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. Your host for today's conference is Jason Riley, Vice President of Investor Relations. Mr.
Riley, 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 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.avalonbay.com/earnings, and we encourage you to refer to this information during your review of our operating results and financial performance.
And with that, I'll I'll turn the call over to Kevin, Chairman and CEO of Allstate Community for his remarks. Tim?
Yes. Thanks, Jason, and welcome to
our Q1 call. With me today are Kevin O'Shea, Sean Breslin and Matt Berenbaum will provide brief commentary on the slides that we posted last night, And all of us will be available for Q and 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, And lastly, highlighting our liquidity position and credit profile. Before getting started, I'd just like to acknowledge The last 7 or 8 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 and large coastal metro areas in the U.
S, we've certainly been impacted by this pandemic, 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. But 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 and service to our customers. Now let's turn to the results of the quarter, starting on Slide 4.
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 percent, respectively. All of our major regions, except Metro, New York, New Jersey, I posted same store revenue growth of 3% or more in Q1. In Q1, we completed 3 development communities totaling 215,000,000 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 community so far this year.
And lastly, we raised over $900,000,000 in capital this past quarter at an average initial cost of 2.9%, With most of that coming from a $700,000,000 10 year bond deal at 2.3% completed in February, A record low re offer rate for 10 year body issuance and U. S. Re history. And with that, I'll turn it over to Sean, who will discuss portfolio operations, including what we've seen so far in April and May. Sean?
All right. Thanks, Tim. Turning to Slide 5, the impact of COVID-nineteen and the various shelter in place orders had a material impact on leasing velocity in March, As noted in Chart 1, 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 offer to increase conversion rates, Leasing velocity rebounded. It was only modestly below 2019 levels, and similar to the volume of notices today, Kate, 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 2, this resulted in fewer move ins and move outs during the month of April. Taken collectively And as depicted on Slide 6, availability increased and occupancy suffered. As indicated in charts 12 on Slide 6, 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 3rd week of March, but has ticked back down a bit over the past 6 weeks or so.
The impact of reduced leasing volume in March ultimately impacted physical occupancy as well, as noted in Chart 3, With April down roughly 75 basis points from March and 50 basis points from last year to 95.3%. In Chart 4, you can see the impact of the recent environment on April rent change, which ended the month at essentially 0. This outcome reflects our efforts to help mitigate the impact of COVID-nineteen on residents by offering a no rent increase lease renewal option to undecided folks And 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 7, We collected about 96% of what we would have typically collected in an average month from our customers, which is noted in Chart 1. And 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 percent of normal levels or about 150 basis points behind April, but 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 8, the collection rates for our highest income customer has just 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. So with that operational overview, I'll turn it over to Matt to address construction and development. Pat?
All right, great. Thanks, Sean. To provide an update on how the pandemic is impacting our construction operations, Slide 9 shows our 19 active development communities across our 8 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 listing of some of the more extreme restrictions. And the 4 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 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 $2,400,000,000 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 3 years have averaged just 800,000,000 A little more than half of our mid cycle run rate of $1,400,000,000 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 $4,000,000,000 of next cycle development projects with a total investment of just 100 and $20,000,000 The development rights pipeline includes 28 different projects with more than 20% of the projected capital in flexible public private partnership deals and 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 sheet.
Thanks, Matt. Moving to Slide 12, as shown on the next two 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 $1,800,000,000 from our credit facility and cash on hand. This compares to near $900,000,000 in remaining expenditures on development underway over the next several years, of which about $400,000,000 is expected to be spent over the remainder of 2020.
As a result, at quarter end, our $1,800,000,000 in liquidity Exceeds remaining spend on development in 2020 by roughly $1,400,000,000 and our liquidity exceeds Total remaining spend on development over the next several years by nearly $1,000,000,000 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 $70,000,000 of debt in late 2020 and only $330,000,000 in debt maturing in 2021 for a total of $400,000,000 in debt maturities over the next 7 quarters. Thus looking at over the balance of 2020 and incorporating both development spend and debt maturities, our quarter end liquidity of $1,800,000,000 Exceeds remaining debt maturities and spend on development over the rest of 2020 by $1,300,000,000 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 $500,000,000 So 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 and excessive 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 4.6 times was below our target range of 5 times to 6 times, leaving us meaningful capacity to absorb leverage increases as we proceed through these challenging times. And 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. And with that, I'll turn it back to Tim.
