Good morning, ladies and gentlemen, and welcome to the AvalonBay Communities 4th Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. Following remarks by the company, we will conduct a question and answer session. And we ask that you refrain from typing and have your cell phones turned off during the question and answer session. Your host for today's conference call is Mr.
Jason Riley, Vice President of Investor Relations. Mr. Riley, you may begin your conference.
Thank you, Ali, and welcome to AvalonBay Communities' 4th Quarter 2020 Earnings Conference Call. Before we begin, please note that forward looking statements Maybe made during this discussion. There are a variety of risks and uncertainties associated with forward looking statements and actual results may differ materially. There's a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10 ks 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.
The attachment is also available on our website at www.avalonvey.com/earnings. 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, Chairman and CEO of AvalonBay Communities for his remarks. Tim?
Thanks, Jason, and welcome to our Q4 call. With me today are Kevin O'Shea, Sean Breslin, Matt Birenbaum and for the first time, Ben Shaw. Sean, Kevin and I will provide commentary on the slides that we posted last night, and all of us will be available for Q and A afterwards. Before turning to our prepared remarks, I'd like to take a minute to introduce Ben, who many of you have met either during his previous job or since the announcement in early December. Most recently, Ben served As the CEO and President of Seritage Growth Properties, where he led the company from its inception And oversaw the transformation of the company from a portfolio of Sears stores into a mix of shopping, dining, entertainment and mixed use destinations.
Prior to Seritage, Ben was COO of Browse Properties, an owner of regional shopping malls and before that he was SVP with Vornado Realty Trust. Ben brings a deep background in developing, operating and activating real estate In addition to broad experience in many of the markets in which we do business. This is only Ben's 2nd week on the job, So he'll likely have a limited role on the call today, but I thought I'd give him the floor for a couple of minutes just to share a few comments.
Ben? Thank you, Tim. It's terrific to be here and I'm truly honored by the opportunity to join this team and organization. AvalonBay is one of the rarefied group of companies in my mind led by Tim and the senior team that have been able to successfully shape, Build and grow an enterprise of this quality and scale and do so with a core culture with a focus on integrity, caring and continuous improvement that remain a real differentiator for the organization. And for me in terms of why AvalonBay, it very much started with what I believe to be the strong overlap Between those values embedded here and my personal values and those that I look to bring to teams and organizations.
I'm also passionate about creating real places that connect with people and communities and there's not a purpose more powerful than AvalonBay's core purpose of creating a better way to live. And
to be
a leader as an organization in providing better quality housing environments that are safe, healthy, Gauging and at the appropriate price point, fulfill such a meaningful need in so many communities. And to do that in scale across the country, It's a very special place for me to have the opportunity to be a part of. My official first day was not quite 2 weeks ago on Monday, January 25, And my early transition is in full swing. On a personal front, I'm now a Virginia resident, having moved with my family into an Avalon community nearby. Not only is it a wonderful home and community, I also get to be fully immersed in the AvalonBay experience, living and breathing our offerings each and every day focused on listening, learning and building relationships across the organization.
My early listening tour also includes our shareholders and the investment community And I will be coordinating with Kevin, Jason and team on that front and look forward to connecting with many of you over the coming months. I'm very excited to be part of the AvalonBay organization as we collectively help shape the future of the company and stay on the forefront of creating better ways to live. And before turning it back over to Tim, I want to give a heartfelt thanks to the wider AvalonBay team and associates for how you've welcomed me my family to the AvalonBay family. Thanks, Tim.
Great. Well, thanks, Ben, and it's great to have you And welcome again. Our prepared comments today will focus on providing a summary of Q4 results And some perspective on 2021 and how it impacts our plans for this year. Before getting started on the slides, maybe just offer a few introductory comments on the quarter and the year. The Q4 was a tough end to what was already a very challenging year for the company and the business.
The normal effects of an economic downturn on the apartment sector were magnified by work from home mandates, civil unrest in our city centers And the growing strength of the for sale market. The contraction of apartment demand in urban submarkets over the last year has been profound And unprecedented to anything we've experienced, except perhaps for the tech rec in the Bay Area in the early 2000s. Over the last few weeks months, we have begun to see some signs, early signs of stabilization, With a steady improvement in occupancy followed by effective rents beginning to level off in all of our markets. And yet visibility for the business beyond the next 90 days or so remains challenged due to a combination of unique Risk factors including ongoing transmission of the virus and its variants, the rollout and efficacy of the vaccine, The continuation of work from home mandates, the regulatory extension of eviction moratorium in most of our markets, And lastly, the size, impact and distribution of any potential additional federal stimulus that may be passed in the coming days. As a result, for earnings and operating metrics, we've decided to provide quarterly guidance in lieu of full year guidance.
We are providing annual guidance, however, on a number of other items like lease up income, capital formation, development starts and overhead. And we'll continue to update and share information with you as we move through the year. And if the environment changes such that we believe we can reliably expand our guidance, We'll do so. So now let's turn to slides starting on Slide 4. As I mentioned, Q4 was a tough end to a challenging year.
Core FFO growth was down by almost 17% in the quarter On a year over year basis and 7% for the full year. Same store revenue was down just over 7.5% year over year and 1.6% sequentially from Q3. For the full year, same store revenue declined 3.2%. We completed almost $400,000,000 of development in Q4 at a projected initial yield of 5%. And for the full year, we completed almost $800,000,000 at a yield of 5.2%.
While yields are down by almost 100 basis Point due mostly to lower rents. They remain 75 to 100 basis points above prevailing cap rates. The 2 Northern California developments completed this year particularly weighed on results as rents have declined by double digits in that region over the last year. Excluding those 2 communities, the average stabilized yield for completed communities was 5.8%. In Q4, we started 3 communities in suburban Northeast markets, which have been less impacted by the economic downturn.
These were the first wholly owned community started in 2020. We raised $465,000,000 of capital in Q4, mostly through dispositions. For the year, we sold over $600,000,000 at a weighted average GAAP rate of 4.4% and an unlevered IRR of 10.8% over an average 14 year hold period, which compares favorably versus the last 2 to 3 years. In addition, we raised just over $1,300,000,000 of debt this year, Mostly to refinance maturing or near maturing debt of just over $1,000,000,000 And lastly, we purchased or repurchased Purchased almost $200,000,000 of stock for the year at an average share price of $150 Turning now to Slide 5, we thought we'd provide a little more color on the components of same store revenue declines that we've experienced on a year over year and a sequential basis.
On Slide 5, you'll see on a
year over year basis, this past quarter, we saw about half the decline in safe store revenue Being driven by lower effective rents at about a half by increased vacancy and bad debt. And as we mentioned last quarter, future declines in same store revenue This year will be driven by pressure on lease rates as lower rents we've been leasing at over the last couple of quarters begin to roll through the portfolio And concessions, which have also been elevated over the last couple of quarters and are amortized over the lease term. Turning to Slide 6 and sequential same store revenue. Sequential same store revenue was down 1.6% Q4 from Q3, driven mostly by lower lease rates, which were down more than 2% sequentially And concessions as the cumulative impact of amortized concessions continue to grow from Q3 to Q4. Lower lease rates and higher amortized concessions were offset by a significant pickup in occupancy in Q4, which Sean will touch on in his comments.
And with that, I'll turn it over to Sean to discuss portfolio performance in more detail. Sean?
All right.
Thank you, Tim. Moving to Slide 7, you can see the impact of the pandemic on physical occupancy and the absolute effective rent we have achieved Over the past year, broken out between urban and suburban submarkets. Chart 1 reflects our suburban submarkets, which makes up about 2 thirds of our portfolio. We experienced some deterioration in both occupancy and rate during the spring summer of 2020, We have recovered most of the occupancy over the past 4 months. And as of January, effective rental rates were up about 1% sequentially from December and are roughly 4% below where we started 2020.
The primary driver of the
weakness in our suburban portfolio has been the performance of assets Located in job centered hubs where employers have adopted extended work from home policies and transit oriented developments With use of mass transit has declined materially during the pandemic. Some examples included Assembly Row in Boston, Tysons Corner in Northern Virginia, Mountain View and Cupertino in Northern California and Redmond in Washington State. Chart 2 reflects our urban portfolio, We suffered from elevated lease breaks, turnover and an overall reduction in demand in the late spring summer months, which is prompted by employers extending work from home policies in major urban universities announcing the adoption of distance learning models for the fall term. Occupancy dipped to a low point of roughly 90% in September, but has since recovered by more than 300 basis points. We're still about 300 basis points below what we consider a more normal occupancy rate in urban submarkets, but likely won't experience that level until people return to work And major universities open for on campus learning.
