Good morning, ladies and gentlemen, and welcome to AvalonBay Communities' first 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. You may enter the question- and- answer queue at any time during this call by pressing star one. If our question has been answered or you wish to remove yourself from the queue, press star two. If you are using a speakerphone, please lift the handset before asking your question, and we ask that you refrain from typing and having your cell phones turned off during the question- and- answer session. Your host for today's conference is Jason Reilley, Vice President of Investor Relations. Mr. Reilley, you may begin your conference.
Thank you, Kathy, and welcome to AvalonBay Communities' first quarter 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 afternoon's press release, as well as in the company's Form 10-K and Form 10-Q filed with the SEC. As usual, this press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during your review of our operating results and financial performance. With that, I'll turn the call over to Tim, Chairman and CEO of AvalonBay Communities, for his remarks. Tim?
Yeah. Thanks, Jason, welcome to our Q1 call. With me today are Kevin O'Shea, Sean Breslin, and Matt Birenbaum. We'll provide a brief commentary on the slides that we posted last night, all of us will be available for Q&A afterwards. Our comments today will focus on providing a summary of Q1 results, an update on operations so far this year, including through April, an overview of development activity and the status of construction sites, lastly, highlighting our liquidity position and credit profile. Before getting started, I'd just like to acknowledge that the last seven or eight weeks have been far from normal for any of us on this call, or any of our more than 3,000 associates at AvalonBay. Given our market footprint in large coastal metro areas in the U.S., we've certainly been impacted by this pandemic on a professional and personal level.
Many of us have had to learn to adjust to a different working environment at home while managing new and shifting family dynamics at the same time. Even more of our associates have been asked to leave the comfort and safety of their homes most every day to provide housing and service for the more than 100,000 residents that call one of our communities home. What we do is fundamentally essential, and we are grateful and inspired by our team's amazing dedication and thank them for the commitment they demonstrate every day in service to our customers. Let's turn to the results of the quarter, starting on slide four. It was a solid quarter. Highlights include core FFO growth of almost 4%, driven by healthy internal growth, with same-store revenue and NOI growth coming in at 3.1% and 3.0%, respectively.
All of our major regions, except Metro New York, New Jersey, posted same-store revenue growth of 3% or more in Q1. In Q1, we completed three development communities totaling $215 million at an average initial yield of 6.4%, continuing a track record of creating significant value through this platform over this cycle. Given the current economic situation, we have not started any new development or acquired any new communities so far this year. Lastly, we raised over $900 million in capital this past quarter at an average initial cost of 2.9%, with most of that coming from a $700 million 10-year bond deal at 2.3% completed in February, a record low reoffer rate for 10-year bond issuance in U.S. REIT history. With that, I'll turn it over to Sean, who will discuss portfolio operations, including what we've seen so far in April and early May. Sean?
All right. Thanks, Tim. Turning to slide five, the impact of COVID-19 and the various shelter-in-place orders had a material impact on leasing velocity in March, as noted in chart one, with year-over-year volume down roughly 40% from March 2019. In April, however, as a result of our teams becoming more proficient with virtual and no-contact tours, prospective residents becoming more comfortable venturing out to tour apartment homes, and the various incentives we offered to increase conversion rates, leasing velocity rebounded. It was only modestly below 2019 levels and similar to the volume of notices to vacate for the month. Unfortunately, the reduction in leasing volume in March coincided with our normal seasonal increase in the volume of notices to move out from our communities. As noted in chart two, this resulted in fewer move-ins and move-outs during the month of April.
Taken collectively, and as depicted on slide six, availability increased and occupancy suffered. As indicated in charts one and two on slide six, availability was trending well below 2019 levels throughout most of the first quarter, but spiked in the second half of March when leasing velocity fell materially. 30-day availability peaked at roughly 50 basis points greater than last year during the third week of March, but has ticked back down a bit over the past six weeks or so. The impact of reduced leasing volume in March ultimately impacted physical occupancy as well, as noted in chart three, with April down roughly 75 basis points from March, and 50 basis points from last year to 95.3%. In chart four, you can see the impact of the recent environment on April rent change, which ended the month at essentially zero.
The second reflects our efforts to help mitigate the impact of COVID-19 on residents by offering a no-rent increase lease renewal option to undecided folks. Our response to the weakening environment, which included offering incentives to increase prospective resident conversion rates, which did in fact increase from about 23% in March to 34% in April. Turning to slide seven, we collected about 96% of what we would have typically collected in an average month from our customers, which is noted in chart one. If you look at the collection rates by segment, the rate for our market rate customers was the highest, with our corporate housing or short-term rental customers, which only represent 3% of billed residential revenue, the lowest. In terms of May collections, over the past few days, we're trending at about 94.5% of normal levels, or about 150 basis points behind April.
It's early in the month. There are differences in how calendar lays out, with the first being on a Friday in May versus a Wednesday in April, and other nuances that influence daily payment volume. Moving to slide eight, the collection rate for our highest income customers has been the best, which isn't too surprising given the impact of the pandemic on the various service-related businesses throughout our markets. In terms of regional collection rates, the tech-led Pacific Northwest and Northern California regions have been the strongest, and Southern California the weakest. Unfortunately, the impact of the pandemic on entertainment and tourism businesses in Southern California has been pretty severe. Most of the studios and other businesses producing content have been shut down for several weeks now, and all the major tourism-related sites, including Disneyland, Universal Studios, and many other venues, are closed.
With that operational overview, I'll turn it over to Matt to address construction and development. Matt?
