Ladies and gentlemen, and welcome to AvalonBay Communities Second 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 please have your cell phone turned off during the question and answer session. Your host for today's conference Mr.
Jason Riley, Vice President of Investor Relations. Mr. Riley, you may begin your conference.
Thank you, Matt, and welcome to AvalonBay This concludes the Q2 2020 Earnings Conference Call. Before we begin, please note that forward looking statements may be 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 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.babilandre.com/earnings, And we encourage you to refer to this information during the review of our operating results and financial performance. And with that, I'll turn the call over to Tim Potton, Chairman and CEO, that will update you for his remarks. Ken? Thanks, Jason, and welcome to the Q2 call. With me today are Kevin O'Shea, Sean Breslin and Matt Birenbaum.
Sean, Kevin and I will provide commentary on the slides that we posted last night, and then all of this will be available for Q and A afterwards. Our comments will focus on providing summary of Q2 results, an update on operations And some perspective on development in the balance sheet now that we've entered an economic recession. But before you start on the deck, I I'd offer a few general comments about the environment we are currently facing. To say things that have changed over the last is certainly not a statement. We are in the middle of the largest global health care crisis in a century.
The economic downturn is the most severe we've seen since the Great Depression and on the heels of the longest expansion on record. And social unrest is at a level we haven't experienced since Vietnam and the civil rights movement over 50 years ago. It's been said, but these are indeed unprecedented times. And these events aren't just having an unprecedented impact on economic activity, But also on income and wealth distribution across industries in the broader population. For those companies and workers leverage the virtual economy, they're Actually doing quite well, and some are even driving.
For those companies and workers that operate in a real economy of bricks and mortar like ABD, We're certainly feeling the normal effects and then some of the downturn. And then for those companies and workers Travel, leisure and entertainment sectors, among others, they are basically in shutdown mode. These sectors, as well as others, We'll undoubtedly need to be restructured over the next few years. Many companies will not survive, and their employees, seemingly Temporarily furloughed for now. We'll join the ranks of the permanently unemployed within the next several quarters.
And unfortunately, those impacted by these events or most impacted by these events are those in lower paying service jobs And minority populations. As a result, discount trend carries not just the normal economic risk of prior recessions but also profound health, So while this was a sudden and quick downturn, the timing and shape of the recovery is hard to project. And that presents a unique challenge in managing our business and Communicating our expectations to you, our shareholders. Having said that, we'll do our best to be as transparent and direct as possible As we all try to understand and gauge how the current environment will play out in our business in the months and quarters ahead. Now let's turn to the results of the quarter starting on Slide 4.
As expected, Q2 was a challenging quarter. Our core FFO growth is down almost 2%, driven by same store revenue decline of almost 3% or 2.2% of retail, distributed. And on a sequential basis, from Q1, same store revenue was down 4.5% or 3.9%, excluding retail. We had no development completions or new development starts this quarter, and we've had no starts since so far year to date. Lastly, we raised over $700,000,000 in capital this quarter at an average initial cost of 2.8%, Most of that coming from a $600,000,000 long tenure bond yield rate of around 2.5%.
As Kevin will share in his remarks, Our liquidity, balance sheet and credit metrics are very well positioned heading into this downturn. Turning to Slide 5. I wanted to drill down a bit more on the decline in same store residential revenues this past quarter. As this slide demonstrates, the Higher than normal bad debt is likely to continue given the breadth and depth of the downturn coupled with a mixed inventory in many of the markets in which we operate. We also experienced higher concessions in the quarter and lower other income as we laid various fees This past quarter 4 are residents, including late payments, common area amenities and credit card convenience fees.
Average lease rate for our same store portfolio in Q2 is actually up 1.8% over Q2 of 2019, We expect to be embedded in Q1 of this year. Turning to Slide 6. As I mentioned in my opening remarks, this downturn closes unique risk relative to other recessions. In addition to the household contraction and consolidation that occurs due to job losses in any downturn, The pandemic is driving other trends that are impacting rental demand. These include work from home flexibility that is shifting similar to demand from Higher costs in urban infill markets.
Many renters are relocating, perhaps only temporarily, to lower cost markets or submarkets, Leisure areas or even back home with their parents. 2nd, relative low mortgage rates and the desire for Space is accelerating demand for single family homes. Many homebuilders recorded strong orders in sales this past quarter, 62% to back half of the quarter, And homeownership rate is on the rise. And lastly, we're seeing reduced demand from 2 important segments around corporate and students. As most temporary corporate starts have been canceled, while higher education is adopting remote learning models and inhibiting on campus activities for the fall.
These factors will likely weigh our performance until the public health crisis is abated. On the other hand, they'll also likely With that, I'll turn it over to Sean to discuss operations and portfolio performance in Ricky, Sam. Joe? All right. Thanks, Tim.
Turning to Slide 7. The factors Tim highlighted on the previous slide impacted leasing volume throughout the quarter, which is down roughly 10% year over year. Turnover for the quarter fell about 5% resident notices believe our communities exceeded leasing velocity, most materially in May when we experienced about a 25% increase in lease breaks For a variety of reasons, including corporate apartment operators shutting down operations in certain markets. As a result, move outs exceeded move ins for the quarter. As of yesterday, net lease volume for July is roughly on pace to the volume of notices to vacate our communities, which should help stabilize Moving to Slide 8.