You could also see that rental rates fell substantially the past 3 quarters, But it flattened out late in the year and picked up about 2% from December to January. On a year over year basis, effective rental rates in our urban portfolio are Effective rent by region for the last year. Occupancy has recovered from the low point in every region except the Pacific Northwest, Which continues to hover around 93%. Rents
have leveled
off in all of our regions over the past couple of months We experienced a modest uptick in January in the Metro New York, New Jersey, Mid Atlantic and Northern California regions. Also in Southern California, effective rents have increased sequentially for the past 3 months. It's certainly too early to call the bottom in rents. It will experience year over year negative rent change for the next few months as we pass the 1 year anniversary of the pandemic, but we'll continue to highlight sequential trends in both rents and occupancy as key indicators of a bottoming.
Now I'll
turn it to Kevin to address our outlook, development and balance sheet. Kevin?
Thanks, John. Turning to Slide 9, we highlight our financial outlook for 2021. Although we prefer to provide our traditional full year outlook, the uncertain resolution of the pandemic and the related regulatory orders, Including evictions moratorium across our footprint has reduced our visibility on our performance later this year. Consequently, for 2021, We are providing operating and earnings outlook for the Q1 only and we are providing guidance for development, capital activity and other select items for the full year. Nevertheless, to assist investors in deriving their own perspective on our outlook for the year, we have enhanced our disclosure on expected performance in the Q1 of 2021.
Specifically, we identified actual residential revenue performance in January 2021 for our same store communities, which reflected a year over year decrease of 7.8% and a sequential decrease of 40 basis points from December 2020. We also provide ranges for projected residential performance for revenue, operating expenses and net operating income in the Q1 of 2021 In the Q1, we project a year over year decrease in same store residential revenue of about 8.5% to 10%, Reflecting the impact of lower residential lease rates, amortized and newly granted concessions, lower occupancy versus the year ago period and a persistent level of uncollectible lease revenue. We expect an increase in same store residential operating expenses in the low 4% a year over year comparison including, 1st, the presence today of COVID related expenses that were not incurred during most of Q1 2020. 2nd, substantially reduced maintenance and other spend during the beginning of the pandemic in 2020 that will make for a challenging comparison in the current year period. And 3rd, elevated turnover and marketing costs in the current year period.
As a result, for the Q1, we project Decrease in same store residential net operating income of between 13% 16%. And finally, we project that core FFO per share for the first Quarter will range between $1.85 per share and $1.95 per share. At the midpoint, our projection of $1.90 per share in core FFO for the Q1 of A $0.04 sequential decline related to dispositions completed in the 4th quarter and a $0.04 sequential decline related to increased overhead and primarily driven by increasing development lease up NOI and commercial NOI, the latter of which was reduced in the 4th quarter by the write off in straight line rent receivables. As for the full year guidance on other items, We project starting about $750,000,000 in new development projects in 2021. We expect to complete $1,100,000,000 of development projects this year.
And we expect NOI from new development communities undergoing lease up to be between $40,000,000 $50,000,000 in 2021. For full year capital activity, we anticipate sourcing about $630,000,000 in external capital from asset sales, condominium sales from Parklogia and capital markets activity. This compares with expected capital uses for development, redevelopment and debt maturities and amortization of $835,000,000 in 2021. Turning to Slide 10. As I just noted, we do expect to increase our development activity in 2021.
The roughly $750,000,000 an increase from the $290,000,000 in development started last year when we curtailed new investment activity in response to the pandemic. Over the past 4 years, about 85 percent of our development starts have been located in suburban markets, whereas Sean mentioned, Fundamentals have been much more favorable. For 2021, our development starts are also concentrated in our suburban markets. In addition, this year's 2 urban starts are located in residential city neighborhoods and not in the more hard hit high density central business districts. These new development starts to contribute to earnings and NAV growth in the next few years and we'll be delivering into a market environment that we anticipate will be highly favorable for new lease up in 2023.
Turning to Slide 11. Almost 95% of current development underway is already match funded with long term debt and equity capital. As a result, we have locked in the cost of investment capital on these developments, which in turn helps to ensure that these projects will provide earnings and NAV growth when they are completed and stabilized. As shown in the next two slides, we continue to enjoy tremendous financial strength and flexibility with excellent liquidity, modest near term debt maturities and a well positioned balance sheet. Shown on Slide 12, liquidity at Quarter end was roughly $2,000,000,000 from our credit facility and cash on hand.
This compares to just under $600,000,000 of remaining on development underway over the next several years, resulting in approximately $1,400,000,000 in excess liquidity relative to our remaining development commitments. Turning to our debt maturities on Slide 13, we show our debt maturities over the next 10 years and our key credit metrics. For debt maturities, we have only $600,000,000 in debt maturities and amortization over the next 2 years, of which less than 40,000,000 Matures in 2021. As a result, our quarter end liquidity of $2,000,000,000 exceeds both our remaining development spend and our debt maturities over the 2 years by approximately $800,000,000 As for our key credit metrics, atquarterend Net debt to the core EBITDA of 5.4x was in line with our target range of 5x to 6x, While our unencumbered NOI was at or near an all time high of 94%, reflecting our large unencumbered pool of assets that we could tap if necessary for And finally and perhaps most importantly, as we look beyond the end of this pandemic, our strong balance sheet provides us with Terrific financial flexibility to pursue investment opportunities as they emerge in the recovery ahead. With that, I'll turn it back to Tim.
Thanks, Kevin.
Turning to Slide 15, I thought I might provide some longer term perspective on this downturn in our business. This slide shows an index for same store base rental revenue since 1999 or over the 22 years Plus or minus since the Avalon and Bay merger. A couple of things worth mentioning here. First, as you can see, the long term trend is positive and reflects a healthy business. Over the last three cycles, annual Compounded same store revenue growth has been roughly 3%.
Rates have grown a little faster than that during the expansionary phase of the cycle, Generally contract for 1 to 2 years during a downturn as we're doing now and then reaccelerate during the recovery phase at the start of the next cycle. Housing has been a consistent performer over many cycles, as demand and supply generally grow in tandem over the cycle, With net completions roughly matching the pace of household formation most years, except during recessions when a number of households temporarily contracts. As we're in downturns, it can be difficult to project operating performance as no two downturns and recoveries look exactly alike. Just to demonstrate that the downturn in the early 2000s was reasonably deep for the apartment sector. In fact, it took almost 5 years for rents to recover back to their prior peak across our footprint.
And in San Jose, rents didn't fully recover for The downturn in the late 2000s was comparatively steeper as the economy and labor market We're significantly impacted by the financial crisis. And while it was steeper, it was also shallower for the apartment sector as rental demand Benefited from the correction in the for sale housing sector. The current downturn brought on by the pandemic has been the steepest yet For the economy and for the apartment sector. While we are perhaps seeing early signs of stabilization, it is difficult to predict the Timing and strength of the recovery, given the myriad of uncertainties directly impacting our business, whether it be economic, regulatory or health related. Importantly though, we are confident that the apartment housing markets will recover, that we will return to sustained growth in rents and revenues Over the next cycle, just as we've seen over the last several cycles.
And then multifamily will continue to be a good business for the long term. So turning now to the last slide and in summary, operating performance continued to decline in Q4. During the quarter and early part of Q1, we began to see early signs of stabilization and some important operating trends. We saw healthy gains in occupancy sequentially, with urban submarkets recovering about half the occupancy they lost earlier in the year. Rent growth began to level off after declining for most of the last three quarters and some regions even began to see modest sequential improvement.
Transaction market has recovered and strengthened significantly in recent months with suburban assets generally now selling atorabovepre COVIDvalues. As Kevin mentioned, our balance sheet and liquidity remain in great shape and well positioned to support new growth opportunities. In fact, given recent operating trends and improved capital and transaction market conditions, we decided to activate the development pipeline, Starting 3 new developments this past quarter after having been cautious for most of 2020. Our starts in 2021 will be focused in submarkets And with that, Ali, We're happy to open up the call for some Q and A.
Of course, thank you. We will go ahead and take our first question from Nick Joseph from Citi. Please go ahead.
Hey, it's Michael Bilerman here with Nick. Tim, I wanted to ask you sort of on development underwriting and also maybe bring Ben into the conversations because it's a little bit about mixed use about When you're now underwriting these projects, how are you thinking about those ancillary Services in locations that are going to be part of a community, whether they be retail or even office. And historically, Avalon has partnered with others to do those. I think about the deal you bought in Virginia, where Regency took the retail, I think about Assembly, where federal obviously I brought you in to do the resi. How do you think it's going to evolve?