All right, great. Thanks, Sean. To provide an update on how the pandemic is impacting our construction operations, slide nine shows our 19 active development communities across our eight regions. We started to experience slowdowns in the second half of March in Northern California and Seattle as regional shelter-in-place orders were announced and availability of both labor and inspection started to be impacted. By early April, the Northeast saw similar impacts, such that in April, across all 19 projects, our average daily manpower was reduced by an average of roughly 50%, with wide variations as reflected on the slide. Projects indicated in green have seen relatively little impact, while those in yellow have been proceeding at a significantly reduced pace, and those in red are temporarily shut down except for basic life safety and asset preservation activity.
Residential construction is considered an essential activity in many jurisdictions, and just in the last week or so, we've started to see a lifting of some of the more extreme restrictions, and the four projects in Seattle and the Bay Area just recently moved from red to yellow. We have been working diligently to adjust our on-site health and safety practices to ensure appropriate social distancing among our subcontractor trade partners, add daily health checks and on-site wash stations, and move our supervisory staff to staggered shifts as part of our ongoing response. These 19 development communities represent a projected total capital cost of $2.4 billion, which is our lowest volume of development underway since 2013.
As shown on slide 10, we shifted to a more cautious stance as far back as 2017, and our development starts over the past two years have averaged just $800 million, a little more than half of our mid-cycle run rate of $1.4 billion per year. This puts us in a strong position as we navigate the shift from expansion to recession. Slide 11 shows a breakdown of our future development rights. We've been managing this pipeline of future growth opportunities to provide us with maximum flexibility at relatively modest cost and control over $4 billion of next cycle development projects with a total investment of just $120 million.
The development rights pipeline includes 28 different projects with more than 20% of the projected capital in flexible public-private partnership deals and another 20% in asset densification opportunities where we are pursuing entitlements to add additional apartment homes at existing stabilized communities. Both of these types of opportunities offer flexibility to align timing with favorable conditions in the construction and capital markets. Kevin will now provide some comments on our liquidity and balance sheets.
Thanks, Matt. Moving to slide 12. As shown on the next few slides, we entered this recession very well prepared from a financial perspective with a healthy liquidity position, modest near-term maturities, and a well-positioned balance sheet. Turning first to liquidity, as you can see on slide 12, our liquidity at quarter end totaled $1.8 billion from our credit facility and cash on hand. This compares to near $900 million in remaining expenditures on development underway over the next several years, of which about $400 million is expected to be spent over the remainder of 2020. As a result, at quarter end, our $1.8 billion in liquidity exceeds remaining spend on development in 2020 by roughly $1.4 billion.
Our liquidity exceeds total remaining spend on development over the next several years by nearly $1 billion. Turning next 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 $70 million of debt maturing in late 2020, and only $330 million in debt maturing in 2021, for a total of $400 million in debt maturities over the next seven quarters. Looking out over the balance of 2020 and incorporating both development spend and debt maturities, our quarter-end liquidity of $1.8 billion exceeds remaining debt maturities and spend on development over the rest of 2020 by $1.3 billion. In addition, our liquidity exceeds all of our remaining development spend over the next several years and all of our debt maturities through 2021 by $500 million.
You can see from this that we enjoy healthy liquidity relative to our open commitments through 2021. In addition, we also enjoy considerable incremental liquidity from cash flow from operations in excess of dividends, as well as from our ability to source attractively priced debt capital from the unsecured and secured debt markets to the extent the asset and equity markets remain unattractively priced. In this regard, at quarter end, our net debt to core EBITDA of 4.6x was below our target range of 5x to 6x , leaving us meaningful capacity to absorb leverage increases as we proceed through these challenging times. Our unencumbered NOI was at or near an all-time high of 93%, reflecting a large unencumbered pool of assets that we could tap, if necessary, for additional secured debt capital. With that, I'll turn it back to Tim.
Great. Thanks, Kevin. Just wrapping up and turning now to slide 14. Overall, Q1 was a very good quarter, with results a bit better than we had expected, despite the slowdown we began to experience in the second half of March. In April, we felt much of the impact of the shutdown, certainly, although we were able to still collect most of what was billed for the month, with only 6% uncollected by month-end, which is about 400 basis points lower than normal. Progress at many of our construction sites was impacted by the pandemic. We expect that orders by some of the state and local governments to temporarily halt inspections and construction will result in the delay of delivery and occupancy schedules at several communities, which in turn will push some of the lease-up NOI projected for 2020 into next year.
Most sites that have been impacted are currently in the process of either reopening or are slowly returning to full manpower, as most states are now permitting new construction as an essential service, as Matt had mentioned. Our shadow pipeline of $4 billion in development rights, which is controlled mostly through options or represent densification opportunities at existing communities, offers good flexibility in terms of timing future starts when supported by market conditions. Lastly, as Kevin just mentioned, we're in great shape financially. We have ample liquidity to fund existing investment commitments, a modest level of debt maturing over the next several quarters, and strong access at attractive pricing to the debt markets. With that, Cassie, we're ready to open up the call for questions.
Thank you. As a reminder, to ask a question, please press star one. We will take our first question from Nicholas Joseph with Citi.
Thanks. Hope you guys are doing well. Just first maybe on construction. Obviously, the delays that you've seen are also being seen really across the space. I was wondering how that impacts expected supply in 2020 and on average, how long you think individual projects will be delayed in terms of deliveries.
Sure, Nick, this is Matt. In terms of what happens to total deliveries in 2020, obviously, I think it's too early to tell. What we found the last couple years, even before the pandemic, was that deliveries wound up being 10%-15% below what we had thought at the beginning of the year, just due to labor constraints, inspection constraints, and so on. Certainly, I would expect deliveries to be down by more than that relative to what maybe third-party reports were at the beginning of the year. It really depends, obviously, on how things play out over the next couple of months. As it relates to our pipeline, so far what we've seen is, and what's reflected on our supplemental, five projects we've delayed initial occupancy by a couple of months, call it.
