we have not experienced that this year.
And by all the metrics that we see in terms of lead volume.
Visit volume et cetera, low availability, we certainly don't see that in terms of the near term outlook over the next 30 days or so.
The question would be if you are thinking about what the risks are.
The Delta variant in the.
The impact on potential delays for reopening of certain companies and things like that might there be seasonality.
Q4 is that we're not seeing today thats a possibility we do feel good about where we're positioned though because again.
The spread between asking rents in moving rents is about 12.
Even if those asking rents start to decelerate a little bit there's still a nice spread there to continue to grow moving brands, even if asking rents do decelerate. So again, we haven't seen that seasonal adjustment yet but to the extent some macro factors impacted and.
It's hard to see it we do have enough spread that we can continue to grow moving rents.
Great. Thanks for the time.
Yes.
Alexander Goldfarb of Piper Sandler.
Good afternoon.
1 it is.
And we start raising price.
Come back so quickly. So that's that's wonderful to say just really eye popping, but along those lines you guys now have the Avalon brand do you have other you have even now.
Kenzo Kenzo apologies if I mispronounced.
Just from sort of an economic return basis.
It's pretty <unk> cost basis, what's the sort of range between the core brands and I understand the eats as more of the older suburban stuff, but still a part of your offering but how do we assess the economic returns of the 4 different brands.
Hey, Alex it's Matt I guess I can speak to it a little bit in terms of.
And the economics.
Others may want to speak to it in terms of the existing asset base, but sales.
Youre right <unk>, we can't we can't believes profitably.
Nobody's been able to figure that out in this industry.
So that that brand growth from acquisition through avalon's aging into it over.
The development, which has happened in some cases.
It's really not so much about.
1 brand necessarily being more profitable.
<unk> generated a higher year than another it's about half.
Or.
Being able to.
Served more customer segments in a more tailored way so that we're optimizing.
Tong opportunity on any given site.
It's not necessarily that Eva is going to generate a higher yield than in Avalon.
And in certain locations, where he was more appropriate.
And Mike it might be a better decision to program that communities and Eva, whereas the dual brand as we've done in some cases.
And if it weren't Avalon and vice versa.
No.
Really and we think that by doing that we're able to first do more business.
We can we will.
Broader product line to choose from and second optimize any individual opportunity that comes along as opposed to having the same offering that we're going to force into multiple different submarkets.
And locations.
So we.
We did underwrite that and look at that and we are.
Thinking there was that there is this great underserved market of folks that want a new apartment, but don't want.
Don't value all the other things that they're basically being over served by an avalon or even.
Eva.
And no 1 in the market is really delivering to that customer segment.
And our analysis would show that between.
Hard cost savings from programming it more lightly and operating savings by operating it more likely in a more self service manner.
From longer term Capex savings.
By now that we can get to a rent point, which is 10% to 15% below what an avalon would be in that location and get a similar yield.
No.
Dara locations, where you could do both but.
And what we what we're finding there at least so far with the 1 we've done is the discounts less than that it's more like 5%. So we're.
<unk> excited about that it's still early we'll have to see how things play out kind of post COVID-19 to really see where that settles in but.
That's the way I'd think about it.
Okay. That's helpful. And then the second thing is just sort of along the development.
Just given.
The demands, especially suburban but also people wanting.
More space for living or maybe.
Just.
More housing type as you guys see these sites is there more of an ability to either at Cowen house or add I'm, not suggesting you guys getting single family, but add more elements that make your apartments more sort of longer living for people, where you can hit.
We're pretty sort of a different demographic, that's additive, but still within the whole site plan make all the math work.
Absolutely, Alex and I point, you to our biggest start for the quarter, which is we just started Avalon Boswell common phase 1 that's a deal in bottle, which is a very high end infill suburban.
Maybe on the east side of the Lake East of Seattle.
That's a 20 acre site that ultimately we're going to programs with 2 phases and.
In the first phase does have I think about 370 flat and about 100 rental towns.