Great. Thanks, Kevin. Just wrapping up and turning now to Slide 14. So overall, Q1 was a very good quarter Our results are 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 built for the month with only 6% uncollected by month end, which is about 400 basis points lower than normal.
Progress Many of our construction sites will be impacted by the pandemic. We expect that orders by some state and local governments temporarily halt Inspections and construction will result in the delay of delivery and option schedules at several communities, which in turn will push some of the lease up NOI projected for 20 20 into next year. Most sites that have been impacted are currently in the process of either reopening 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 $4,000,000,000 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. And 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. So with that, Cassie, we're ready to open up the call for questions.
Thank you. 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. So I was wondering how that impacts Expected supply in 2020 and on average, how long do 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 of years, even before the pandemic, was that deliveries wound up being Yes, 10% to 15% below what we had thought at the beginning of the year just due to labor constraints, inspection constraints and so on. So Certainly, I would expect more deliveries to be down by more than that relative to what maybe the 3rd party reports were at the beginning of the year.
But, 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, 5 projects We've delayed initial occupancy by a couple of months, call it. And these projects, As of right now, we think that probably the final completion is going to be delayed by about a quarter. So 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 early enough in their process that they haven't been materially slowed down.
Obviously, that could change, but kind of that's the way we see it as of right now.
Thanks. And then just as states in different cities start to reopen, how are you Thinking about kind of repositioning your amenity space to allow for social distancing and then 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 Bigger picture trends such as work from home or anything else.
Yes, Nick, this is Sean. I'll take that one to start and others Jump in if they like. But in terms of the existing amenity space, yes, 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 will place on The occupancy limits that were in place before the pandemic, we're still going to see that reduced pretty materially. But it depends on the type of space, depending on what you're talking about.
Fitness center equipment that was spaced 2 feet apart, we may have to go back and redistribute the equipment to have more space As an example, chill spaces, where there were, call it, 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, It's the same thing in terms of our swimming pool. So there's a fair amount of work underway to sort of regensify the various spaces that 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. And then in terms of the longer term trend, You're 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 sort of independent contractors working from home that are producing content or in sort of contracting business and things of that For different types of industries, entertainment in particular comes to mind for a place like LA. So that trend 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. Yes.
And we'll take our next question from Rich Hightower with Evercore.
Hey, good afternoon, guys. Hope all is well.
So I wanted to get your reaction to One of your competitors comments yesterday regarding a little bit more underperformance in the garden style communities versus high rises Vis a vis collections, are you seeing the same in your portfolio? Or do you have any comments along those lines?
Yes, Rich, this is Sean. I can share a few thoughts on that. Just how we've looked at collection rates maybe a few different ways. Certainly, we talked about it by segment in terms of what was presented on the slides and in my prepared remarks. But In terms of some other metrics that we look at and have been following, first, the sort of price point A's versus B's.
As are running about 100 basis points higher than Bs at this point in time. And then when you look suburban, urban, what we're generally seeing Across most of the markets, suburban is outperforming by about 25 basis points or so, a little bit, but not terribly material. Probably one exception is New York where the urban environment collection rate is better than the suburbs given the impact we've seen in Westchester It's been pretty material in terms of the pandemic. And then in terms of HiRise versus Garden and MidRise, Highrise is slightly better, but there's not a lot of Highrise product to benchmark it against, to be honest. And most of that for our portfolio is going to be in New York, A little bit in D and C.
It's just not a big sample size. I probably wouldn't draw too many conclusions about the product type differences.
Okay. So maybe a little
bit of differentiation there in terms of what you're seeing versus maybe, I guess, elsewhere In rebrand. Okay, that's helpful color. And then 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, We'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. So 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 a little Oscar there for Just Factor. Thank you for taking the questions today. So I was just wondering if you guys could give some more color on the condo sales going on right now. So I think you mentioned that one were under contract in 4Q 2019 on the call.
And so I was just wondering, I I assume all of those were the ones that were closed so far. And are there any new projects underway? Is the market about active? Are you expecting to take a lot of price cuts? Or are you just holding
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. So as of today, we have 41 units closed And have generated $129,000,000 That's an average price of $3,150,000 per condo. We have 22 others under contract with binding deposits.
That represents another $70,000,000 of proceeds. It's actually slightly higher. Price $3,170,000 $3,180,000 per unit. The sales activity, The new contract activity was pretty strong in January February. In fact, if you go back to our Q1 call, We had 54 contracts at that time.