Can those pieces stay Capitalized separately or will it require someone to come in and take a loss on retail or a loss on office To support the multifamily rents effectively you have to get higher returns on multifamily to make the math work.
Yes, Michael. I think we've talked a bit about this in the past and obviously he's probably more interested in it just given The events in the last few quarters is, as we talked about mixed use, we pursued in a number of ways, Oftentimes partnering as you suggest, whether it's with federal or Regency or Edens on a number of projects where it's more of a condo structure, Well, we may be building out the core and shell and ultimately turning back that retail to them. And That's been sort of the MO in cases where it's been a pretty significant piece of retail. And we felt like it was We were able to reasonably sort of separate the execution and ultimately the management of the two pieces. We're also doing a fair bit of mixed use that I sort of think of as sort of horizontal more kind of PED, if you will, where we may be assembling Maybe assembly of Sledberry is a good example of this, where there may be a separate adjacent Yes.
Back there, Whole Foods was part of the community, but it was owned fee simple, Not a condo structure, but piece simple by a different retail developer that also had a for sale housing component, also had a restricted an age restricted component as Also, particularly in the suburban locations, we'll look to do that. I'd say kind of the some of the infill locations will probably contain a partner With some of the top retailers in the country. And then the 3rd category, which I think is where your question was headed is, is when the uses are so integrally Yes, sort of link, where it's probably in the interest of the asset That it be controlled by a single entity, whether that entity is a partnership or whether we control it, whether we control the entity 100%. I think probably our preferred solution in that case is where we're again partnering with somebody's expert in the area of retail And can underwrite and help operate that, but our partners in the venture are with us. And so we'd be looking at the economics The entire venture together and trying to optimize them in terms of the trade offs that you inevitably make Between the ground plane, which is usually the retail and the residential above that.
So I think you'll if you sort of fast forward over the next 5, 10 years, think you'll see more of the 3rd category emerging and companies like us will be partnering with Presumably, the Regencies, the Federals and Edens of the world to make that happen.
And then just in terms of the rent recovery, and I know you pointed out that extraordinarily the timing and the strength of recovery, particularly in the urban submarkets is Difficult to project, you made a comment about the early 2000s and how San Jose didn't recover from a rent perspective to prior peak for 15 years. I guess, when you think about New York and San Francisco, which you still have a fair amount of exposure to, I guess, what are you trying to underwrite? So I would assume having a view would Your capital allocation decisions about either rotating capital out of these markets or trying to go deeper overall. If you have a 15 year timeframe, that can make it a lot more difficult. So where is your mindset today about When you take the rent recovery and how the fundamentals in New York and New York and New York just go will turn?
Yes. Thanks, Michael. I didn't use the San Jose example So, yes, that's what we think is going to happen in New York City and Downtown San Francisco. Obviously, the San Jose case was extreme because there had been a big spike During the tech run up in the late 90s in 2000. So a lot of that period of gain was just before sort of The tech crash.
But I think your point is I think part of the point is that some of these things can be long cycles, right? We still believe In New York and San Francisco, we believe in our coastal markets as an investment thesis going forward. I mean, they are We think they're going to contain to be centers of innovation, homes of great research universities, that are going to over index in our view in terms of Knowledge economy where you have higher incomes and productivity and that density of knowledge that's As markets are critically valuable, particularly to startups and companies that are getting off the ground. Now, As companies continue to grow and mature, they're going to distribute their workforces as we've seen over the last year to satellite, Some satellite markets and other markets and with the additional sort of either work from home or hybrid positions is Maybe perhaps all over the map. So I think it's too early to underwrite sort of what the relationship between Demand and supply is going to look like over the next 5 years, but we don't see those markets in long term decline, to be clear.
When you think about sort of the power corridors in this country, it's still Washington to Boston on the East Coast and LA On the West Coast and those are long cycles too. Those don't reverse themselves over 5 or 10 years. So Inevitably, we're going to continue to allocate capital to some of our other markets that I think are going to be somewhat Beneficiaries by maybe some spillover effect from New York and San Francisco, whether it's DC, Seattle or Boston, as well as recent expansion markets Denver and Southeast There's probably other expansion markets in our future as well that are likely that has some of the same characteristics, research universities, Attractive to knowledge workers, particularly some of these larger mature companies disperse their workforces Across the wider geography.
It sounds like you won't sell in New York and San Francisco to fund that, that will be other sort of Sales to do it or just raising enough capital to expand?
Yes, I don't think we're at a point where we think it probably makes sense to Pursuit sales, just given the performance of those markets right now, I think we I think all of us, we're going to feel a lot better once we see How much they bounce back? I'm not saying they're going to bounce 100% back from where they were a year or even 2 years ago. But until we until there's a little bit more visibility there, I just don't think you're I think the bid ask is just going to be too wide On assets in those markets, I mean Sean mentioned in urban markets we're seeing rents down 18%. They're down more than that In Northern California and New York, so the city. So I think it's early, but I think it's safe to say that's not where probably the net growth is going to be For the portfolio, just like if you're Google or Facebook, probably a lot of your net growth isn't going to be Is it going to be in Mountain View and Menlo Park?
So, but it doesn't mean you're going to abandon those regions. So They're going to be core to they're going to continue to be core to our portfolio, but it's probably not what's where the growth is going to come from as it relates from a capital allocation standpoint.
Thanks Tim. And we'll go ahead and take our next question from Rich Hill from Morgan Stanley. Please go ahead.
Hey, good afternoon guys. And Ben, it's nice to hear from you on ABB earnings call. Look forward to working with you. Hey, guys. I wanted to spend a little bit more time thinking about the bridge from 1Q versus 4Q.
I recognize that the sales in 4Q probably had a $0.04 to $0.05 hit. And I appreciate the additional disclosure on capitalized interest, which is another $0.01 to $0.02 But it still seems like the guide is at midpoint It's a little bit lower than what maybe we were expecting. So as you think about that given the green shoots, Is it just is it something to do with the mix of apartments coming online? Or how should we think about that difference, which Given the green shoots, I would have expected maybe the guide to be call it $0.05 to $0.07 higher. So maybe I'm just trying to understand like how you get there and if you could break that down a little bit
Rich, this is Kevin and maybe I'll sort of take a stab at that. I tried to walk people Threw that in my opening remarks. So I don't know that I have a whole lot of details. So let me begin by maybe repeating that. And then if you have further questions around that, we can try To dive a little bit deeper, so just as a reference point, we anticipate core FFO per share at the midpoint declining from $2.02 in Q4 to $1.90 in Q1.
In terms of this $0.12 sequential decline, You know, relative to our budget, what we have is an $0.08 sequential decline in residential same store NOI, a $0.04 sequential decline Related to dispositions that were completed in the 4th quarter, so you need to bear in mind, we did sell about $450,000,000 of assets in the 4th quarter That were present for much of the Q4 and are no longer present in the Q1. So that's a $0.04 sequential decline from that line item. $0.04 sequential decline as well from increased overhead and strategic initiatives. And those total Call $0.16 or so and they are partially offset by sequential increase in other community classifications, primarily which Include increasing lease up NOI from development and then commercial NOI, which is expected to recover sequentially Because that was burdened in Q4 by the write off in straight line rent receivables. So that was kind of the backdrop For it, again, it's hard for me to reconcile against your expectations, which seem to have been about $0.05 higher, but that's the backdrop, I'm happy to answer any follow-up questions you
may have about the No,
that's very helpful. And I follow all of that. What I was trying to understand a little bit more was the $0.08 headwind, the same store NOI, because it seems like the quarter is going to be maybe a little bit More challenging than 4Q despite some of the green shoots that have emerged. And maybe I'm just asking a naive question, but I wanted to maybe understand why same store NOI is a headwind versus 4Q despite what looks like to be improving occupancy and improving effective blended rents?
Yes, Rich, this is Sean. Why don't I try to provide some high level commentary on that, that I think may help. And then if you're Looking for additional detail, we can certainly take it offline. But one thing to keep in mind here is that while we're talking about sort of green shoots in terms of leveling off our brands and such, We do have sort of the cumulative effect of both lease rent reductions as well as the amortization of concessions That will bleed through the P and L as we move through 2021. So in other words, the expectation would be as you look forward to the next couple of months, The impact from the amortization of concessions and the cumulative effect of those lease rates will be Higher than it has been in Q4.
So that's something that I'm not sure people always think about, but one sort of Broadly to look at it as an example is we granted about $47,000,000 in cash concessions in 2020. We only amortized about $16,000,000 of those. So there's still another $31,000,000 of concessions that we'll amortize through 2021. So that will continue, as Tim mentioned in his talking points, to impact the growth rates as we move forward over the next several months. So that provides some additional headwind.