We experienced 120 basis point decline in physical occupancy from April to June, With most of it occurring in May as a result of the lease breakdown I mentioned a few moments ago, Chart 2 on Slide 8 depicts both lease and effective rent change for the quarter. As detailed in our earnings release, blended lease rent change was down 40 basis points in Q2, while effective rent change was down 3.1%. Rent change for July has improved slightly from June, but the nature of the health crisis and economic environment will dictate the ongoing demand for rental housing and our pricing power as we move through the balance of the year. Turning to Slide 9, we can see the regional distribution of both lease and effective rent change for Q2. Northern and Southern California were the most challenging regions for a variety of reasons, while the Pacific Northwest performed the best.
Moving to Slide 10 to look at performance metrics by submarket type. Certain submarkets deteriorated more materially during Q2 As compared to suburban submarkets, from an occupancy standpoint, urban submarkets declined by 2 70 basis points from year over year, While suburban submarkets fell by only 50 basis points and from a rent change perspective, urban submarkets fell suburban by roughly 200 basis points. Well, the weakness in urban environments is pretty broad based. Across our portfolio, it's most pronounced in San Francisco, Boston and parts of L. A.
Unfortunately, demand in urban submarkets is suffering from a variety of factors, several of which Tim mentioned in his prepared remarks, including a desire for more affordable price points, extended work from home policies across corporate America, a lack of short term and corporate demand, Uncertainty regarding on campus learning at Urban University and a general concern about population density. Shifting to Slide 11 to discuss our development portfolio. Construction delays at the beginning of the pandemic weighed on both deliveries and occupancies during the second quarter. As noted in Chart 1 on Slide 12, deliveries and occupancies for the first half of the year fell short of our expectations by roughly 4 and 650 units, respectively, which translated into an NOI shortfall of approximately $2,000,000 Fortunately, following some initial shutdowns of about onethree of our construction sites for a short period of time, all our jobs are currently underway, albeit with a slower pace of deliveries expected across certain assets. I'll now turn it over to Kevin to further address development of parts, Funding and the balance sheet.
Kevin? Thanks, Sean. Turning to Slide 12. In response to the current environment, we have chosen not to start any new construction projects far this year, despite having initially guided in the beginning of the year to about $900,000,000 in construction starts for 2020. Looking ahead, we expect lower construction costs to benefit many of our future planned starts, and we are prepared to wait for the expected collection of hard costs Before breaking ground, we've been watching a little bit of a bit on these investments.
Although real time construction costs are difficult to come by, Initial indications suggest we are beginning to see a softer labor market and a reduction in overall construction activity make their way to the subcontractor pricing. As for development that is currently under construction, as you can see on Slide 13, we are in a remarkably Development under construction is already 95% match funded with long term capital, which not only mitigates the financial risk of development, but also means that we have locked in the investments to our profit on these developments We're having a maximum long term effective return on the projects of equity and debt price for the new refelience projects. Finally, as shown on Slide 14, we continue to enjoy an exceptionally strong financial division today. This is particularly evident in comparing our key credit metrics today to From the Q4 of 2008 when we entered the last recession, specifically since late 2008, Our NASDAQ EBITDA ratio has improved to 4.9 times from 6.5 times. Our interest coverage ratio has increased to 6.9 times From 4.5x9, our unencumbered NOI percentage has increased to 94% from 77%, and our credit revenue has improved It's A3A- from A1 to B2B plus This strong balance sheet position provides us with great flexibility Thanks, Kevin.
Just turning the last slide and offering a few summary comments. Q2 was a challenging quarter, Driven by the suddenness of the pandemic and the death of the downturn, so far, the impact on same Store performance has been driven by lower occupancy and elevated bad debt. Contributions From NOI, new development lease ups were less than expected due to construction delays and lease up absorption. We have curtailed that new development dramatically And I've not started any new community so far this year. Despite the strength in the Purcell market, we do expect construction costs to fall over the next few quarters, And we'll incorporate that into our capital allocation finance.
And then lastly, the balance sheet is very well positioned, both in absolute Since it's relative to prior downturns, which is Kevin Benedict, there's plenty of financial flexibility to Address challenges or opportunities as they arise. So with that, Max, we'll open the call for questions.
Our first question will come from Nick Joseph with Citi.
Thanks. I appreciate the color and the rationale behind pausing new starts. Just curious how long you think The delay will be until you actually start your projects again and then what signals are you looking at before actually making that decision to proceed? Nick, this is Matt. Yes, I mean, it is we have We could start.
And we are we do have a fairly high degree of conviction that hard costs should start to collect here. So that's the main thing we're looking at is kind of where our costs trending, what the subcontractor bid coverage look like. There may be one deal that we would start here that's kind of got some exceptional circumstances. This is actually an opportunity there, and we're looking at Starting with 3rd party joint venture capital, which is, as you know, very unusual for us. But for kind of for wholly owned, 1,000,000 sheets from the stores, That's really what we're watching.
It's kind of an interplay between potential reduction in hardtop and pricing reductions in MLIs on the other And kind of looking at what the total basis looks like, what costs look like relative to their long term term line and what rents and NOIs look like relative to their long Yes, Nick, it's hard to know exactly. If you look at last cycle, we've talked about 4 or 5 quarters. Part of my introductory comments around what this economic downturn might look like is maybe different from Others that we've seen were others may have been sort of maybe drifted a little bit more into the recession. This is quite sudden. And that was where it made them a quicker bounce back.