So we've actually added 9 since then or about $40,000,000 in incremental sales Since the Q1 call and 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. And traffic did slow dramatically in the back half of March and the early half of April. I will say in the last just 2 or 3 weeks traffic has picked back up, and although they're virtual tours, traffic is back up to over 30 per week, which It's a pretty strong number and comparable to where it was kind of before things stopped in mid March. So But 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 than the early contracts. There's a lot of different price In the building depending what line and what floor. So, it's not exactly apples to apples, but so far, we haven't seen any Back there, yes, but 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 and which few markets just aren't responding no matter how generous the concessions become?
Yes. I mean, John, the response has been pretty healthy across most of the markets. I I mean, 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 LA is priced at slightly more concessions on average in the LA market as compared to others, to get those conversion rates to sort of reasonable levels. But 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 and I'll just be specific around 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 LA to get people to spur to action just given what was happening In that market environment, which was already weak, as you may recall, at the beginning of the year and pandemic certainly only made it that much more difficult in terms of People 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 studios Being closed and a lot of people that produce content in Southern California, those shops being closed.
So that's why the one market where it's been a little more challenging.
Okay. And then last one for me. Just a question about DC 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 Yes, put it up there against any other market in the next 12 months to 24 months just in terms of rent growth and occupancy trends.
Yes. I mean, based on what we know as of now and just think about the composition of the workforce, I think DC should hold up relatively well. I mean, if you think about the nature of the pandemic and how things have started and the impact on Joblessness today for the most part as opposed to kind of a trickle down, it's really a trickle up type thing where a lot of the job losses Heavily concentrated at those lower level service jobs. You're talking about food service, bars, restaurants, Hotel workers things of that sort, it may trickle up some, and in certain geographies where people are paid well, Again, like L. A.
To produce content, maybe disproportionate impact, but DC, highly educated population, A lot of professional services, defense, etcetera, but expect it to hold up relatively well and we've seen that thus far even though it's only been sort of 6 We extend this point in terms of what's happening, but others may have
a different I thought to add to that. No, I agree. I mean, between the knowledge base, knowledge and nature of the economy, The federal government, I mean, state and local governments are going to be benched. I think you're going to see cutbacks there, but not as much in the area of federal government. I think it Just saying that pretty well.
I mean, I think DC was hurt a little bit initially just because our exposure to hospitality. Obviously, both Hilton and Marriott here, which Had massive furloughs, kind of early on in the pandemic, but I think over time, Sean is right out, we expect it to stand up pretty well relative to the Yes, overall, Chad.
Okay. Great. Thanks for the time.
We'll take our next question from Austin Wurschmidt with KeyBanc.
Hi, good afternoon, everyone.
I 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-nineteen?
Yes. Good question, Austin. It's Matt. We certainly think the direction is headed down. I think As you see here in this very moment, I'm not sure that you would see that yet.
And in several of our projects, We have decided to defer. One of the reasons we've deferred some of our potential 2020 starts is because we think that there will be a better buying I don't know, 3, 4 quarters maybe. So I think it takes a while to work its way through the system And probably we'll see it first in some of the early trades, where like 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,
it's going to need to
be finished. If anything, it may take longer to get finished over the next 4 to 6 quarters. So, one of the advantages we have is because 90 plus percent 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 3rd party general contractor, which is the way a lot of the private So still too early to tell. We'll see what happens in the last downturn. It was down maybe 15%.
That was an extreme correction, but time will tell. I think Tim wanted to add something.
Yes. Also, 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% to 8% increases for the last 3 years. So it was probably already well above trend and That provides us a little bit more conviction that we're likely to see a correction. And certainly in terms of wages, commodities, materials, It's a subcontract position all come down, putting downward pressure on pricing, offsetting that somewhat. We do we would expect a little bit higher general conditions Just given changing protocol, 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 the cost benefits from that as you come out of a downturn in the early parts of an expansion.
So So overall, we would expect we do expect costs to
come down. They're going to
need to just to make sense, make sense of the economics given NOIs are flat to on their way down and capital costs if anything are up since we had in the pandemic Looking at both sort of the bond and the equity markets obviously.
That's really helpful. I mean, you guys had Previously started expected to start $900,000,000 Matt, I think you alluded to some of those projects you delayed purposefully with potential for cost to come in. What percent of that $900,000,000 are costs fully baked at this point?
I would say none of it.
I mean, you're talking about
the cost or the start commitment. We haven't committed to starting anything this year.
The cost on some of the projects?