Six projects, as of right now, we think are probably the final completion's going to be delayed by about a quarter. That's maybe a third of our 19 that are actively underway right now. Some of the others are either in areas that have been less impacted or are early enough in their process that they haven't been materially slowed down. Obviously, that could change, that's the way we see it as of right now.
Thanks. Just as states and different cities start to reopen, how are you thinking about kind of repositioning your amenity space to allow for social distancing? Maybe medium and longer term for the developments under progress or any kind of future developments, how do you think about changes to different amenity space, given maybe potential bigger picture trends such as work from home or anything else?
Yeah, Nick, this is Sean. I'll take that one to start, and others can jump in if they like. In terms of the existing amenity space, yeah, we do have a team that is taking a look at what the occupancy standards are for different types of spaces.
Not only at our communities, but at our offices as well, and what kind of limitations that we'll place on the occupancy limits that were in place before the pandemic. We're still going to see that reduced pretty materially. It depends on the type of space, depending on whether you're talking about fitness center equipment that was spaced two feet apart. We may have to go back and redistribute the equipment to have more spacing, as an example. Chill spaces where there were soft seating that was side by side with tables around, that may have to be a space where we just reduce the number of items in there in terms of chairs. The same thing in terms of our swimming pool.
There's a fair amount of work underway to re-densify the various spaces at our communities to make sure they comply with the proper social distancing protocols, and it's just going to take some time to work through each one. In terms of the longer-term trend, it's probably a little too early to tell now, but certainly there was a trend to see more people working from home, whether they were telecommuting or whether they were just independent contractors working from home that are producing content or in a contracting business and things of that sort for different types of industries. Entertainment in particular comes to mind for a place like L.A. That trend will likely continue. I think it's probably a reasonable conclusion from what we see, but to what degree, it's probably too early to tell at this point.
Thank you.
Yeah.
We'll take our next question from Rich Hightower with Evercore.
Hey, good afternoon, guys. Hope all is well. I wanted to get your reaction to one of your competitor's comments yesterday regarding a little bit more underperformance in the garden-style communities versus high rises vis-à-vis collections. Are you seeing the same in your portfolio, or do you have any comments along those lines?
Yeah, Rich, it's Sean. I can share a few thoughts on that, just how we've looked at collection rates maybe a few different ways. We talked about it by segment in terms of what was presented on the slides and in my prepared remarks. In terms of some other metrics that we look at and have been following, first is sort of price point, As versus Bs. As are running about 100 basis points higher than Bs at this point in time. We look suburban, urban. What we're generally seeing across most of the market, the suburbans are performing by about 25 basis points or so. A little bit, but not terribly material.
Probably the one exception is New York, where the urban environment collection rate is better than the suburbs, given the impact we've seen in Westchester has been pretty material in terms of the pandemic. Then in terms of high rise versus garden and mid-rise, high rise is slightly better, but there's not a lot of high-rise product to benchmark it against, to be honest. Most of that for our portfolio is going to be in New York, a little bit in D.C. It's just not a big sample size, so I probably wouldn't draw too many conclusions about the product type differences.
Okay, maybe a little bit of differentiation there in terms of what you're seeing versus maybe, I guess, elsewhere in REIT land. Okay, that's helpful color. I guess, just as you think about foot traffic and demand patterns picking up now that we're into May and things have kind of come off the bottom, are you seeing any differentiation between suburban and urban within the portfolio along those lines?
Not material at this point. It's more market driven, I'd say, where you've got certainly the hotspots are a little more sensitive to the rebound, and we're seeing people want to still continue with more of the virtual tours as opposed to self-guided, as opposed to maybe like the Mid-Atlantic where people seem to be more comfortable given the state of the environment either with self-guided tours for the most part at this point and not as many virtual tours. I think it's really a market-based dynamic as opposed to maybe price point at this point or location, as you pointed out, urban versus suburban.
Okay, great. Thank you.
We'll take our next question from Jeff Spector with Bank of America.
Hi, everyone. This is actually Alua Askarbek there for Jeff Spector. Thank you for taking the questions today. I was just wondering if you guys could give some more color on the condo sales going on right now. I think you mentioned 41 were under contract in 4Q 2019 on the call. I was just wondering, I assume all of those were the ones that were closed so far. Are there any new contracts underway? Is the market active? Are you expecting to take a lot of price cuts, or are you just holding off on this in general?
Sure. This is Matt. I think in case some people couldn't hear the question, it was about Columbus Circle condo sales and recent progress. As of today, we have 41 units closed and have generated $129 million. That's an average price of $3.15 million per condo. We have 22 others under contract with binding deposits. That represents another $70 million of proceeds. That's actually a slightly higher price, $3.17 million, $3.18 million per unit. The sales activity, the new contract activity was pretty strong in January and February.
In fact, if you go back to our first quarter call, we had 54 contracts at that time. We've actually added nine since then, or about $40 million in incremental sales since the first quarter call. Really all that came in February and the first half of March, because once the stay-at-home orders came into place, we went to 100% virtual tours in mid-March with our sales agent there. Traffic did slow dramatically in the back half of March and the early half of April. I will say in the last just two or three weeks, traffic has picked back up. Although they're virtual tours, traffic is back up to over 30 per week, which is a pretty strong number and comparable to where it was before things stopped in mid-March.