Yes, that's very helpful guys. And I think the simple explanation, sorry complicated it is there's just an earn in benefit that still has to burn off over time, which makes it
a little bit more of
a tougher comp. But that's very helpful. One more just clarification question and then I'll get back in the queue. But that 0.04 dollars of strategic initiative that you mentioned, Is that one time or is that reoccurring as we think about modeling?
It's reoccurring. It's part of our Full year guidance for overhead costs, which includes a significant component of which is investment in Building out our digital capabilities and other strategic initiatives. And so it's the capability that we've been adding and continue To our business and is therefore occurring throughout the course of the year. So it's something that you can kind of think about as continuing on. Rich, just
to add on to that one as well. We may talk about it in more detail in the coming quarter or 2, but it ties into some of the information that we Provided back in sort of late 2019 in terms of our investment in digital capabilities, AI, machine learning, things of that sort that If anything, has only accelerated as we've moved through the pandemic. If you think about what's been happening with virtual tours and self guided tours and smart access and Things of that sort. I think, if you talk to it, not only us, but our peers and others, there's even probably more conviction in making those investments And the ROI associated with them that we would expect to continue to invest in those capabilities over the next couple of years for sure Yes, I didn't see those payoffs come through. Hey,
Rich, just to add to that. I mean, as we're making those investments in innovation, there's a bit of a geography issue, right? You got It may be hitting the overhead line, but the benefit oftentimes flowing through to the assets. And so when we are able to save some payroll, things like that, it May not be obvious because the payroll expense is a big number. The property OpEx is a big number maybe compared to what the strategic initiative number is.
Got it. Guys, thank you very much. I know this was sort of wonky modeling questions, but I really appreciate you spending the time to detail that a little bit more. Thanks guys.
And we'll now move to our next question from Rich Hightower with Evercore. Please go ahead.
Good afternoon, guys, and again, welcome to Ben on these calls.
So my first question, I kind
of want to hone in again on San Francisco and New York and the big sequential occupancy gains In the Q4, obviously, a lot of that must have been driven by pricing in the market as opposed to anything related to return to office Sort of the normal seasonal leasing pattern that we might consider, but as you think about the pace and the drivers of Demand going forward as we go through 2021, what do you think the key drivers are that we should be And how does that overlay with what is normally peak leasing starting in the spring and how do we fold in to turn And how do you guys think about the moving parts given that this is just going to be a strange year in all respects?
Yes, Rich, why don't I take a first shot at that and others can comment as needed. But I think the factors that you'd like Monitor are first what you mentioned in terms of employers basically reopening their offices and Calling people back to work in these major environments is obviously a key driver here. As Tim mentioned earlier, we're probably not expecting 100% to return, But certainly a very high percentage are very likely to return. The second component is what I mentioned in my prepared remarks is sort of the reopening of these major urban universities that really do draw in not International students that do occupy apartments in some of these major urban centers. And it's not just the student, but it's the ancillary staff, faculty, etcetera, etcetera.
So when
you think of New York and San Francisco and markets like that, that's And then ultimately what's going to follow that is more business activity where there was corporate demand and things That's our 4 consulting assignments and such that you can make up 1% to 2% of a market. So the combination of those factors What will really sort of drive demand, what we'll likely see is people lease apartments A little before they need to be either on campus or back at work or going to some consulting assignment, etcetera. And so the timing Of which that is something that I think we probably all debate. I think our view at this point just based on what's happening with the pandemic and vaccinations, Etcetera is that it's probably sometime maybe in the summer when you might see that happen depending on how The vaccination of the population occurs over the next few months here. So we could see employers flying people back in the summer or maybe the fall When people are returning to school and such.
So I think those are the key questions, the timing of which is just be determined For it to have a material impact on 2021 results, however, given the lease expirations that we have from
quarter to quarter, You really would need
to see that happen probably in the late spring to early summer to have any kind of meaningful impact on 2021 As compared to what occurred in the fall where we only have maybe 20% to 30% of our lease expirations remaining, you would see the lift in 2022.
Okay. That is helpful color, Sean. I guess, my second question here, You're obviously ramping up development starts this year. What's the chance that you guys even go bigger than the 6 $50,000,000 to $850,000,000 guidance if you think we're really on the cusp of the next multiyear recovery
in multifamily.
Well, it's a good question. As I mentioned in my prepared remarks, it's Somewhat a function of what we've seen in the markets, both the real estate markets as well as the capital markets, at this point, we're basically funding that development With planned dispositions, just given where our leverage is right now and trying to sort of protect our credit metrics So, and I think as we've said in the past, it's hard to it's with gains ratios of around 50%, it's hard to It's not too much. If we wanted to double down, we'd end up having to do distribution, then it's just not capital. It's not as capital efficient. So I think what would have to happen is the equity markets, I mean, we had a good start today, I guess, but the equity markets would need to recover More at a level which we think sort of more reflective of intrinsic value in NAV, where we might have some we might have access to those markets as well To really expand the balance sheet in order to accommodate more development.
Now having said that, not all deals we think are sort of ready to go. As I mentioned in my remarks, for the most part, we're focused on markets that haven't been as impacted From a run rate standpoint, so that the yields are still at least on a current basis, so offer we think sort of an appropriate Risk adjusted return, that's not true of the entire development pipeline. And you know how these deals work. You just don't go out and pick up some land options and start the next quarter. These things take even deals that are entitled can take a year or 2 years to sort of fully gestate before they're ready to Before they're ready to start, so the number is probably not going to just probably just can't flex up too much even if market conditions were great, but it's I suspect it's going to be in this range unless market conditions move dramatically one way or the other.
Got it. Thank you.
We'll take our next question from John Pawlowski from Green Street. Please go ahead.
Thanks. Matt, could you give us a sense for the 2 Northern California dispositions, how you think values ultimately settled out to where what could have gotten on the sales pre COVID and any CapEx color for those 2 deals?
Sure, John. We sold the 2 deals in Northern Town in the 4th quarter. Yves San Rafael was our only asset Marin County, that's a pretty unique asset in a very supply constrained Part of the world with very little existing stock, almost no new construction. So I would say that one, I don't think that the value there was really impacted much at all. We think the cap rate was high 3s, maybe around 3.9%.
So I'm not sure, maybe it's down slightly from where it would have been Year ago, but that's just such a special asset that it's a bit of a one off story. The other asset that we sold at the end It was East Diamond Heights. That's an older rent controlled asset in the city of San Francisco. And we were a little bit motivated there to close by year end because the city Through a valve initiative increased their transfer tax to the highest in the country at 6%. So there was definitely some Dollar savings by closing before year end.
That deal was about a 3.7% cap, it's 470,000 unit. I would say a year ago that asset probably would have sold for 8% to 10% more, although it's hard to know. Maybe not as impacted in terms of the NOI as some of the other assets just because it was a rent controlled asset. So some of the rents were below market, but also maybe less lift for the buyer way out because there'll be more constraints on our ability to raise rents. So Probably a little lower beta maybe than some other assets in San Francisco.
Okay, great. Thanks. And then second question for Sean, Sticking with Northern California, just curious your thoughts, particularly in San Francisco, San Jose, when A lot of your private competitors occupancy is well below your own level and it feels like the entire market is 1 to 3 months free. And so The short question is, are you going to be able to sustain the occupancy and sustain stable rents As your private competitors play catch up, do you feel like the floor is underneath or is it going to be a choppy few quarters here?
Yes, Tobin, that's a good question. I think if you look at basically how The quarter unfolded and not just in Northern California, but across some of the more impacted markets, Whether it's ones you referenced or New York City or Redmond in Washington State as an example is, we've certainly seen rents as we build occupancy and now they've sort of leveled off and question kind of rolling forward is, Today, sort of balance along the bottom here as we basically try to kind of hold occupancy where it is. We feel like the For the most part across the portfolio, we're pretty close to where we think market occupancies are. And so rents should get better. The question is how much as the rest of the market sort of does what it does as you pointed out.
I think there's some of the other peers are going to be higher in occupancies, some are lower Trying to catch up, but I think just given what we've seen, the belief is that it was probably just for the next couple of quarters, we're going to kind of be bouncing around a little bit. Wouldn't say that we're expecting a sharp uptick. I wouldn't say that. But Should we expect some marginal improvement? I think that's reasonable to assume given where the rents were to get the occupancy that we needed.
Now we're trying to sort of stabilize a little bit, so we should be able to compete without as much inventory available and therefore The rents won't need to be as soft, I guess, is the way I'd describe that. Every pocket is a little bit different though the way I think you need to look at it In terms of what's happening, is there new supply, is there not new supply, things like that do impact these submarkets in potentially a meaningful way depending on what's going on there.