Yes. The only cost that would be baked would be where we bought the land already. I think 2 of those 9, and we did buy 2 parcels of land in the Q1 that's related to deals that could have been or could be 2020 starts. So we spent $38,000,000 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. And then last one for me, Kevin, maybe to pull you in Here a bit, the balance sheet is certainly in great shape, but if you don't start any or only a small subset of that 900,000,000 Where do you expect leverage to finish the year?
Yes. I mean, 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 midyear call and provide We have a clear visibility on a whole range of things, including not only NOI, but also Investment activity and in capital markets activity, We're standing right now at a remarkably low leverage level of net debt to EBITDA of 4.6 times versus The target range of 5 to 6 times and that's intentional. We very much intend to drove that leverage number down over the last 2 years to give us more scope, more capacity, as we might have to pivot through a downturn. And so 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 through incremental development spend. But as I pointed out in my opening remarks, we've already got a bundle of liquidity here relative to our open commitments here over the near term.
And from a capital plan standpoint, although we withdrew guidance, when we provided our guidance, our initial expectation was to raise External capital $1,400,000,000 and we've already raised $900,000,000 of that. So we'll further through the year and Raise 2 thirds of what we initially had hoped to raise. We may not need to raise as much as all that. But 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. So 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.
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're not you don't have the incremental spend, But we'll wait and see what you have to say in 2Q. Thank you.
Take our next question from Nick Yulico with Scotiabank.
Hi. This is Sumit from Usha in 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, 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?
Yes. So you footnoted
the yield as slightly reduced, saying that You brought down the yield for or you brought down assumptions for developments nearing completion on DCEP. So just trying to get a sense of What's the split in the yield reduction for particularly for developments that are more near term in 2020, let's say?
Yes. So as a general rule, our practice has been that when a deal Yes, more than 20% leased. Then we kind of remark the rents to market to reflect the experience that we're actually having. And until that time, we tend to carry the rents that what we initially underwrote. So we've talked for years about the fact that we don't trend rents, and that's what we mean by that.
So In this particular release, we only have the 3 deals that are completed. And in that case, those rents reflect the actual rent roll in place. Those are all more than 90% leased. It's on the schedule. And then there's 3 other communities where we have Enough leasing done that we've reflected the most current rents there on the chart there on Attachment 8.
The other 16 assets, we haven't done enough leasing yet. So those
are still the original pro
form a rents. So 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 form a. And when we get leasing activity, we will adjust them accordingly. So it's Really not any change from
our current practice. I think it's
just an additional disclosure that 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 they currently sell?
Yes. Just to add one thing on that. As Matt indicated, just for the Q1, there were 6 assets in lease up. And if you look across the rents for those 6 assets, 4 of them were producing rents at that time, kind of average for the quarter that were above the original One was equivalent to our original pro form a and one deal kind of in Northern Seattle was modestly below our original pro form a. When you blend all that together, rents at that point in time were roughly 3% above pro form a around $80 or so.
But there were some cost changes on those deals. So the net reduction in yield really was only about 10 basis points So weighted average of 5.9, so, really immaterial in the context of the whole basket.
Thank you so much.
We'll take our next question from John Guinee with Stifel.
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? And then second, if there is a slowdown in development starts in 2020, how would that affect G and A and interest costs in 2021 as you need to you can no longer capitalize people and Development interest expense?
Yes. John, this is Tim. I'll maybe take the first and Kevin, if you want to take the second piece of it or not. But with respect to our market footprint, as we talked about in the past, We'll be happy to potentially diversify a bit of our exposure to the larger coastal markets into other knowledge Economy type markets, part of which drove our entry into Denver and into Southeast Florida for sure. And there 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. So we try to really kind of sort of activate all the levers, if you will, with respect to those markets. So we Really haven't been held back by desire to get in those markets. It's a function as much of The opportunity is anything, but we'd expect that to continue. That will 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.
But Right now, it's more through debt and asset recycling. So 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 indexed to the innovation economy and therefore we think we'll outperform over a long period of time From a demand standpoint. And I think your second question had to do with G and A around development. I can maybe start that and Kevin, if you want to come in.
We're always going to try to right size the development Organization to sort of the to what we view the opportunity set over the next 2 or 3 years. To the extent we delay Deals this year, it means we're probably going to have more stacking up in 2021 or 2022. So part of it is to make sure that you're properly positioned not just for what you have to do for the next 6 months, But really for the platform over the next 3 or 4 years, to the extent this becomes a very protracted recession that changes Obviously, that's not how we're viewing the environment today. We are viewing this as a kind of a slow buildup from a Sharp downturn and if we do see meaningful contraction in construction costs for the balance of 2020 And then you start to see some recovery in 2021. You start to see 2022, 2023 could be really good time to be delivering A new product which would argue for heightened starts in 2020.