Until people can actually get in and physically see the product, which we hope they'll be able to do within the next month or so, we won't really know how that traffic might convert to additional contracts. Pricing has been consistent. We haven't really seen a difference in terms of the pricing levels, either asking or what we're achieving, for the last 10 or 15, 20 contracts in the early contracts. There's a lot of different price points in the building, depending what line and what floor. It's not exactly apples to apples, but so far, we haven't seen any impact there yet. Again, until we really get people back into the building and start seeing some additional new contract activity, which hopefully will happen soon, we'll have a better sense.
Okay, great. Thank you.
We'll take our next question from John Pawlowski with Green Street Advisors.
Hey, thanks. Sean, as you guys roll out concessions in different markets, which markets are responding better in terms of traffic coming in when you roll out specials? Which few markets just aren't responding no matter how generous the concessions become?
Yeah, John, the response has been pretty healthy across most of the markets. I guess I'd have to tell you that based on what you probably have heard from others, and are just pointing out some of the weakness in L.A., it's probably taken slightly more concessions on average in the L.A. market as compared to others, to get those conversion rates to reasonable levels. In terms of the rebound, for the most part, I would say that it's been pretty steady with some limited exceptions, and the exceptions really more relate to the hotspots. I'll just be specific in and around New York, where people are still pretty hesitant, given the environment, to be out shopping for apartments.
People are doing virtual tours, and the concessions are reasonable, but not as much as what was required in L.A. to get people to spur to action, just given what was happening in that market environment. Which was already weak, as you may recall, to begin the year. The pandemic certainly only made it that much more difficult in terms of people who are qualified being able to come out and shop for an apartment and be able to afford to rent an apartment, given what was happening with all the Universal Studios being closed and a lot of people that produce content in Southern California, those shops being closed. That's why the one market where it's been a little more challenging.
Okay. Last one from me, just a question about D.C. and the defensiveness of that market. Obviously, a winner on a relative basis during the GFC. In your minds, the price point of your portfolio in the D.C. Metro and the employer base and how that's shifted, is D.C. different this time, or would you still put it up there against any other market in the next 12 to 24 months, just in terms of rent growth and occupancy trends?
Yeah, based on what we know as of now, and just thinking about the composition of the workforce, I think D.C. should hold up relatively well. If you think about the nature of the pandemic and how things have started and the impact on joblessness to date, for the most part, as opposed to a trickle-down, it's really a trickle-up type thing where a lot of the job losses are heavily concentrated at those lower-level service jobs. You're talking about food service, whether it's bars, restaurants, hotel workers, things of that sort. It may trickle up some. In certain geographies where people are paid well, again, like L.A. to produce content, maybe disproportionate impact. D.C., highly educated population, a lot of professional services, defense, et cetera, would expect it to hold up relatively well.
We've seen that thus far, even though it's only been sort of six weeks at this point in terms of what's happening. Others may have a different thought to add.
No, I agree. Between the knowledge base, the knowledge nature of the economy, the federal government. State and local governments are going to be pinched, and I think you're going to see cutbacks there, but not as much in the area of the federal government. I think it should stand up pretty well. I think D.C. was hurt a little bit initially just because of our exposure to hospitality. You have obviously both Hilton and Marriott here, which had massive furloughs early on in the pandemic. I think over time, Sean is right. I would expect it to stand up pretty well relative to the U.S. overall, John.
Okay, great. Thanks for the time.
I'll take our next question from Austin Wurschmidt with KeyBanc.
Hey, good afternoon, everyone. I was curious if you were to negotiate a new contract today on a construction project, where do you think hard costs would be versus pre-COVID-19?
Yeah. Good question, Austin. It's Matt. We certainly think the direction is headed down. I think as you sit here in this very moment, I'm not sure that you would see that yet. In several of our projects, we have decided to defer. One of the reasons we deferred some of our potential 2020 starts is because we think that there will be a better buying opportunity in, I don't know, three, four quarters maybe. I think it takes a while to work its way through the system. Probably we'll see it first in some of the early trades, where concrete or site work, paving, where deals aren't starting. Those folks will start to see they have excess capacity and probably start to cut their pricing first.
It'll probably take longer before it gets to some of the finished trades where there's plenty of stuff underway that's going to need to be finished. If anything, may take longer to get finished over the next four to six quarters. One of the advantages we have is because 90%-plus of our construction, we are our own general contractor. We can kind of time that and play that strategically a little more than if we were using a third-party general contractor, which is the way a lot of the private side of the business works. Still too early to tell. We'll see what happens. In the last downturn, it was down maybe 15%, and that was an extreme correction. Time will tell. I think Tim wanted to add something.
Yeah, Austin, I'd just say, I mean, going into this, obviously, we've been seeing a lot of pressure on construction costs. We've probably been seeing 6%-8% increases for the last three years. It was probably already well above trend, and that provides us a little bit more conviction that we're likely to see a correction. Certainly in terms of wages, commodities, materials, profits of subcontractors, those should all come down, putting downward pressure on pricing. Offsetting that somewhat, we would expect a little bit higher general conditions, just given changing protocols, social distancing, things like that, and perhaps productivity being a little bit strained. Offset again by, as subcontractors start to reduce their workforce, they're left often with their most productive crews, and you oftentimes get cost benefits from that as you come out of a downturn in the early parts of an expansion.
Overall, we do expect costs to come down. They're going to need to, just to make sense of the economics, given NOIs are flat on their way down, and capital costs, if anything, are up since the beginning of the pandemic. You're looking at both sort of the bond and the equity markets, obviously.
That's really helpful. You guys had previously expected to start $900 million. Matt, I think you alluded to some of those projects you delayed purposefully with the potential for costs to come in. What % of that $900 million are costs fully baked at this point?