Okay, great. Thanks for the time.
We'll take our next question from John Kim with BMO Capital Markets. Please go ahead.
Thank you. Comparing this downturn versus the prior recession on Page 14, I guess one of the big similarities between now and early 2000s is the homeownership rate and the strength of the housing market. And I'm wondering if you think this is a factor that's most important in terms of the phased recovery this time around or have landlords including yourselves Aggressively cut rents so that the recovery time could be quicker.
Yes, John, it's Tim. It's a good question. I mean, we are definitely seeing the for sale market strength. I think part of that, like the early 2000s, is demography. As you start to see the kind of the 30 to 34 year olds are the leading edge of the millennials come forward and start to purchase.
I do think what's happening is you are seeing just an acceleration of folks that may have bought a year from now or 2 years from now, 3 years from now, Accelerating that purchase decision just because of what quality of life in the urban markets has been like over the last year. Yes, we'll have to see. When you look at it's been our view, I think we've talked about this over the last 2 or 3 years that Housing demand between rental and for sale is going to be more balanced over the next decade than we've seen over the last 2 decades. Last decade was kind of the renter decade, the decade before that was kind of the homeowner decade. There were some artificial factors driving it, Particularly in 2000, as you know, with what was going on in terms of just the whole mortgage crisis.
But, I just think just given kind of the mortgage finance we have a place now. I think it's going to be driven more by fundamental factors and speculative factors. And for a long time, Home ownership rates were just sad at like just 64%, 65% and they were kind of that level on a margin level, and if you look at what's happening in terms of the growth and we've talked about this too, in terms of this growth in Single person or single parent household, that population is still growing. That population is still growing. And that multifamily It's a better use for a better housing choice for that group.
So I think there's a lot of thought of factors when We sort of put them all together, it really does suggest sort of balanced housing demand going forward. So today, we're producing whatever Close to 1,000,000 or around 1,000,000 single family units and 3 or 4, maybe 400,000 multi family units. That feels about right Relative to marginal demand, I think it's been accelerated as we're speaking right now just because of the pandemic. But as you look at over a 2, 3, 4 year period, It sort of strikes us as about sort of the right mix of supply to address marginal demand.
That's very helpful. Thank you. And the second question for Kevin. The impact to your earnings from concessions doubled this quarter Last quarter, but can you remind us how the concessions have trended throughout the year last year, so the average concessions be granted By each quarter?
Well, maybe Sean, if you want to speak to the average concession value?
Yes. I mean, I think what I can probably describe to you is, if you look at the leases that we signed, kind of what The pace has been in terms of concessions. So in Q3, the average concession for a lease sign was $1100 When you look at Q4, the average was $13.50 but it did tick down as we move through the quarter. So as an example, October was $14.50 a lease, November was $1400, December was $119,000 And they were down to just under 1,000 at least in January. So the trend has been our friend in terms of the impact of concessions.
In terms of the accounting of it, just one comment to reiterate what I mentioned earlier and Kevin can address it more thoroughly as well is We granted about $47,000,000 in cash concessions in 2020, but we did only amortize $16,000,000 of them in 2020. So There's still $31,000,000 in deferred concessions on the books that will be amortized through 2021. And then in addition to that, whatever concessions, cash concessions we grant in 2021 will also commence amortization. So Hopefully, that gives you some sense of sort of the headwind as we move into 2021 from the concessions that were granted but deferred in 2020. I don't know if that answers your specific question or if you have a follow-up.
I can add a couple of things, John. It's Kevin again. So Just
to give you a sense to
frame it, if you kind of look at our earnings release to start the discussion here for and as Sean has mentioned on Page 31 of our earnings release. For the full year of 2020, we granted $46,600,000 worth of concessions. That's just the granted number. If you kind of go back, in Q4, we granted about 19,500,000 Q3 granted about $15,300,000 So the difference pretty much is really what we did in Q2. So that's going to be, call it, dollars 12,000,000 or so granted in Q2.
And again, we will be amortized for the quarter.
Is it fair to assume that Q3, that Year over year comps are easier, you'll be withholding the concessions on renewal?
Well, it is a function of what Concessions Week grants in 2021. All of being equal, if you just So to stop today, if you thought the concessions were going to go to 0 effective February 1, as an example, what's on the books Today, the peak concession burn off for amortization would be sort of in the April, May timeframe. We're still granting concessions maybe at a lower Great, but we're still granted concessions now. So it's very likely that the peak burn off of the amortization We'll drift into the summer sometime depending on the volume of concessions that we grant and the amount of each concession over the next few months.
That's helpful. Thank you.
We'll now take our next question from Austin Wurschmidt from KeyBanc. Please go ahead.
Great. Thanks guys. Just wanted to touch on sort of the occupancy rebound again and economic occupancy is now approaching kind of that mid-ninety 5% range. I think you were 96% plus pre pandemic, but anyhow, how How does it change your view towards continuing to build occupancy given I guess your view that it could be until the summertime Until you start to see a surge in demand, as people firm up the back office dates and then into the fall for the student population. How does that kind of balance that continuing to grind down, I guess, on the concessions versus trying to build So you give yourself maybe some cushion as you get into the spring leasing season and the expirations start to increase.
Yes. Austin, this is Sean. Good question, kind of from a strategy standpoint over the next 2 or 3 months. As I mentioned in response to a couple of questions ago, we think as we look across the suburban markets and the urban markets that In the range of what we consider market occupancy based on multiple data points that are available out there, people use Axiometrics or CoStar or various other sources like that. And so we've got the ability to sort of triangulate into where we think market occupancy is, and we're comfortable sort of operating around market occupancy to slightly above maybe 100 basis points to 200 basis points.
Anything beyond that and you're probably just giving up too much rate to hold that higher occupancy. So while occupancy may drift up a little bit Over the next couple of months here, I wouldn't expect it to spike materially, similar to what we've seen in the last 4 months. So for us, it will be more about maintaining marginal improvements in physical occupancy and really trying to make Sure. We find where we can hold those rents and see sequential improvement in effective rents Asset occupancy, that would be worth gain going forward for us. To the extent that there is a significant pivot one way or another in
Thank you. And then you referenced the 18% decline in rents. I think it was in reference to urban markets. But as we think about that recovery, Last quarter, you did mention you've kind of gone further down in the renter pool from a credit perspective. Can you give us Any type of metric to give us a sense of how that change in renter profile, how significant it's been or maybe an affordability Ratio comparison versus the years leading up to the pandemic?
Yes, no, also a good question. And one thing to be clear about is, if anything, our credit standards have become more stringent during the pandemic given the various regulatory
orders that are
out there, particularly the eviction moratoria, Where we have reached down further in the rental pool is more from an income perspective. And obviously rents are down, so people can qualify for apartments that maybe they couldn't qualify for. Last year when you go to New York City here in San Francisco and the rents are down 25%. But in terms of maybe You might be going with this is their ability to pay in the future as we see a rebound and are trying to push through rent increases. And while income levels are Down rents are down more than that.
So actual rent to income ratios have come in a little bit over the last few quarters, Which just tells us that there is more ability to absorb increases on the other side of the pandemic. We see a rebound. And one thing to remember, Excuse me. As it relates to concessions is, well, we have to amortize concession for GAAP purposes. We don't amortize the So they may receive a month free as an example upfront, but the next month they are circling a check for the full amount of the lease rent.
So any renewals that we provide to them at some point in time when the lease expires will typically be based off of lease rent as opposed to the success rent. So people are in a position where they can afford, but they're writing a check for as opposed to the effective tax.
Right. And what's the decrease in the gross For face rent, if you will, versus that 18%?
Yes. So if you look at it On a rent change basis as opposed to the blended values that we were talking about, basically we had effective rents that were down 11.2%, But if you look at lease rents, they were down about 7%.
Yes. No, I saw that for the quarter. I was more curious, I guess, over the course of How that 18% number would compare? And is our income still down less than that Face rent number, you remove the concession as you referenced?
That's correct. Yes. Yes, incomes are down less than the reduction of rental rates.
Okay. Thank you.
We'll now take our next question from Lou Asgerebek from Bank of America. Please go ahead.
Hi, everyone. Thank you for taking the question. I know we're going a little too long, so I'll be quick. But I wanted to ask a little bit more on the demand side that you've been seeing Just to get a clear idea, are you still seeing a lot of those bargain hardeners coming in within markets looking for the deals in your urban markets? Or are you starting to see a little bit more demand coming in outside of those markets?