So we want to make sure we've got the right size Development and Construction Organization really over the next 3 or 4 years, not just over the next 6 months and not much has Change 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 about $1,400,000,000 to roughly $800,000,000 sort of late cycle. So it's already kind of size For late cycle downturn type dynamics. Kevin?
Yes. I mean, it's just a couple of things. I mean, And 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. And And 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 Q1, capitalized overhead did sequentially increase a little bit in the Q1 due to a few one time items and Such as increased benefits and payroll costs, but for full year 2020, we would expect that 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. 1, in the there was Footnote in the release about the impact of loss fees, dollars 1,400,000 per month. Can you just talk about your expectations? I'm assuming The eviction moratorium markets, obviously, there are no late fees.
And then, yes, I'm guessing wherever you don't have amenities open, you aren't charging amenities. So how should we think about this $1,400,000 a month? Is that something we should be thinking about for the next few months? Or is your view that Within whatever, maybe by mid summer, a bunch of communities will fully be open where this number won't be as big as it is right now.
Yes, Alex, this is Sean. Just to give you some perspective, about 80% of that $1,400,000 was in way of common area amenity fees because our amenities are closed. So our expectation is you're going to see a kind of slow rebuild of that line item over the next few As states begin to reopen, we resize our occupancy limits as I was describing earlier in response to a question And 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 Based on the local market environment, but that's the majority of it that should fully rebuild. The rest of it was small stuff related to Some late fees and credit card convenience fees and things of that sort.
Okay. Okay. And then On your line of credit, you guys had drawn the $750,000,000 and then you quickly paid you just paid back the $535,000,000 Sounds like you have about $150,000,000 or so rough numbers on condo sales. What drove it's pretty quick that you guys pulled it down and then So 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?
Or was it just once you guys delayed a bunch of projects, suddenly you realize that you didn't need all that money at once?
Hey, Alex, this is Kevin. So we drew a portion of our line of credit, basically 3, so $750,000,000 out of the $1,750,000,000 in mid March. And 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. Instead, 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.
So 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.
Yes. Maybe just to add to that Alex, I mean once the Fed came in, Obviously, the bond markets became very constructive and we had to stop as we would have access to bond markets If we needed to. So that was the reason that ultimately just paid it back.
Okay. Okay. Thank you.
We'll take our next question from Rick Anderson with SMBC.
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 because but then 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. So what do you think?
Do you think Not that we could have changed it, but do you think you were 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. I mean, 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 A better market pricing and more leasing velocity. So your rent roll is increasing.
You kind of earn it all kind of in that March to July timeframe. And obviously, that's challenge right now. Yes. To the extent you can take in time pandemics may argue for a late fall start. But we have a lot of things in our control.
We haven't gotten there yet.
Yes. I mean, come on, can you guys do anything right? So the second question is maybe perhaps a more realistic and longer term vision.
So you guys Our thought of is 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 that he 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 The basic fundamentals of the industry might look like 5 years from now.
Rich, Tim, yes. In terms of demand for multifamily, I think that's going to continue to be driven by the nature of the households. I mean, there's been such great growth in Single person households, that's what really drives the demand for our business. It's most of our households are singles and professional couples, very, For a few children, but in terms of kind of the product and the service, I do think you'll probably see some of this the work from home take stronghold. There's already a trend that I think that Sean alluded to in some of his remarks.
I think that's a good basis for expecting that that might accelerate a bit. We had already started putting co working Lounges and spaces and 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're pretty good size to begin with. And 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 sort of 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 They're working out in a community with their peers and maybe a large club Well, with much of high schoolers that are cleaning up equipment and things like that. So, and then within the unit, Another trend that had already started, I think it might accelerate, it's just more flexible open unit spaces that can The nature of the space can change during the course of the day based upon kind of where you are in your day, Yes, we're kind of kitchen dining spaces convert to office spaces. My office space is an apartment community right across the street. And I noticed a number of people have sort of set up their desk right up against the window.
I don't think that's where it was They're just spending their good part of their day there now. So I think people will start to think about that in terms of unit design Folks may be using the space more during the day than they have historically. And then there's certainly just the need for broadband And high speed and reliability there and anything that we can do to kind of support that. And then I guess last thing I just mentioned is kind of the smart home initiative, which a lot of folks are pursuing now. But I I think one of the most intriguing aspects of that is the remote entry, being able to allow goods and services To sort of flow freely throughout community rather than having to be handled by Yes, somebody at a front desk or in a central office that people can get access right up to the unit and potentially Yes, right into the unit to the extent that the resident has to step away.