I would say none of it. Are you talking about the cost or the start commitment? We haven't committed to starting anything this year.
No, the cost on some of those projects.
Yeah. The only cost that would be baked would be where we bought the land already. I think two of those nine, and we did buy two parcels of land in the first quarter that related to deals that could have been or could be 2020 starts. We spent $38 million on those two deals so far. A little bit of the soft cost is baked, but we haven't bought any of the construction on any of those jobs.
Okay. Understood. Thank you. Last one for me, Kevin, maybe, to pull you in here a bit. The balance sheet's certainly in great shape, if you don't start any or only a small subset of that $900 million, where do you expect leverage to finish the year?
Austin, we're probably going to have to provide a more fulsome update on what we expect our capital plan to be for 2020 when we have our mid-year call and provide clearer visibility on a whole range of things, including not only NOI, but also investment activity, and capital markets activity. We're standing right now at a remarkably low leverage level of net debt to EBITDA of 4.6x versus a target range of five to 6x . That's intentional. We very much drove that leverage number down over the last few years to give us more scope and more capacity as we might have to pivot through a downturn. We find ourselves kind of in the spot we had hoped we would be, which provides us an awful lot of flexibility to respond to opportunities that may present themselves here in the coming months.
As well as capacity to take on debt if need be, to pull through incremental development spend. As I pointed out in my opening remarks, we've already got abundant liquidity here relative to our open commitments here over the near term. From a capital plan standpoint, although we withdrew guidance, when we provided our guidance, our initial expectation was to raise external capital of $1.4 billion. We've already raised $900 million of that. We'll sort of through the year and raise two-thirds of what we initially had hoped to raise. We may not need to raise as much as all that. I think the bottom line answer to your question is, while we haven't updated our guidance, I think our capital needs going forward are pretty modest.
You can probably, looking at the balance sheet in terms of absolute debt levels, where it is, it's probably not going to change a whole lot from here based on what we know today.
No, that's helpful. I guess I was just getting at it seems like it could be lower to the extent you get some lease up and you don't have the incremental spend. We'll wait and see what you have to say too, Q. Thank you.
Sure.
Take our next question from Nick Yulico with Scotiabank.
Hi, this is Sumit from Scotia, and for Nick. Thank you for taking the question. Just following up on the development discussion. You mentioned as a footnote that you've lowered the yields on your developments. I'm just wondering if you could give a little more color as to what kind of yield reduction you're looking at for near term or developments in lease-up versus, let's say, stuff that's going out in 2021, 2022.
Sorry, can you repeat the question? This is Matt. The question was about the yields shown on the development?
Yeah. You footnoted the yield as slightly reduced, saying that you brought down the assumptions for developments nearing completion on these subs. Just trying to get a sense of what's the split in the yield reduction, particularly for developments that are more near term in 2020, let's say.
As a general rule, our practice has been that when a deal gets more than 20% leased, then we kind of remark the rents to market to reflect the experience that we're actually having. Until that time, we tend to carry the rents at what we initially underwrote. We've talked for years about the fact that we don't trend rents, and that's what we mean by that. In this particular release, we only have the three deals that completed, and in that case, those rents reflect the actual rent roll in place. Those are all more than 90% leased as on the schedule. There's three other communities where we have enough leasing done that we've reflected the most current rents there on the chart there on Attachment A.
The other 16 assets, we haven't done enough leasing yet, so those are still the original pro forma rents. That's consistent with what our practice has always been. I guess we did add a note just to make clear that we have not endeavored to update those because of any changes in the environment related to the pandemic. We're still carrying the rents that were in the initial pro forma and when we get leasing activity, we will adjust them accordingly. It's really not any change from our current practice. I think it's just an additional disclosure to make sure folks understood that it's a more volatile environment than it's been. Sean, do you want to talk to kind of how the current lease-
Just to add one thing on that. As Matt indicated, just for the first quarter, there were six assets in lease-up. If you look across the rents for those six assets, four of them were producing rents at that time, kind of average for the quarter, that were above the original pro forma. One was equivalent to our original pro forma, one deal, kind of in northern Seattle, was modestly below our original pro forma. When you blend all that together, rents at that point in time were roughly 3% above pro forma, or around $80 or so. There were some cost changes on those deals. The net reduction in yield really was only about 10 basis points to a weighted average of 5.9. Really immaterial in the context of the whole basket.
Great. Thank you so much.
I'll take our next question from John Guinee with Stifel.
Oh, great. John Guinee here. Two quick questions. One is, has this situation given you any thoughts on speeding up or slowing down into other markets such as South Florida and Denver? Second, if there is a slowdown in development starts in 2020, how would that affect G&A and interest costs in 2021 as you can no longer capitalize people and development interest expense?
Yeah. John, this is Tim. I'll maybe take the first and, Kevin, I don't know if you want to take the second piece of it or not. With respect to our market footprint, as we've talked about in the past, we happen to potentially diversify a bit of our exposure to the larger Coast markets into other knowledge economy-type markets, part of which drove our entry into Denver and to Southeast Florida for sure. There have been other markets that have been on our screen as well. We've been pretty active in terms of our investment in both those markets, both in terms of acquisitions and new development and also funding third-party developers. We try to really kind of sort of activate all the levers, if you will, with respect to those markets. We really haven't been held back by desire to get in those markets.