We think this should be a more drawn out bounce back and likely to be more and more You've heard certainly the Nike swooshed from all people normally hear in sort of a K shaped recovery where it's going to be very uneven depending upon Demographic and the population. So just given the public health And economic aspects of this one, it's hard to know for sure. But As we shared on that one slide, we did starting to see construction costs correctly. Last cycle, they corrected on the order of 15%, maybe a little bit more. And we're probably going to see kind of double digit Corrections before we start to have a little bit more faith that we're buying deals out of the base case, but we'll look to sort of next cycle.
Thanks. And then you announced the $500,000,000 share repurchase program. How do you think about actually executing on that? And where does it currently Yes. Nick, this is Kevin.
I'll jump in here and Henry want to add a couple of comments. You're right. As we saw in our earnings release, we didn't have a share repurchase program of $500,000,000 And really the genesis behind that is we believe our stock is, as you alluded to, trading at a compelling value, both absolutely and Relative to other investments, including the development. Because we have the balance sheet strength and liquidity to pursue program, we intend to do so. So as you can see in the earnings release, we're likely to fund that on a long term basis with asset sales and potentially incremental debt.
But We do intend to proceed and probably be intentionally on a measured basis to leave clarity on those sources. But I think At this point, that's probably our most attractive investment that we have today. I'd maybe just add a little bit to Kevin. I agree. I think you have 2 things working.
It's a much attractive investment, and you've got the disparity between what equity is costing and what some of the debt is costing that's being supported Our attrition is on the Fed right now, as we know. And our belief in all, there's not a lot of visibility on asset pricing. Yes. We're we feel pretty strongly that asset prices, I'm afraid, that you're with what equity prices have corrected. We've seen 930 percent on the equity and probably we think probably less than 10% on asset sales.
So That informs our conviction as well in terms of what the alternatives are in terms of the in terms of capital sources.
Our next question will come from Rich Hightower with Evercore.
Hey, good afternoon, guys.
So I'm on the second chart on Page 8, Just on the blended light term rent change chart, just help us understand some of the details there across new and renewals and What you're seeing currently, urban and suburban and maybe some of the weaker markets you mentioned, Boston, San Fran and LA, just help us understand some of the What goes into the mix there?
Yes. Rick, it's Sean. Happy to walk you through it a little bit. And as we noted on an effective basis, lending was down about 3% for the quarter. If you look at it on the lead space, it was down only about 40 basis points.
And certainly, based on what I mentioned in my prepared remarks, We've seen the greatest weakness in Northern and Southern California. And if you could double click through those regions, Probably the softest spots are San Francisco and throughout L. A, particularly in some of the entertainment oriented economies Around L. A, if you think about Hollywood, West Hollywood, Burbank, San Fernando Valley, etcetera. And then the other markets, Yes.
We're basically anywhere from sort of 0% to minus 2%. And across the other markets, The softest spots are probably New York City and throughout the urban submarkets within Boston. And as I mentioned in my prepared remarks, generally across the portfolio, What we're seeing in the urban submarkets is rent changes trailing suburban by about a couple of 100 basis points. And as you probably noted in the chart, Economic occupancy and fiscal occupancy are both trailing what we're seeing in those verticals of markets as well. So certainly a tougher place to be as it relates to both rent change and occupancy in those environments.
And as it relates to kind of where things are today, If you look at it in the context of July, effective rent change is down about 3.5%, a little bit better than June. And lease rent change is down about 2%. And in both cases, renewals do remain positive right now, sort of in the 50 to 70 basis point range, Slightly lower than what we experienced in Q2, but still positive in July at this point.
Okay. Sean, that's helpful. And then just thinking maybe a little more broadly on
Some of
the bullets highlighted in the prepared comments about the work from home shift and the fact that suburban is Forming urban. And I would also assume with respect to home purchases and given the price points in Avalon's markets, maybe you're a little more insulated From that effect than the average apartment landlord out there. So at what point does that sort of mix start to help Avalon in the Having a highly concentrated suburban portfolio, when do you think we'll really see that show up In the numbers there, as
you net positive, I think. Yes. Rich, it's John. I can provide a couple of comments and then Tim can chime in. I mean, it's really a function of how some of those factors evolve over the next few months here.
I mean, urban submarkets, we've mentioned several of the factors that are So I think what I mentioned in my prepared remarks is sort of the nature of the health crisis and economic environment will dictate when people sort of come back There are these submarkets in at least a more material way. And on the suburban side, it's really a function of Sort of portfolio mix. In some places, it's certainly very helpful. There are some submarkets where even though suburban is A little bit painful right now. I'll pick one specifically like Mountain View and Northern California, where outside of Q3, given their extended work from home policy, It seems to be a weaker submarket even though it's technologically considered suburban.
So I'm not sure there's a one size fits all answer here as it relates To that, let me get my general thoughts at this point, Tom. But, yes, maybe just Yes. As mentioned, suburban has been outperforming urban prior to the pandemic, and we have been seeing a trend both on the demand And it's Benqi here. Urban supply To outpace Suburban by a fair amount in our markets, but also on the demand side, which last cycle, Supply and demand are stronger in the urban submarkets. This cycle is probably going to be the opposite.
We're both superb We'll get you off sort of 'twenty one, 'nineteen where you're likely to see stronger demand in some of the suburban submarkets and more supply. And that's probably because Millennials, kind of a just more economic activity starting to occur in the suburbs and part of the support building. So As you see, more economic activity, that's how they're drawing more rental entry demand than the suburbs as well. But We already started to see that
Our next question will come from John Klotzky with GreenTree Advisors.