Yes. No, it's a good question
in terms of the bargain I guess in the current environment, yes, sort of everybody is looking for a deal. But as I mentioned in response to the last Question, if people are well qualified with good incomes that are coming in. So it's I would say that we're not looking for people that really can't afford what we're doing. And so they're really trying to drive for a deep discount to They could counsel for them. In terms of the question about net new demand coming in from sort of other geographies, that's a good question.
I don't have that right Top of my head, but I would say for the most part what we're seeing is that given the entire market in many cases has improved in occupancy That there is net new demand coming into these markets as opposed to just a recirculating of the existing demand that's already in place that would allow that to happen. So I don't have specific detail for you in terms of how much of the demand in New York City is an example, but market occupancy to come up, there has to
be net new demand.
Okay, got it. Thank you. And then just a quick question on Boston or New England overall. It looks like the effective rents really dropped off in Is there anything behind that other than maybe the supply that you guys have been talking about?
No, I mean, it's the same phenomena. The urban markets in Boston are still very challenged. It's quite choppy, Not quite as bad as New York City or San Francisco, but the urban markets are driving most of it and there are some sort of infill pockets. I mentioned your Assembly Row asset, Denton, Chestnut Hill, pockets like that Sort of the inner ring suburbs are also a little bit weaker. Some of the more distant suburban towns Good school districts and things like that are performing better.
Got it. Thank you.
Uh-huh. We'll
now take our next question from Nick Yulico from Scotiabank. Please go ahead.
Thanks. I just wanted
to go back to the slide in
the presentation where you gave the occupancy and blended rents For the suburbs and urban environments. And I guess I'm just wondering for those 2 different buckets, Suburbs versus Urban, if you had if you could give us a feel for kind of a composition of the blended rent, meaning what Sanjay, that was renewals versus new leases for the different regions?
Yes. Nick, that's a good question. It's a lot of data points because it is a blend of renewals and new move ins, which Changes by month. That's probably something Jason could talk to you about offline as opposed to trying to walk through that because it again changes month by month. If you think about it, if you want to do, you can just go look at our turnover rates that we provided in the earnings release to get a feel for it though.
It shows that year to date and for the last couple of quarters. That will give you a good sense of the mix.
Right. Okay. Yes. That's what I was wondering if it was kind of Similar to the turnover rate because I guess my question here is, if your turnover is at your lowest point of the year in the 4th quarter and 1st quarter, and we're looking at a blended rent number that is, in some cases, stabilizing or slightly ticking up Versus higher turnover periods, I guess I'm just wondering what we should really be reading into this because doesn't it just mean that you're Signing less new leases, which is where the worst pricing is. And so the fact that it's starting to stabilize, but you're doing more renewals versus new leases And going into a period in the spring where you have a
lot of new leases, I
guess I'm just trying to wrestle with what we should really be reading into this Lines of improvement for January and the Q4 versus other parts last year.
Yes. No, it's a good question. I think to the comments that I made to John earlier, probably a little too early to tell in terms Calling it a bottom, but we are pleased with the fact that during what is typically a seasonally lower period where we had Turnover up 15% year over year that we have been able to slowly pull back on concessions And see slightly better blended rents, sort of net effective basis for now 4 months basically, 3 to 4 months. That gives us a sense that we're kind of pricing in the right neighborhood and that was building occupancy. So we don't need to build as much occupancy as we were attempting to do in the last 3 or 4 months.
Therefore, We believe we should be able to do better in terms of absolute effective rents moving forward. To your point though, it does What happens in each market as we get to the spring leasing season is yet to be seen. So I think we're kind of bouncing around the bottom now. And Question is, will we continue to see those sequential improvements now that we're at that occupancy platform that we want to be at, that is a function of just pure And these markets and what happens. So I think it's probably a little too early to call in terms of the specific question that you have whether I should read in that that this is at the bottom and it's going to bounce back.
I'm not sure we're prepared to say that just yet.
Okay. Thanks. That's helpful. Thanks, guys.
We'll take our next question from Rich Anderson from SMBC. Please go ahead.
Hey, thanks. Good afternoon, everyone. So when I think about percentages and talk about percentage, you can get sort of misleading. If I don't have any jobs that were lost in Your markets in 2020, but you need kind of 2x growth to get back to where you were in absolute numbers, because just because you're growing off a smaller base. And then the same logic applies to the 18% decline in your urban effective rates.
You got to do 30 plus Off the lower base to get back to where you were in absolute per unit rent. And my point is, When you look at your slide on Page 14, it's taken 3 to 6 years for you to just get back to where you were And whether it was the tech bubble or the housing crash, does this environment, which is somewhat more black and white, it's sort of virus vaccine, It's as bad as it was, it's not very complicated. Do you think that the recovery back to where you once were in Whether you use jobs or rents, whatever the metric is, will be tighter than that 3% bottom end of the range that you've experienced in history?
Rich, Tim here. That's obviously one of the big debate here As to whether this is going to be V shaped or swoosh shaped in terms of recovery and that's ultimately its jobs, It's what's going to help propel a total household formation and the deconsolidation of households that may have Consolidated over the last year. And while the unemployment rates are looking pretty good, obviously, the labor participation rates Are pretty low. So it's going to take some really decent economic growth to I think to really I think, yes, suburban rents could be back a lot could be a lot quicker than the 3 to 5 months, 3 to 5 years we've seen at that. I think the question here is really about Urban and some of the really tech intensive suburban submarkets like a Mountain View or a Menland Park as we were talking about before.
And It's going to take some economic growth, I think. And so I think we may see sort of a quick V shape Maybe for the suburban markets and the urban markets maybe, we may not be back into those rents for another 3, 4 years?
Yes. So it leads me to my kind of second question, which is, you're not giving full year guidance because you don't have a lot of visibility beyond 90 days, But then you're ramping development up. So I just wondered if your confidence In a period 2 years from now when you might be delivering these assets is higher than it is 6 months from now, and I imagine it is, but that's what I'm trying to pinpoint. Or is the development you're turning on Sort of specific to those markets and those areas that maybe weren't as impacted by the COVID
pandemic? Yes. It's the latter point that you're making. It's as I said before, I think suburban rents could be back to where they were in a year. They're only down 4%.
It doesn't take a lot of growth to get that 4% back in those markets. And so yes, We're focused we're kind of activating that lever in markets where we think there's like as I said in my prepared comments where we think the risk adjusted Return is makes sense to us right now.
All right.
Yes. Thank
you. We'll go ahead and take our next Question from Anthony Paolone from JPMorgan. Please go ahead.
Yes, thanks. On the expense side, is there anything for 2021, as we look out, that could bring just expense growth back down to sort of an inflation number? Does the turnover and some of these other dynamics just Step function is up for higher growth this year?
Yes, good question. I think it's more of the latter. I mean a lot of the stuff that we're seeing is sort of related to the pandemic and it prompted whether it's a higher turnover cost, PPE and extra cleaning costs, associates that are on leave and therefore driving temporary labor, contract labor overtime, things like that You kind of play their way through and obviously we have a tough comp just given first half of last year and particularly the second Quarter, yes, spend came to a screeching halt in a number of different areas. As turnover came down, maintenance projects were delayed, etcetera, etcetera. So I think that it's just going to put pressure on what the numbers look like, particularly as Kevin mentioned in the first half of this year, given that sub comp, It'll be a little bit easier when I get to the second half because some of those expenses and elevated turnover and all that will be more comparable, But particularly the first half, a little bit pressure.
Okay. And then just second question for Kevin. The $160,000,000 to $170,000,000 of total overhead for 2021, do you have the comparable number 2020, just to understand the increase, I think it's a couple of line items and a variety of adjustments to get there.
So Tony, you're referring to the kind of the core expense overhead number?
Yes. I think you gave brackets around, I guess it combines like G and A and property management, a few things like that.
Core expense overhead for core FFO of $160,000,000 to $170,000,000 The reference point for the prior year was about 100 $1,000,000 $151,000,000 so it's about a $14,000,000 year over year increase where most of that is as we've alluded to before related to Investment is very strategic and related initiatives. I mean strategic initiatives alone are about $7,000,000 of that number, Probably about 5 on a growth basis and there's an ancillary investments as well and there's some additional compensation costs including Executive transition costs.
Okay, got it. Thanks for that.
We'll go ahead and take our next question from Alexander Goldfarb from Piper Sandler. Please go ahead.
Sure. Good afternoon and Ben welcome aboard. I'm assuming that you declined the free rent incentives, So you can do your part to help earnings. Two questions here. The first, just going to guidance, Tim and Kevin, You've laid out definitely that you think things are bottoming.