And that's a site where a couple of years ago, we might have sold a piece of that site to our for sale developer.
Irvine communities and instead, we decided we would do the lower density component of the product ourselves as well.
Average unit size there includes even in a flat we have more flat with dense than we would have built in the past that there's work from from spaces as.
As well as the tandem so I think the average unit size there is about 1070 square.
Fee as opposed to.
Other communities, we might be developing in metrics lifecycle that might've averaged $8.850, or 900 square feet per home. So thats definitely a trend we're seeing in our portfolio.
Okay. Thank you.
And as a final reminder, it is star 1.
Or would you like to ask a question or make a comment.
We'll next hear from Alex Kalmus, Zelman and associates.
Alright, Thank you for taking my question.
A question based on the eviction moratoriums.
Sort of the bad debt side.
Many.
Okay.
Units are.
Is this mostly from sustained non payers at this point.
That are causing the sort of sustained bad debt expense or little more broad based and then.
Secondarily.
The eviction moratoriums are lifted.
What could this due to.
The occupancy levels are high.
Hypothetically they were on lease at 1 time.
Yes, Alex good.
Good good questions. So on the first part of your question on sustained non payers, yes that is for the most part the answer as it relates to the bad debt on the second question.
Many.
I kind of would maybe refer back to what I mentioned earlier on the various.
It's kind of eviction moratorium that's out there.
Assuming nothing happens due at the federal level or state level.
Actions in place at the local level actions in place the timing.
All of those and when they are lifted we will likely be different from jurisdiction to jurisdiction.
And the ability to get people out.
CT system have backed up maybe et cetera.
As a result of those things, we believe the sort of bleed in process as it relate.
I mean.
People, leaving our communities either of their own choosing or through a legal process will take some time and therefore units coming back to the market so to speak.
And units it has to be turned and then leased and occupied will probably be not just a 1 or 2 quarter process.
It's too, but potentially a few quarters to work our way through yes.
Some people will leave early when they see sort of a line at the end of the tunnel and they need to do something there will definitely be those people who will hold us at the very last minute until they are really force out.
And everything in between so therefore, we do believe it will work its way through the system.
At the time, the market, where it's probably most concentrated for us and many others as in Los Angeles.
So that 1 could get a little bumpy, depending on what happens in a specific jurisdiction but.
But we still think that our residents who will choose different paths to their eventual outcome and therefore it may take us.
2 or 3 quarters for it to work its way through the.
Over a period.
And.
Based on conversations with many others I think people expect a fairly similar outcome.
Got it makes sense. Thank you very much.
On the demographic side with Covid tenants.
The 70 basis point bump in occupancy sequentially.
Do they pretty.
Pretty much match, the portfolio's demographic base or are you seeing a little differences here and there depending on.
Maybe market or or.
The type of age or income levels.
Okay.
Yes also a good question I mean at the portfolio level.
So.
The changes have not been terribly material.
If you look at the suburban portfolio as an example, inc.
<unk> are pretty consistent with kind of pre pandemic levels. In 2019 average age is basically the same it went from high 30 fives to low 36 range, so not a meaningful difference.
Level on the urban side at the portfolio level income so down about 6%, but average age actually went up and then it kind of makes sense. If you think about it because moving values are basically back at 2019 levels, while it's super well the urban and move ins are still a 7% to 8% below 2019.
So rent to income ratios have remained.
Simply constant and we've seen income has come up as rents have come back. So it all kind of lines up there are some nuances by region income.
<unk> are up a little bit more in Asia, as well and some of the suburban New York markets.
But.
At the portfolio level modest changes relative to quota.
And relative to kind of pre pandemic 2019 levels.
Got it thank you very much for the color.
Yes.
And that does conclude the question and answer session for today at this time I will turn the call back over to Tim <unk> for any.
Any additional or closing comments.
Thank you April I know, it's been a long call and thank you all for being on today.
Just hope you enjoy the rest of your summer and stay well. Thank you.
And that does conclude today's conference. Thank you all for your participation.
You may now disconnect.
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