Thanks a lot. Sean, I wanted to back your comment about you see some visibility and lease occupancy heading into August. Does that comment hold for the current pockets of leases that you alluded to, L. A, Boston, San Fran? In short, Rajan, yes.
And we are starting to see some Do you see demand come back in some of these urban submarkets based on announcements that have been made today as it relates to hard to learning environments, Both on campus and distance learning and anecdotally getting a lot of feedback from some of the student population that Yes. We've had enough time at home. And even if they're only to be on campus a couple of days a week, they want their apartment back. So whether it holds or Obviously, it's a function of the health crisis and the decisions that are made across these university systems. But in general, I would say we are seeing it Relatively sort of stabilized a little bit.
That being said, between now year end, as I mentioned in my prepared remarks, Yes, health prices and the economic environment will dictate whether things kind of shift up or down in terms of demand as we move forward here. Makes sense. And then the 200 basis point drag from bad debt in the quarter on the residential portfolio, The opening remarks were something to the effect that has been evaluated. Is that a reasonable betting line just in the trajectory Over these coming months, we'll get meaningfully worse and meaningfully better. I guess I don't understand I don't know how to completely think Through markets like in L.
A. Where this eviction moratorium keeps getting kicked down the road. So just curious if comments around the Yes, John, happy to comment and then Kevin or Tim can chime in as well. I mean, at this point in time, it's obviously difficult to predict, given the nature of, you would have mentioned the health crisis, the macroeconomic environment. Obviously, there have been federal support for people Today, in terms of being able to sort of subsidize their incomes, which I think came to this morning in terms of personal income growth.
So I think assuming it's a relatively static environment through year end, you probably expect those sort of collection rates to hold within reason. But to the extent there is significant shift in any one of those variables in a meaningful way, obviously, they could pick it up or down As a result, I think those are the primary variables we'll all be monitoring to try terms of whether we think it's going to pick up and or down, so
Our next question will come from Jeff Spector with Bank of America.
Thank you. Good afternoon. Just want to go back to some of the big picture comments, Tim, that you've discussed so far, including some of the comments during the Q and A. And I very much appreciate how difficult it is to figure out the medium to long term. I was just thinking again your comments about The lower cost options elsewhere, without fees, increasing homeownership.
I mean, can you talk a little bit more how this is impacting, let's say, Avalon's Medium- to long term strategic plans, whether that includes new markets, I guess, can you share some thoughts on that? Yes. Sure, Jeff. I think we've spoken to this in the past. As Lenny has said, I mean, I think the pandemic is these These trends aren't necessarily new.
A lot of them are being accelerated. You can tell you, you can tell us our big tech and Employers in places like New York and California are already diversifying their workforces In other markets, whether it's Amazon in D. C. Or having bases in Austin or Denver. And so we want to be leveraged really to the innovation and knowledge economy.
And so that means kind of going with those workers around. And to the extent jobs employers continue to chase jobs rather, jobs sort of The job shaking employee rather than the employee chasing jobs in one of the in those markets. As far as we have into Denver and Southeast Florida. Now I would say one of the things is that you look at Just the fiscal situation of some of the blue states, obviously, are being exacerbated as well. And so I think that probably informs our thinking also in just The overall affordability driving some of the population in some of these markets, We want to be in a sort of spillover market.
We think what's happening is good for the innovation economy. So I don't think it's Bad, that's a story for San Jose and San Francisco and Boston, but recognize that some of Some of those benefits are going to spill over to some other sort of secondary innovation markets as well, and those would be good markets for us to be in. And so we're looking at a few things. 1 is to kind of reallocate or recycle capital, some capital in New York, certainly. And probably in the future, some out of California to both expansion our existing expansion markets as well as markets like DC, Seattle and Boston.
And then also potentially some new markets that we're not going to go in. And is that And appreciate the comments. I mean, I guess, your thoughts on work from home and the permanency of work from home, Does that impact the decision process at all? Or do you feel like that is it's just a temporary Adjustment right now, but maybe there'll be more going forward, but not to the extent that some in the media are portraying it, So I'm on the street at the train. Yes.
It's hard to know. I know that the office guys get that question a lot. I guess that sort of speaks from Our own experience, we would expect you to have more work from home activity kind of going forward. But there are certain jobs There are more kind of individual contributors where they can be efficient working away from the office space. That is not Close to the majority of the jobs in this company or most companies.
And so we view it as kind of a more of a marshmallow effect. It gives people a little bit more Questions really not where to live. If they want us to work from home, then secondly, they're probably not going to act as focused on career growth. We're probably not going to manage a lot of people working on phone at least over the next few years, in my view. So I would say, does it really affect Our view in terms of where we want to be, probably less so than the fact that big employers like the Google News and Apple The world are already diversifying their workforces in other markets With satellite operations there, so whether it's a satellite operation or people working from home, they're likely to go to some of the same markets, I would
Our next question will come from Rich Hill with Morgan Stanley.
I wanted to Follow along those lines of bigger picture questions and go back to
some of your prepared remarks.
Specifically about homeownership, we've seen some similar trends with homeownership, particularly under the age of 35 Cohort, do you think those are just near term given the decline that we've seen in interest rates? Or do you think there's a more secular shift going on there?