It's a function as much of the opportunity as anything. I would expect that to continue, that we'll continue to sort of trim from some markets and recycle some capital, or to the extent it makes sense to grow the balance sheet to invest capital in those markets, we can do that as well. Right now it's more through debt and asset recycling. I don't think anything's changed there. We'll continue to evaluate other markets that we think it could make sense for us to be in long term, that we think are
Over index of the innovation economy, and therefore, we think we'll outperform over a long period of time from a demand standpoint. I think your second question had to do with G&A around development. I can maybe start that.
Sure.
Kevin, if you want to come in. We're always going to try to right-size the development organization to what we view the opportunity set over the next two to three years. To the extent we delay deals this year, it means we're probably going to have more stacking up in 2021 or 2022. Part of it is to make sure that you're properly positioned, not just for what you have to do for the next six months, but really for the platform over the next three or four years. To the extent this becomes a very protracted recession, that changes the calculus obviously. That's not how we're viewing the environment today. We are viewing this as a kind of a slow build up from a sharp downturn.
If we do see meaningful contraction in construction costs for the balance of 2020, as you start to see some recovery in 2021, you start to see 2022, 2023 could be a really good time to be delivering a new product, which would argue for heightened starts in 2021. We want to make sure we've got the right size, development and construction organization really over the next three to four years, not just over the next six months. Not much has changed in terms of our view that it needs to change material, in part because we'd already brought it down from, as Matt had mentioned, from around $1.4 billion to roughly $800 million sort of late cycle. It was already kind of sized for late cycle, downturn type dynamics. Kevin.
Yeah, maybe just a couple of things. As a result of some of those, the decline in start volume, we did have some recent staff reductions in our capitalized groups last year or so. When we put our budget together for this year, we did expect capitalized overhead for 2020 to be a bit below what it was in 2019. If you look at what happened in the first quarter, capitalized overhead did sequentially increase a little bit in the first quarter due to a few one-time items such as increased benefits and payroll costs. For full year 2020, we would expect that capitalized overhead run rate would decline in the back half of the year somewhat, based on what we know today.
Great. Thank you.
We'll take our next question from Alexander Goldfarb with Piper Sandler.
Hey, good afternoon. Just two questions from me. One, there was a footnote in the release about the impact of lost fees, $1.4 million per month. Can you just talk about your expectations? I'm assuming for the eviction moratorium market, obviously there are no late fees. I'm guessing wherever you don't have amenities open, you aren't charging amenities. How should we think about this $1.4 million a month? Is that something we should be thinking about for the next few months? Is your view that within whatever, maybe by midsummer, a bunch of communities will fully be open where this number won't be as big as it is right now?
Yeah, Alex, this is Sean. Just to give you some perspective, about 80% of that $1.4 million was in way of common area amenity fees because our amenities are closed. Our expectation is you're going to see a kind of slow rebuild of that line item over the next few months as states begin to reopen. We resized our occupancy limits, as I was describing earlier in response to a question, that it will slowly rebuild. We don't expect it to snap back, I guess I would say, just because the pace of opening is going to be different by jurisdiction based on the local market environment. That's the majority of it that should slowly rebuild. The rest of it was small stuff related to some late fees and credit card convenience fees and things of that sort.
Okay. On your line of credit, you guys had drawn the $750, and then you just paid back the $535. Sounds like you have about $150 million or so rough numbers on condo sales. It's pretty quick that you guys pulled it down and then paid it back. What shifted in your thinking? Was it more that, hey, we weren't sure if banks were going to fund, or we weren't sure if the Fed was going to be there? Was it just once you guys delayed a bunch of projects, suddenly you realized that you didn't need all that money at once?
Hey, Alex, this is Kevin. We drew a portion of our line of credit, basically three-eighths of it, $750 out of the $1.75 billion in mid-March. We really did it on a precautionary basis, not because of anything in our business, not because of our development activities, not because we had any particular use. We didn't have commercial paper. There was really nothing related to AvalonBay that caused us to draw that $750. It was really just a reaction to the initial stage of the pandemic and its impact on the capital markets, and before the Fed had fully stepped in to stabilize the markets.
It was really done on a precautionary basis to ensure that we had greater control over the capital that would give us incremental abundant time and room to maneuver through what we thought would be a choppy set of months ahead of us.
Yeah. Maybe just to add to that, Alex. Once the Fed came in, obviously the bond markets became very constructive, and we had confidence we'd have access to bond markets if we needed to. That was the reason that ultimately just paid it back.
Okay. Thank you.
I'll take our next question from Rich Anderson with SMBC.
Yeah. Thanks. Good afternoon, everyone. First question. This whole thing started to take effect at the beginning of what would be considered the heavy leasing season for multifamily. My first guess was perhaps that was a good thing. I thought about it, maybe it was a bad thing because there was more activity and tenants maybe had an arrow in their quiver to negotiate. What do you think? Not that we could've changed it, do you think the industry or yourself was negatively impacted by the timing, or how do you think that played out from a cadence standpoint?
Rich, Tim here. It's hard to know. The one thing I would say, when you are in the peak leasing season, it is when we get most of our rent growth for the year. You have both the benefit of better market pricing and more leasing velocity, your rent roll is increasing. You kind of earn it all kind of in that March to July timeframe, obviously that's challenged right now. To the extent you can time pandemics, I may argue for a late fall start. We have a lot of things out of our control. We haven't gotten there yet.
Yeah. Come on, can't you guys do anything right? The second question is maybe perhaps a more realistic and longer-term vision.
We'll fire up the lab.
You guys are thought of as sort of visionaries, and I don't know if your different unique product types and price points came out of the Great Recession, but let's pretend for the sake of this question they did. Do you feel like that there is an evolution to multifamily as a consequence of all this? Maybe more comparable with a work-from-home environment, maybe more of a build-out of internal office space or technology enhancements or laser printers or whatever might people be needing right now that they don't have because they're working from home. Is that something that you think, or maybe there's another alternative about how multifamily will evolve out of this? Do you have any idea, or have you thought about it at all about what the change in the basic fundamentals of the industry might look like five years from now?