You're not sure how things will go, but in general, You've laid out sort of a base case. So with that in mind, why couldn't you provide a full year number even if it's a wide range because it seems like you're Tracking in the sort of $750,000 $760,000 something like their midpoint and just sort of curious what prevents you From providing even if it's just a wide range something, because as I say from your Q1 observations, It sounds like you feel comfortable with where things are shaking out and you have a general sense that if that continues, then you sort of would know where you were for the full year.
Yes, Alex. It's a fair question. I mentioned in my kind of earlier remarks, it's more than just 1 or 2 things that are kind of at play here. We didn't even get into the issue of eviction moratorium where we've got, Call it, 3% of our units are tied up and people that aren't paying. We have potentially a federal stimulus that They might benefit from, actually and actually help us to actually to potentially even reverse some bad debt that we've taken on before.
Sean, in terms of the work from home mandates, when they expire, it makes a big you can make a big difference in terms of when we might get initially A good occupancy boost, but with that comes other income and other things as well. So when you put them all together and you start start playing at these variables, you get ranges and you feel wise. And we just think it's not that reliable. And frankly, it's I think in the past, we've actually haven't given quarterly guidance. We've given annual guidance because that's how we manage our business in a typical year.
We don't Manage it quarter to quarter. Reality is we're managing it week to week, month to month, quarter to quarter right now. And we feel like we've got Enough visibility at about 90 days to provide reliable guidance beyond that. We just don't think it's that reliable. And it's to be putting it out there, it's always been trying to reconcile and sync up.
It just it's us didn't think it was really adding anything to the conversation. But so others may choose To provide outlook with a wide range, I get it. And I think if you're at a Sunbelt have a Sunbelt portfolio, I think it makes total sense that you'd be We're providing guidance right now, but that's not the situation we're in.
Kevin, I don't know if you have anything else.
I mean just to add to that, I think that covers Tim, but, Alex, for us it came down to can we satisfy the test of providing a reasonably reliable midpoint And a reasonably narrow and useful range. As we know, anything is possible in Excel. But when we kind of play with these variables and look at the back half of the year, There were things that could be very positive or very negative and they're beyond our ability to reasonably predict with accuracy. And Given that, we just didn't feel like we could meet the test of providing a reasonably reliable midpoint forecast, which hopefully would be what we people would focus on What, even if we gave a wide range? And we couldn't provide a reasonably narrow range around that.
So we just felt like why try to get something that allows us to have a range in the business in
Yes, Alex, this is the last thing to add. That's one of the reasons we showed the Slide 14 as well and kind of Put a circle around the downturns and the recoveries. That's when it's hard to protect the business. I mean, when you're in an expansion, it's fairly linear and we feel like we can give some pretty reliable guidance in terms of how the portfolio ought to perform over the next 12 months.
Okay. And then the second question is, as you guys think about ramping up the development program and using more capital, How does that balance with the expansion markets and to the extent that you're looking at other markets like Nashville or Austin or some of the other sort of popular markets these days, how do you reconcile your balance of capital between investing and development in your current markets Versus using that capital to either in your expansion markets or enter other new markets?
Well, Alex, it's a good question. I think the reality is that We didn't give guidance around acquisitions and dispositions to the extent that we to acquisition, let's say. To To the extent we acquire, we would just sell more and existing assets. So it's really be done more through portfolio management, basically recycling capital Out of certain markets and you know where we've been recycling, largely the Northeast, into markets like Denver and Southeast Florida and potentially Some other expansion markets to come. But at this point in the cycle where capital is priced, that's probably how we would fund it.
Yes. If equity values recover in any meaningful way where you think it makes sense to expand the balance sheet in an accretive and prudent way, That'd be sort of the second alternative.
Okay. And then just finally, the New York development site, which one was that, that was written off?
Hey, Alex, it's Matt. That was the investments that we had in the East 96th Street RFP.
Okay. That was the Cuomo de Blasio one. Got it. Okay. No problem.
Thanks.
Hey, Alex, just to be clear, when we write it off, it means it's more probable than not. It's less probable than not It doesn't mean we're not still working in it for Ceridian, but it's more probable.
Yes, we have
to do this from an accounting point of view. It's tipped the other way and it's being less probable.
And we'll go ahead and take our next question from Brent Dilts from UBS. Please go ahead.
Hey, thanks guys. Just one for me at this point. But could you talk about how the financial struggles of some of the largest U. S. Transit agencies who are talking about Permanent cuts to service might impact your transit oriented properties?
Yes, Brad, this is Sean. I can take a stab at that one and Madhur is going to jump in. But It's probably a little too early to tell right now, I would say. I mean, certainly, ridership has fallen dramatically through the pandemic and all the major transit systems. And as a result, in my prepared remarks, I mentioned that one of the locations Our suburban footprint that has been most impacted is sort of transit oriented developments, just because people don't need it as much.
What does that result in permanent cuts versus just the temporary reductions in capacity that we've seen has yet to play out? And I suspect that It probably wouldn't be decisions made around permanent cuts until we get beyond the pandemic and people see what ridership sort of normalizes that. So I think it's probably too early to call on that, at this point, but certainly if there are transit oriented developments that are out there that are The residents are heavily relying upon transit system and capacity is cut dramatically. There will be a negative impact on those assets. It's probably just too early to tell what that might
I'll just add one thing to that.
This is Matt. On the other side, Perhaps marginally it makes the transit agencies a little more aggressive with trying to dispose of some of their land and or go Some joint developments, actually one of the deals we just started this past quarter was Avalon Summerville, which is at a NJK stop in Simpson, New Jersey. And we are looking at other sites where transit agencies are probably going to feel more pressure to monetize their land positions.
Okay, great. Thanks guys.
We'll take our next question from Rob Stevenson from Janney. Please go ahead.
Good afternoon, guys.
What percentage of your 2021 development starts are locked in Cost wise at this point and what are you seeing with respect to construction costs, especially lumber given what's going on there and how Decent is the labor supply these days.
Sure. Hey, Rob, it's Matt. I can speak to that one as well. If we haven't started a job yet, we have not locked in the cost on anything really except for probably the land and a little bit of the entitlement costs. So, the starts that we're looking at potentially for next year, I think we own the land on maybe 2 or 3 of them and then there's a couple others where we have they're under hard contracts.
So everything else It's subject to the market. The land and the soft cost usually is around a third, 20 5%, 30%, 35% of the total. Capital cost, the hard cost is usually around 65% depending on the product type. If you'd asked at the beginning of the pandemic, I'd say we had A pretty high degree of conviction that hard costs should come down, particularly in some of these markets that had seen a big run up over the last couple of years. I'd say we've less conviction around that today, just seeing how the for sale market has recovered.
And so And lumber right now is very, very expensive. Fortunately, we're not in a position of really having to buy much lumber as we sit here today because we didn't start anything for 3 quarters last year. But if lumber pricing doesn't adjust back to where we would expect Some of those starts may be in question. And my guess is like a lot of commodities, there is a little bit of a self correcting element to that, that we're not the only ones that will probably find ourselves in that position. There are a number of mills that are shut down right now because of COVID concerns.
So we do think Supply should start to increase again here by springtime. But at this point, I'd say our sense is more the costs have leveled off and except for maybe in a few markets Where they were really overheated, I'd say the expectation at this point is probably move towards more of a flattening than a
real nominal decline in hard costs.
Okay. And given that, I
mean, where are the yields on the new start, the 2021 starts relative to the 5.8% on the current pipeline?
Right there, just about the same. And when you look at our current development pipeline and you look at the mix of the current development It is mostly suburban and even the deals that are in lease up, there's a couple of them that are behind pro form a, but there's a couple that are actually ahead of pro form a as well. So that kind of makes sense when you look at When you compare that to kind of near term start.
Okay. And then last one for me. Where are you in terms of the mix of condo sales at ParkLogia? Is what's left skewed towards higher or lower price points or is what's left fairly consistent with what you've already sold?
Congratulations, Rob. I was wondering if we're going to get through the call without a question about park closure. So We have closed 73 units. We have another 15 where we've accepted offers or under contract. So that would bring us to 88 total.
The mix, we have sold maybe a few more. I think we sold 3 of the 4 penthouses. So the mix is going to start to a little bit more towards low priced units just because of that, but we still have a reasonable mix up and down the building. And that's where we're seeing frankly some pretty good traction now is in the more modest price points in the podium of the building. Traffic has actually picked up quite a bit.
We've seen 15 to 20 increase a week in January. We've been averaging about 4 new deals a month the last 3 months, whereas the last call, it was more like 3 per month. So, but we do have the inventory that remains is a little bit more affordable on average.
And is stuff being sold, I mean, thus far been primary residents or are these largely secondary residents? And are you expecting any impact if New York City and State passes additional soak the rich type of tax measures?