Yes. Rich, I can speak to another thing I have is I think part of it may be, if you just look at the composition of millennials, As well as the piggyback of the product, there's a lot more of those that are under 35 in that 30 to 35 cohorts than there were Yes. So they're starting to enter into this kind of prime home ownership. So I think a lot of it is being Stimulated by demographics and really being accelerated by what we're seeing in adjusted registered. We're not seeing it yet With our residents, reason for who actually went down to purchase them, but homeownership is going up nationally and has an impact on the overall rental pool It affects all of us as landlords at some level.
We may be a little we think we're probably less into the epicenter of it. It's probably mostly coming from single family rental and other demographics in other markets. But it does have an overall it does have an impact on the broader sort of run through, if you will.
Got it. That's helpful. I've been a little bit surprised there hasn't been more focus this earnings season on the election coming up in a couple of months And potentially, regulation depending upon what parties have power. I'm wondering if that is something that you're focused on. Obviously, the Biden plan has housing as a big focus And affordability on the other side of COVID-nineteen is obviously more challenged.
How are you thinking about that maybe over the medium to long term?
Richard, back to that, I mean, most of the regulatory risk we face is really at the local and state level, not as much at the national level because we're probably A little bit more concerned if there was another nominee that was a Democratic nominee, certainly at the national level. But Our markets have always been more regulated than other markets. We are in blue states. It's always part On new housing, which is self elevated rents and rent growth over time, I think the issue That you're starting to touch on is the key one, which is when it starts to weaken the price controls and rent controls, that becomes the issue for us And the type of rent control, certainly in New York and parts of California, we have vacancy deconstructed. That is That's usually pretty manageable in terms of as an owner of as an owner of policy.
We have to continue When you lose and you have controlled pricing on vacants, if they become available, that's the kind of rent control that industry we have to absolutely avoid. And it is It'll be awful for the housing markets, if that occurs. So that's something we're going to continue to watch. We're going to continue to fight as an industry because It's not effective for us as landlords, for sure, but effective for the housing market long term. It's not a way to solve any housing crisis at any local level.
It's politically expedient, but it's from a policy standpoint. It's absolutely clear, Paul. Understood.
And then one more question, if I may. In the past, you've done a really good job thinking about how Your development and your land development is really under option, you don't have to move forward with it. So I'm wondering, as you survey the landscape post COVID-nineteen, Are there any land that you have under option and maybe high barrier or blue states that If you might want to not move forward with and you mentioned Florida, I think earlier in your remarks. Are there any other markets where you prefer Maybe focused on the development going forward versus some of the markets that you're in right now.
Yes. Rich, it's Matt. As it relates to our current development rights pipeline, you're right. We only own 2 of those 28 deals Our landowner will be bought from a 3rd party. So we do have a lot of optionality.
And it's really deal by deal. There may be deals in there that We're not going to work without some type of restructuring. There are other deals that probably will work. And there's some deals where we may say the land It's a good price, and we may close on the land in Paris for a while, wait for hardtops to come down. So it's a little bit of all of the above.
It doesn't really factor into the geographic mix. It's really bottom up in terms of where we find the best opportunities. And so we have a couple of development rights in some of our expansion markets, including 2 in Denver and 1 in Florida that are working their way through the system. We have development rights in our legacy markets as well. I don't think we've seen any particular trend yet in terms of Kind of an impact to the land market or development economics more so in one market than another other than where you're seeing obviously WEN
Next question will come from Wes Golladay with RBC Capital Markets.
Hi, guys. Another development question for you. Wonder if you could frame up how the development pipeline is active. It's positioned relative to the headwinds you cite on Slide 6. And then basically trying to get a sense of Volatility around your 5.7% projected development yield.
I'm sorry, is that about the development underway or the development right to pipeline future? Yes. Sorry, the asset pipeline. I mean, I believe you guys Pivoted a few years ago to more of a suburban footprint, but I don't know if they technically qualify and review that as more
of the infill that you
cited in the heading on Page 6. Yes. I mean, when you look at the $2,400,000,000 in development underway, when you kind of look at in terms of right, the current deals We've done enough LinkedIn, if there's one that rents to market yet. And on those 5, actually, the rents are slightly ahead of growth levels by about $30 So Now the yields are a little bit behind because there's been some cost overruns on a couple of other deals. But generally speaking, so 5 of the 19 are more or less mark to market.
The other 14, you can handicap them. A lot of them are in markets that have seen less Downward rent pressure so far. It is a predominantly suburban portfolio. In fact, looking at I think the only deal In that, if we would consider urban other than Hollywood, which is under construction, would be one day in downtown Baltimore. And
Yes. Got it. And then
what about with the work from home trend? Are you noticing any demand for your larger units, people looking for maybe another room for an office or maybe room for the view? Yes. Wes, this is Sean. I mean, we've been digging into that.
And at least based on sort of early I would say it appears as though suburban direct entry product, which often is a townhome, It's doing a little bit better in the current environment. And there is a little bit mixed, but overall, that appears to be a positive trend for us in terms of that product type across the portfolio. And I would say just to add to that, this Matt, when you look at our development, as an industry, the average unit size has been trending down for the last cycle. It probably came down 10%. What we've seen at least the last near to our development starts, we have been inside, we started to move the other direction.
A lot of that is going to shift to more suburban That's right. But also even before the pandemic, we were starting to see just the demographics heading where there were greater demand for 3 bedroom units, Which we didn't use to hardly build at all. Now almost every project we build has a new 3 bedrooms in it and more of the kind of
Our next question will come from Nick Yulico with Scotiabank.