Rich, Tim again. In terms of demand for multifamily, I think that's going to continue to be driven by the nature of the households. There's been such great growth in single-person households. That's what really what drives demand for our business. Most of our households are singles and professional couples, very few children. In terms of kind of the product and the service, I do think you'll probably see some of this work from home take strong hold. There's already a trend that had started, I think, that Sean alluded to in some of his remarks. I think there's a good basis for expecting that that might accelerate a bit. We had already started putting coworking lounges and spaces with meeting rooms in all of our communities.
They may need to be a little bit bigger now just to provide a little bit more space, but they were pretty good size to begin with. If you think about it from a resident standpoint, they might prefer that environment to Starbucks, which is a much more controlled environment if they're going to work from someplace other than the office. I think similarly, there's been a movement towards much bigger, grander fitness centers. I think you're going to continue to see that. I think people are going to have more faith and comfort in working out in a community with their peers than in maybe a large club with a bunch of high schoolers who aren't cleaning up equipment and things like that.
Within the unit, another trend that had already started, I think that might accelerate, is just more flexible, open unit spaces that the nature of the space can change during the course of the day based upon kind of where you are in your day. Where kind of kitchen, dining spaces convert to office spaces. My office faces an apartment community right across the street, and I've noticed a number of people have sort of set up their desk right up against the window, where I don't think that's where it was to begin with because they're just spending a good part of their day there now. I think people will start to think about that in terms of unit design, that folks may be using the space more during the day than they have historically.
Certainly, just the need for broadband and high speed and reliability there, and anything that we can do to kind of support that. I guess the last thing I just mentioned is kind of the smart home initiative, which a lot of folks are pursuing now. I think one of the most intriguing aspects of that is the remote entry.
Goods and services to sort of flow freely throughout a community, rather than having to be handled by somebody at a front desk or in a central office that people can get access right up to the unit and potentially, right into the unit to the extent that the resident has to step away. I think you'll see all those things that were trends anyway, perhaps just accelerate as a result of this.
Yeah, really good call. Thanks, Tim. Appreciate it.
Sure.
As a reminder, if you would like to ask a question, please press star one. This will be your last chance to enter the queue. We will take our next question from Hardik Goel with Zelman.
Hey. Sorry, guys. Can you hear me?
Yeah. Now go ahead.
Yeah. Yes, thank you.
Thank you for taking my question.
Yes, we can hear you.
I was just wondering if I look at your development pipeline, I know Matt talked about how you guys don't trend rents, and you only really update them when there's 20% leasing. If you look at the development pipeline that's going to deliver 2021, late 2021 or mid-2021 and beyond, how do you feel about the underwritten yield on those? I know there's a lot of uncertainty, but what kind of buffer is there where you would still underwrite it today?
Hey, Hardik. It's Matt. The deals that are delivering in 2021, first deliveries in 2021 are deals that generally were started in the last year, call it. Otherwise, they'd be delivering sooner than that. On those deals, I guess we'll see what happens, right? Fundamentally, it's going to depend what happens to market rents, what happens to NOIs. Some of those deals were higher-yielding deals in the first place just because of the geography of where they were. That, in theory, I guess, gives you a little more room. There's a few that are early enough that we might actually realize a little bit of construction cost savings.
As I mentioned, we are, in some cases, shifting from trying to buy things out as quickly as possible to slow things down a little bit to take advantage of hopefully what could be a better market to buy construction services in a few quarters. Yeah, the risk there is the same as the risk in the stabilized portfolio. It's just the risk of what happens to market rents between now and then.
Yeah. Hardik, I guess I'd just add that I think we're in the first recognize those deals are capitalized in a different capital environment. You got to look at both the cost of capital as well as the underlying fundamentals. As you saw in Sean's remarks, rents in April were roughly flat on a year-over-year basis. I think there's a basis for believing that they should continue to come down. We've lost 20% of our workforce, and even if three-quarters of it comes back as states start to open up the economies, we're still looking at 8% unemployment and likely to see flat to maybe slightly negative household growth while we're still delivering some new supply. That's going to take its toll in the near term on NOIs.
As I mentioned before, I think ultimately we could see a pretty strong late 2021 and 2022 as deliveries, if people do start or do what we are doing, which is delaying starts, and you start to have a dearth of deliveries at a time when maybe the economy's really starting to regain its footing.
Just kind of one other thing, Hardik. As you think about sort of development, how it flows through our earnings from a business model standpoint and compare it perhaps to the last downturn. As you know, we've emphasized over the cycle how match-funded we are with respect to long-term capital being sourced to fund the development underway. Really at Q1, we were over 80% match-funded with long-term capital against the development book that's underway. That's an important point.
Tim touched on it in his answer to Mongo. I really do think as you think about AvalonBay and how we might perform here in the coming years, it's an important distinction to draw in terms of how we are positioned from a balance sheet and funding point of view, and a built-in accretion point of view with respect to development relative to, say, the last downturn, where we had much more in the way of open and unfunded development commitments at a time when 12 years ago, developments were coming in around 5% or 6% yields, and we were funding it with debt costs around 6%. Today, it's very different. We'll see where the yields ultimately shake out to be. We know debt costs for us on a 10-year basis today are probably somewhere in the mid-2% range.
We don't really need much of that at all. We're already over 80% match-funded on the development underway. We really are in terrific shape from that standpoint to sort of benefit from baked-in profit growth on the 80% or so that we've already paid for that's underway. To the extent we have to source incremental capital and use debt to do so, that's likely to be an additional source of accretion.