I don't know. Again, this is not Billionaires' Row. I mean, this is by Manhattan standards, this is A pretty compelling value proposition, which is I think why we're continuing to see our sales pace maintain pretty strongly. It is not There's a lot of people buying condos for their kids. In many cases, maybe their kids who are going to university in New York That market obviously has been a lot of distance learning since the pandemic hit, but may well pick up.
So I don't have the exact breakdown of primary versus secondary residences, but I would say that
there is a lot of,
piete terres and a lot of family type transactions.
Okay. Thanks guys. Appreciate it.
We'll take our next question from Haendel St. Juste from Mizuho. Please go ahead.
Hey, thank you. Good afternoon. First question is on the bad debt. Remain elevated in 4Q, very similar to the 3rd quarter. I guess, first of all, are you expecting a similar level?
Is that what's embedded Within your 1Q guidance here? And second, I guess, when do you think you can see some improvement there? And since you brought it up earlier, how's
Well, Haendel, this is Ted.
Maybe I'll answer the first Couple here. In terms of the Q1, we are expecting a persistent level of bad debt expense to roll into the Q1. So Not meaningfully different from what you saw in the 1st in Q4. And I don't know, Tim, you want to I'm sorry, Sean, if you want to add any more about kind of
Yes. Just On the eviction moratorium, there is sort of a myriad of various credit card orders out there Related to both evictions, whether we can charge late fees, whether we can allow renting fees, things like that. So it's not just at the federal level that we have to That's why with state and even local local companies. So one example you may have noticed that California extended what you call it, communicate into a new bill called KB91 Thanks, Tim. This is Victoria through Jim.
So and there's other things in Washington State and various other places. So While the CDC order is a little bit of a
federal override,
there is quite a bit Yes. Jigsaw puzzle out there, I guess, I would say in terms of what you can do at the state and local level. Our expectations at this point is that We'll probably see most of that hold through mid year, very likely depending on how things unfold with the vaccination of the population and The economy continuing to recover, that's sort of the house view at this point, but there's No question that it could be extended beyond that. Or in some cases, if things are going well, people let it expire sooner. So That will influence our ability to evict people.
We are continuing other efforts as it relates to collections that will continue. But at this point, what we basically feel like it's going to happen is the bad debt that we saw the last three quarters of 2020 We'll likely continue at that pace. We had a little bit of a nice surprise in January, but it wasn't quite as bad. But the expectation is to look more like the last 3 quarters of 2020.
Yes.
I mean just to add to that, and I mean to begin to revert from that 250 to 300 basis points of revenue trend that you've seen in the last This is something more typical, which is more like 50 to 60 basis points of revenue. Obviously, we're going to need a resolution of the pandemic And a restoration of kind of landlord remedies with respect to those who are non payers. And that could be a little wild here. Certainly not something we expect to change Early in the first half of the year.
Got it. Got it. Very helpful. Second, just one of a follow-up to some earlier questions on development. You noted that all 3 of your new development starts are Northeast Suburban.
So I'm curious, when you're thinking about new starts, when can we see A few more starts in the West Coast or non Northeast markets and in more urban locations. I recognize you have a couple West Coast projects underway in the pipeline, but you haven't started A new West Coast project since I think it's the second half of twenty nineteen. Thanks.
Yes, sure. This is Matt.
We do have
a start likely in Southeast Florida this year. We have a start in Denver that we're planning and we have a pretty large start in suburban Seattle that we're planning later this year. California is tough. California is where we're probably finding the most challenged economics right now for new starts. But we do have starts in the expansion markets and Seattle.
And would those spreads on your expected development yield versus Cap rate fee fairly similar that, call it, 50, 75 basis points spread you were referring to earlier?
Yes. No, I think the spread is more than that. I mean, if you look at, we said the current book is about a 5.8%. I mean, Those assets today would sell for sub 4.5%, probably low 4%. So I think the spread is well over 100 basis points and it's Just as wide given that how low cap rates are in Seattle, Denver and Florida.
Got it. Got it. Thank you.
We'll go ahead and take our last question from Dennis McGill from Zelman and Associates. Please go ahead.
Thank you. Just wanted to touch on supply and your views on how that might play out in 2021, especially in any urban environment. It seems from our work there's still quite a bit to deliver and maybe some of that slides out, but would seemingly limit some of the pricing power once you rebuild occupancy. But just Just wanted to see how you guys are thinking about those competing balances?
Yes, Dennis, this is Sean. Good question. Happy to Comment on that and others can as well. But as it relates to our footprint, we are expecting deliveries in 2021 to come down about 6 7% compared to 2020 and represent about 1.8% of stock. All the regions are expected to be down except for the New York, New Jersey region first, where the decline in deliveries in sort of the New York area are going to be offset by what we're Seeing in Northern New Jersey, particularly Jersey City, it increases by about 35,000 to 104,000 units, Even though the balance of New York City is down maybe 2,200.
So in terms of the trade area, there's an increase there. And then we expect it to be relatively flat In Northern California, in terms of the urban specific, yes, we do see a little bit of benefit certainly coming in, as I mentioned, City, urban Boston, a very modest increase in the district, so not terribly different. In San Francisco, it's basically flat. So no material change there. And then the other urban market, I guess, It would be L.
A. Where deliveries are going to be down about 1500 units. So in general, The supply picture in the urban environments with the exception of San Francisco, NDP will be better in 2021
than it
was in 2020, Which all things being equal should certainly help support the recovery at some point in time.
Hey, Dennis, Tim here. I agree with everything John just said. I think one think it's interesting things to think about with the urban supply. It's not just what's happening over 2021 2022 on stuff that's already been started 2019 2020, but the likelihood that we're going to see starts in 2021 2022 and how that may translate into 2023 2024 performance. I think it's going to be tough for people to get deals financed just against the narrative of this whole kind of work from home, work from anywhere, Dispersing your workforce for satellite offices as well as kind of downtown.
And I think by the middle of
the decade, you could be
in a position where we could be in a position where we're seeing very little supply delivered, where demand may be down a bit, but Well, the fundamentals actually look better, quite a bit better in urban submarkets and even the suburban markets. It's almost a reverse of what we saw this last decade where at the beginning of the decade, 2010, everyone thought urban was going to outperform. And it did from a demand standpoint, but supply more than made up for it, such that performance, actually asset performance is at least in our portfolio, Our markets are stronger in the suburbs. That story could completely reverse, I think, in the next 3 to 4 years.
That's helpful perspective. Thank you. And then on the share repurchase in the quarter, can you maybe just talk about how you triangulated to getting comfortable on the buyback? And then how you might be thinking about that now with where the stock is, if it hangs out here or higher, is it a likely use of capital in 2021?
Yes, Dennis, this is Kevin. So there are a number of variables to take Into account clearly, first of all, what is our alternative use and development is our alternative use. And as you can see, based on Our outlook for the year, we do anticipate starting development and that reflects an implicit view that at least relative To where our shares have been trading lately, development represents a more attractive use for our capital than buying back our shares, although our shares do look quite competitive and It is a tougher call than in most normal circumstances given how we're trading below NAV.
As you
can tell from when we were buying back shares, we were buying back shares at around $150 a share, which we felt was pretty darn compelling when we ran that math. And we're at a different point today. So that price matters to us as well when we're looking at the alternatives. The other factors we need to take into account Not only our source of proceeds, but also what the impact on our leverage is. And we did then and we do now still have the financial And the proceeds from dispositions to engage in a measured buyback if it were to make sense to do so.
But every time we do so, we have Think about the impact on our leverage metrics, and what we knew then and what is still true today is our EBITDA has been sequentially declining over the quarters and Our net debt to EBITDA was at 5.4x in the last quarter. Our target is 5 to 6 times. When we began the pandemic, our ratio was about 4.6 times. And so the movement up in that ratio has really been driven Not by taking on more debt, but rather by a decline in EBITDA. And as we pace through the balance of this year And see that the lower lease rates and concessions work into our rent roll and our EBITDA, we need to be mindful Of managing that ratio, so it stays, if possible, within our targeted range.
Engaging in a heavy buyback could potentially work against that a little bit. But all that said, we stand still ready to engage in a buyback if it made sense on a measured basis mindful of our credit metrics. But at the moment, when you triangulate around what's the best use of our capital development still figures today to be our best use of capital.
And with that, that does conclude our question and answer session for today. I would now like to turn the call back over to Tim Naughton for his brief closing remarks. Tim?
Thank you, Ali, and thanks everybody for being on. I know we've been on for a while. Thanks for all of you That hung in there for an hour 45 minutes. But I look forward to seeing all of you or many of you virtually
And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.