Hi, guys. This is Sumit Sharma in for Nick. Question about your bad debt expense. And I just want to be clear, maybe you've stated this Yes, I apologize for that band. But off the 2.7% of unselectable rent, I guess, how much was part of the bad debt provision or reserve?
Some of the peers have talked about reserves Off the tune of around, yes, 200 basis points or so. And just getting a sense of how much went in reserves, how much is deferred, how much is Stuart, this is Kevin O'Shea. I'm having difficulty hearing you, but maybe just to give you An overview of what we did with respect to bad debt, and then you can ask questions to the extent that I'm not responding to some of your questions. So first of all, our policies reserve delinquent base residential rent after 3 months and those delinquent items after 2 months. For residential revenue, we typically take a reserve of about 50 basis points of residential revenue, and we did so in Q2 in our same store portfolio.
In addition, in Q2, we took a further reserve of about 200 basis points or $10,700,000 including For residents who didn't pay anything during the quarter, that resulted in a total reserve for the same store residential revenue Portfolio of about 250 basis points to $13,600,000 Yes. So of course, we continue to caution our collection efforts, and we're certainly encouraged by leasing collection trends, With share of questions against unpaid April May rents improving about 97.5 percent for about 93%, 94% at month end. So That's the store in residential, right hand. Is that helpful? Is that responsive?
Yes. That's great. Thank you so much. And apologies to be sort of bad sound quality. Another question following up a different kind of Yes.
Just wondering, in terms of the concession activity, you actually provide a lot of information on urban versus suburban. Trying to understand where what kind of unit types are being are seeing the biggest concessions, 2 bedrooms, 3 bedrooms. I think a few moments ago, I want to talk about developments and how changing with the unit mix. I'm just wondering, from a concession standpoint, were you seeing The biggest drop in grants or where you have to give the largest amount of concession? Yes.
This is Sean. I'd give you some general thoughts on that. So first, as you might imagine from what we described in our prepared remarks, Concessions are generally greater in urban environments as compared to suburban environments. Let's start with that. Within urban environment, we tend to see fewer concessions on the more affordable price points, extend to be the Studios and 1 bedroom in those submarkets as compared to the larger units.
Initially, we thought there might be Sort of steadier demand for larger units and people looking to work from home with extra space, I think the affordability issue sort of weighed on that a little bit, And we've seen better performance out of the studios and smaller 1 bedroom. And in the suburban environment, I wouldn't say there's A common theme as it relates to Unitek. It's really submarket driven in the nature of the demographic within that environment. We've got very high quality Towns in suburban Boston with great schools and 2 and 3 bedrooms are solid demand and one's not quite as much. And if you revert to some submarkets in L.
A. With more affordable price points, and studios and 1 bedrooms are In better shape as compared to the larger 200 and 300 units given the shutdowns of the entertainment studios and such. So it's not a common theme as much as it relates to suburban unit type as much as the specific suburban geography. Great. Thank you so much.
Appreciate all the answers. Thanks. Yes.
Our next question will come from Alex Kalmus with Zelman and Associates.
Thank you for taking my question. Looking into bad debt and delinquencies, have you guys learned analysis on your resident base to see With what age, income or profession this is mostly centered on? Yes. Alex, this is Sean. We have to run some data on that.
And I guess what I would tell you is It's more industry specific than it is typical demographic makeup in terms of gender, age, things of that sort. It tends to be self employed, sort of freelance workers, content producers, folks like that that have been impacted most materially. And as some of our East communities, some of the service based sectors that have been impacted As well, whether it's food service, hotels, things of that sort, some of the occupations that Tim alluded to earlier in his opening remarks. So It really is more oxidation driven than anything else. Got it.
And Just a touch upon the Parkologia sales. How was the selling on that this quarter? And I noticed the average unit price was a little higher. So I'm assuming some of that tire units got sold. Was there any discount to February level that you could offer to enhance the sale process?
Alex, it's Matt. So the closings that we saw in the Q2 were almost completely deals that have been under contract Earlier than that? Not entirely. There were a few deals we did in the second part of the quick clauses, including, I think, our entire Penthouse units, So the average price to settle in any given time period is really more a function of Just what units happened to settle based on scheduled settlements and so on. So you can't draw a lot of completions, I don't think, from that.
We have 54 units closed right now. We have another 12 under contract. When we add that together, it adds up to a little bit more than 200,000,000 We have there certainly is negotiation, and there's probably more negotiation at the higher price points. And that was a trend even before The price has hit. So we have not really taken a different approach to pricing post COVID.
There just hasn't been enough frac, Enough traffic and transaction velocity in the market to really even justify it. I'm not sure that if we were to drop prices, we would And it's still pretty compelling value. And that was validated by the pretty strong sales pace we had before everything shut down in early March. So Yes, there is more supply coming, and I would say that there is a little bit more negotiation At the higher price points, we expected that to well below our expectations. Nothing has really changed with our pricing yet.
Our next question will come from Alexander Goldfarb with Piper Sandler.
So two questions. The first one is, do you guys have an idea of how many residents are living in your apartments who are paying rent but aren't actually there? So they've moved away, but they're still paying, right?
Yes. Alex, this is Sean. That's a tough number to come up with. So the blunt answer is no, we don't. And if they voluntarily come to us and say, Hey, I'm going to be gone for X period of time, can you do something for me?
There's not necessarily tracking mechanism for that. That would give you any sense of any real sense of accuracy there.