Just from my standpoint, guys, I have no problem with the balance sheet. I never have. I find it confusing when people are kind of dinging you for that, and it's resulted in you guys holding $750 million on your balance sheet. It's kind of crazy to me. No issues with the balance sheet at all. You guys have been doing this for two decades, and people still get nervous about this. I was thinking more about the IRRs, and Matt and Tim, all of you guys have talked about the 9%-12% range through a cycle. You get 9% on assets started during the last downturn, maybe 12% in your best assets. What I'm trying to understand is on an IRR basis, obviously these things will lease up more slowly if they're coming on in a stressed environment.
What is the IRR on the developments that are kind of 2021 and beyond? Is that a 9% number, 10% number? What does that number look like?
Yeah, I know. We have shared with you in the past, at least with the last couple cycles where we started deals kind of late in the cycle and delivered into a downturn. Those were when you kind of run out 10%, 15% IRRs, they are lower than deals that you start at the beginning cycle or in the downturn and lease up at the early stage of cycle. I think we saw ranges from It narrows over time, as you extend out the time horizon from 10 years. Over a 10-years horizon, but I think we were still clear on our long-term cost of capital. I think on the low end, it was around 8.5%. On the high end, it was more in the 13.5% range.
I would say some of these deals that were sort of timed the worst, that started when construction costs were peaking and delivering into depressive environments, I think they could still be high single digit kind of IRRs. Deals that we start in 2021 and 2022 could be much better than that.
Got it. Thank you. That's great color.
Thank you.
We will take our next question from Haendel St. Juste with Mizuho.
Hey, guys. Thanks for taking my questions. Just a quick couple from me here. Just going back to April rent collections for a quick second. I guess I'm not surprised to see the affordable rent collections trail the market rate collections. I've seen some of this is income and savings related, but I guess I'm more surprised to see the more meaningful lag in the corporate apartments business. Curious if you've been able to identify or help us understand what the key reasons, the key headwinds you're facing there in terms of rent collection. Well, that's the first one. Thanks.
Okay. You were a little muffled on some of it, but I heard the collection rate on the corporates, and yeah, it is lower. The way I think about it is these are the kind of corporate apartment home providers. It's not the corporations per se that are the end users here, but the sort of intermediaries that essentially have a sales team that have reached agreements with various corporations or have a booking site, essentially, that's a marketplace. They are leasing units from us and many other of our peers and others. Those, think of it, I guess I'll call it sort of like an extended stay hotel almost, where their bookings basically dried up pretty darn quickly. Some have some longer-term stays from people who were there on consulting assignments for three or four months, and they'll bleed out a little bit longer.
There are others who really were running more short-term, 30-day stays, and their demand evaporated more quickly. Yeah, we're working through the process with them just as we would with other residents in terms of potential deferrals, payment plans, and things like that. That's why their collection rate was quite a bit lower than what we'd see from our market rate apartments, which is generally higher quality residents, good household incomes, as I indicated in my prepared remarks about the slide that we addressed.
Yes, that's helpful. Thank you. Just wanted to be clear though, ultimately, who is on the hook for the rent? Is it that individual or the corporate sponsor?
The intermediary is technically our credit. That's who we're dealing with. Their ability to pay certainly is based on what occupancy rate they have across their portfolio. To the extent that they're, pick a number, 75% occupied with good corporate clients, that's what they can pretty much pay. Not many of these companies have, probably almost none of them really, have a really strong balance sheet to be able to handle three or four months without rent payments or 25%, 50% occupancy. The nature of the pandemic and how long it lasts and the impact on the business travel will really sort of dictate their ability to pay over the next few months.
Yeah. Well, thanks. Can you also help us understand what percentage of the tours you've been conducting here in April and early May have been virtual? How the conversion rates on those virtual tours compares to more traditional tours historically? Are you finding that you need to offer a bit more incentives to get these virtual tourists to sign official leases?
Yeah, good question. I don't have that right in front of me in terms of the composition of it. I would say that virtual tours for our business are not nearly as effective as the self-guided tours or an escorted tour. Given the nature of the pandemic, it was actually nice to see a rebound in activity in April when people were getting more comfortable with a virtual tour, whether that was online through our website or in some cases, we had community consultants that would basically do FaceTime-type tours through individual units. Some of that was really at the discretion of a customer where they didn't want to come do a tour with someone. They were fine doing it virtually. I think it's evolving, but certainly reflects the nature of the business and where it's going in the future in our view.
The technology investments that we're making and we're already making that we may accelerate as it relates to technology to support a lot of the sort of no-contact type activity between our staff and our customers and our prospective customers. That includes various things on the tour side, on move-ins, receipt of packages, and even on the maintenance side where we're doing diagnostic calls via FaceTime and via other tools to try and diagnose issues for customers to be able to sort of self-serve and self-help in many cases before dispatching someone to go to a unit. I think this will just accelerate some of the things that we were already contemplating as part of our operating platform that will lead to more efficiencies in the future.
Got it. Thank you for that.
Yep.
There are no further questions at this time. I would like to turn the conference back to Mr. Tim Naughton for any additional or closing remarks.
Thank you, Kathy. Thank all of you for being with us today. I know that you've got a lot of calls to cover. Normally I'd say I look forward to seeing you at NAREIT, but I don't think that's going to happen. Hopefully we'll talk to some of you during that week and maybe even see you on a Zoom call somewhere. Take care and stay safe. Thank you.
That concludes today's presentation. Thank you for your participation. You may now disconnect.