Okay. So as your apartment managers are seeing, I guess, maybe mail not being picked up or what have you, So we've got a way to sort of track and understand if those people plan on coming back or they're going to exit whenever the term ends?
Not necessarily. I mean, people have mail picked up. And when you think about buildings that are 500 units and they have 1,000 people in them, Yes. It's really hard to get a sense for that unless there is something specific related to a mail hold And we're aware of or package delivery. But I wouldn't say you could count on that as a representative sample that could give you an accurate estimate.
Okay. And then, Kevin,
on the development program, you guys were planning on doing meaningful starts this year, you haven't. At what point as you deliver, but you don't replace the delivery, at what point do the current capitalized costs start to burn off And that starts to those expenses start to accrete to the income statement. Like where how far would the delays have to go, meaning before We would see the expenses start to appear on the income statement because they could no longer be capitalized.
Hey, Al, this is Tim. Maybe I'll jump in and Tim may have something to offer. I mean, certainly, if we have people working in development or construction, they're not Working on a job, whether it's one that's under construction or one that's going through the planning process, they get expense. They go to the income statement. They don't get While we haven't started anything year to date, we still have a liquidity under construction and $4,000,000,000 after the process.
So we're still managing a $6,000,000,000 Pipeline, we are trying to right size it. If you look at this quarter, it's about 10% lower than the last 4 quarter average over total capitalized overhead. It's trending down as we've seen we've had some recent departures and retirements over the last 6 12 months or some senior folks as we try to They start to sort of rightsize it for the sort of the backside and where we currently are. You probably have You're welcome to have that group's comps instead of those. So if they're not doing things or if they're not keeping as much production, there's a sort of automatic Adjusting factors and the other needs as well.
But our objective is really just to be really to be well positioned and right side kind of for the Early part of next cycle, we'll be able to flex up if we need to. The opportunities arise The capitalized debt we had this quarter is about $11,000,000 About $6,500,000 of that is development, about $3,000,000 of that is construction and about A little over $1,000,000 of it's redevelopment. If you annualize, you get about $25,000,000 in development, about $12,000,000 in construction. That is a level that supports Canada and I think it's on about $800,000,000 to $900,000,000 sort of cross or minus. And that's what we're still geared for.
So To the extent we saw that over the next 3 or 4 years, it doesn't make sense to be doing that kind of volume. Obviously, headcount will I think, I think, Justin, but we suspect over the next couple of years, we're going to be in the existing sort of ramp up activity. We want to make sure we got the leadership And the right personnel in place. And they're still managing, as we go into this recession, about $6,000,000,000 worth of total pipeline, which is We're probably only about 25% off the kind of where it hits peak level, probably in the $7,500,000,000 to $8,000,000 range.
Our next question will come from Rob Stevenson with Janney.
Good afternoon, guys. What's the positive impact that you typically see in terms of traffic and leasing wise in May, June, July time period from the influx of new college graduates Werencing for the first time in your core markets in a normal year, and what have you seen thus far this year? It seems like very few college grads in your core markets We've actually rented apartments this year versus a normal year given how early COVID hit, and so that might be a big driver.
Yes. Rob, Sean, good question. A couple of thoughts on that. Not necessarily Specific data, since it's a little hard to capture, but in our particular case, we don't have a lot of student oriented assets. They're pretty Select across certain markets, particularly in the urban environment, I would say.
But your broader question really probably relates to the of the market that is really made up of the student population, it sort of brings the occupancy up in the entire market. That's something, to be honest, we're trying to get our arms around that. Not quite there yet in terms of what that represents in each one of those submarkets. But there are some markets like we have a property here in the district that's pretty excited to view that When they announced their plan to have a hybrid learning model, we did 80 leases in 1 week. So there are submarkets like that that are highly dependent upon it.
I think broader questions, one, we're still trying to answer, which is sort of collectively what the demand is. From the student population, it's one segment. And then from the short term and corporate rental market is the only segment we think the short term corporate piece is probably in the 2% to 3% range. I'm trying to understand that in terms of the student population, particularly as universities may shift their on campus housing Options, to the extent that they're trying to sort of identify some of those communities. So it's a little bit of moving target.
It's probably hard to answer right at Exact comment. But certainly, the peak time for that demand is as you described it to move them through the pre leasing season that you're going to see sort of Yes. Basically, April through June, what you might see on some of the student housing rates, it will want to be Buildings in the 90% -plus range as you get towards the end of July before they show up in August. So We're on track for that at some of the buildings, but there are places in and around urban Boston, Berkeley, places like that where they are falling short Because of the uncertainty around the ultimate learning model. Well, I mean, beyond the student stuff,
I mean, was really focused on the 21, 22 year olds who just graduated to have a job with, let's say, an investment bank, a tech company, a consulting firm or whatever If you normally get in New York, San Francisco, Boston, etcetera, renting for the first time, where they're bringing an offer letter to
you and they're leasing off
of that, Mean, that influx of students, of former students now people entering the workforce for the first time, mean, how significant is that typically in these Big sort of gateway cities.
And that's probably helpful to answer that has been stuff that's related to people who are coming in for kind of program, like a training program or some other kind of corporate program that you get 2% to 3% of the market. What you're really talking about is just ongoing demand as people are graduating from universities moving into the rental market. About the typical household contraction consolidation that you see in a downturn, that is part of it, which you're describing Kids that can't keep jobs, when they get out of college and stay at home or They go into a house with 6 guys, 6 people instead of getting their own apartment. So You'll see, in past recessions, we've seen occupancies followed by a couple of different basis points. You may still be seeing a little bit of new supply.
So That's all unusual to see. The contraction of household demand on the order of 1,000,000, 2,000,000 Housing units across the country in a normal downturn. And a big portion of that is, I think, exactly what we're really focusing on.
Okay. And then lastly for me, what are you guys seeing today versus at the beginning of the year in terms of construction costs, both hard and soft? I mean, how meaningful has been the delta? And where is the greatest amount of slack today? And Is there any of these buckets that are that you're seeing more pressures either up or down on now, given What's happening in single family or what's happening elsewhere or the falling off of new construction in other sectors?
Rob, this is Matt. We are starting to see it that it is early. So where we started to see it 1st is really in some of the smaller contract CapEx work. So if you think about it, those are the types of Jobs that are short in duration. So if you're a subcontractor that's doing a facade Restoration project for us or some concrete repair work, that might be a 2 or 3 months or 6 months job.
And if they finish 1 up, they don't So we are starting to see it there. And in some markets, we've seen mid single digit buyout savings on network, Which isn't all that meaningful, but given where we've been coming from, where we've just been seeing construction costs growing much faster than inflation for the last 4, 5 years, It is a significant change. On the new construction, it's probably still too early in almost all markets Because everything is underway, and there's a lot underway. We're going to have to get finished first. So again, what you're going to see at first is going to be in the early trades, earthwork, pipework, Demolition, maybe a little bit concrete.
And then we believe it's going to vary as well. So what we've heard others say is Maybe we're starting to see a little bit in South Florida because a big part of what drives that is also there's no wood fence and trucks in there, for one thing. It's all concrete because of Because of the hurricane COVID, and there's a lot of cruise ship restoration work and hospitality work that's not happening. It's been canceled. So The subject there has more excess capacity.
It hasn't really worked its way into most of our markets yet. Yes. Some commodities are down. Lumber is up. Lumber is up quite a bit right now.
So that's probably the response The single family market and just home renovation market. So there's some crosscurrents there, but it generally takes a while. Construction pricing is a lagging indicator, And it's going to take a while for it to work its way through the 15 RDs. Okay. Thanks, guys.
And our final question will come from Rich Anderson with SMBC.
Thanks. Good afternoon. So Kim mentioned or maybe somebody else, but the kind of suddenness of what happened to make A lot of decisions for you, particularly as it relates to development postponement. If memory serves in the 'eight, 'nine timeframe, you did have A sizable write off related to your development pipeline, and if I'm wrong on that, I apologize, but it's still going on memory. I'm curious though, fast forward to 12 years later today, is there anything about what happened and that I'm just wondering how that experience during the great financial crisis has It manifests itself in how you look today.
I know you mentioned the difference in balance sheet in your prepared remarks, but I'm just wondering just In terms of how you approach the business, particularly on the development side?
Yes. Rich, Tim, I I'd say it's not you, Ben, and land. And when you say we had, actually, we rolled off our head impairments on the order of about $80,000,000 total, and a good portion of that was in land. And I would just say relative to the size of the development of our pipeline, we've had deals where profits have been larger than that terms of value you created, sorry. I mean, the homebuilders were taking a fair amount of $1,000,000,000 We take a I think we take a fair amount of an order 60,000,000.
This time, we get done on land. And so we've been really very disciplined about maintaining optionality. And yes, some of the as I was talking earlier, some of the deals may not make, and we may have sellers that are unwilling to restructure, to be sent restructuring sort of Close the gap. And you could have some future write offs, I suspect. But it's really out of the pursuit cost, which is pretty cheap capital Well, to the size of the pipeline that we control.
So I would say the biggest issue is just we just don't have land inventory I have any significant, so this is Saketri for the last one. And the only thing I'd like to add, this is Kevin Rich, is just obviously, we've discussed many times in recent years. One key lesson to take from that long term is to be a whole lot more match funded with respect to the development underway in terms of having the long term capital in place. You see that lesson being applied here in a very visible way with respect to the 2 net voting we have underway right now is 95% already match So that obviously leaves us a lot more foot forward this time around to pursue opportunities that may pop up.
Right. And then secondly, a lot of talk in this call about suburbs beating the urban core. You guys are, I think, Correct me, Roland. On this one, I think you're 60 2 thirds suburban, 1 third urban. And perhaps you're still an expensive option in those suburbs.
Do you think that, that sort of breakout could ultimately help you out long term here as this sort of situation settles And that people maybe don't go all the way back in, but they come back close enough where it benefits you and your suburban portfolio.
Yes. Again, Rich, I think I saw it earlier. There already was a trend. We already were sort of at we started to tilt the portfolio Suburban. And if you look kind of at our history probably where we've created the most values and development pipeline, sort of kind of that suburban infill.
And I think as millennials get a little bit older, you see more active housing and suburbs. I think it's kind of urban light, Okay. Lifestyle mixed use kind of in infill suburban areas is probably provides offers one of the more attractive opportunities that's Less sense than an urban environment also has generally more affordable than We're looking to move it in urban areas. So we're already kind of moving in that direction. And maybe this just pushes us a little bit a little bit harder.
But So I think the demand factors that were already in place are just probably just being magnified by what's happened here in the last few
And with that, I will now turn the call back over to Tim Nunn for closing remarks.
Okay. Well, great. Thank you, Matt. I know all of you have a number of
Once again, that does conclude our call for today. Thank you for your participation. You may now disconnect.