So I think you'll see all those things that were trends anyway perhaps just accelerate as a result of this.
Really good color. Thanks, Tim. Appreciate it. Sure.
We will take our next question from Hardik Goel with Zelman.
Hey, sorry guys, can you hear me?
Yes. Thank you. Thanks for taking my question.
I I was just wondering, if I look at your development pipeline, and I know Matt talked about how you guys don't trend rents and you only really update them on this 20% leasing. But if you look at the development pipeline that's going to deliver 2021, late 2021 or mid-twenty 21 and beyond, How do you feel about the underwritten yield on those? And I know there's a lot of uncertainty, but what kind of buffer is there where you would still underwrite it today?
Hey, Arik, 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, because Otherwise, they'd be delivering sooner than that. So on those deals, I guess we'll just we'll see what happens, right? Fundamentally, it's going to depend what happens to market rents, what happens to NOIs. They Some of those deals were higher yielding deals in the first place just because of the geography of where they were.
So that in theory, I guess, gives you a little more room. But I don't think and there's a few that are early enough that we might actually realize a Little bit of construction cost savings. And 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, we'll have to be a better market to buy construction services in a few quarters. But, yes, I mean, 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.
Yes, I guess I'll just add to that.
I think we're going
to first recognize those deals are capitalized in a different capital environment. So you got to figure Yes, look at both the cost of capital as well as the underlying fundamentals. But 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 3 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. So that's going to take its toll in the near term I'll analyze, but as I mentioned before, I think
it ultimately
it's We could see a pretty strong late 2021 2022 as delivery as people do start to do what we are doing, which is delaying And you start to have a dearth of deliveries at a time when maybe the economy is really starting to really regain its footing.
Just kind of one other thing, Hardik, as you think about sort of developing how it flows through our earnings from a business model standpoint And compared 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. And really at Q1, We were about we were over 80% match funded with long term capital against the development book that's underway. So that's an important point. Tim touched on it in his answer But I really do think that's 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 In addition 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, we had a lot 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. But we know debt costs for us on a 10 year basis They are probably somewhere in the mid-two percent range. So, and we don't really need much of that at all. I mean, we're already over 80% match funded on the development underway. So We really are in terrific shape from that standpoint to sort of benefit from baking profit growth on the 80% or so that we've already Pay for this underway and 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 binging you for that and it's resulted in you guys holding $750,000,000 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 2 decades and people still get nervous about this, but
I was thinking more about the IRRs. And Matt and Tim, all of you guys Talked about the 9% to 12% range for 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?
Yes. We have shared with you in the past, at least with the last couple of cycles where we had when we started deals kind of late in Cycle delivered into a downturn. Those were when you kind of run out 10, 15 yard hours, they are lower than deals that you start at the beginning of cycle Or in the downturn and lease up at the early stages cycle. We but I think we saw ranges from And it narrows over time, right, as you've seen out the time horizon from 10 years. But over 10 years horizon, I think we were still clear on our cost of capital, Long term cost of capital, I think on the low end, it was around 8.5%, 8.5%, on the high end, it was more in the 13.5% range.
I would say it's going to be some of these deals that were sort of time the worst that started When construction costs are peaking and delivering into depressed environments, I think they could still be high single digit kind of IRRs. And deals that we start in 2021 2022 could be much better than that. Got it. Thank you. That's great color.
Thanks.
We will take our next question from Haendel St. Juste with Mizuho.
Hey, guys. Thanks for taking my questions. A quick couple for me here. So 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 I guess I'm more surprised to see the more meaningful lag in the corporate apartments business. So 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. And well, that's the first one.
Thanks. Okay.
I did. You were a little muffled on some of it, but I heard the collection rate in the quarter. It's and yes, it is lower. I mean, the way I think about it is, Yes. These are the kind of corporate apartment home providers.
It's not the corporations per se that are The end users here, but sort of intermediaries that are essentially, have a sales team that have reached agreements with Various corporations or have a booking site essentially that's the marketplace and then they are leasing units from us and many other of our Peers and others, and those there, 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 and some have some longer term stays from People who were there on consulting assignments for 3 or 4 months and they'll bleed out a little bit longer. And there are others who really were running more short term, 30 days And their demand evaporated more quickly. So we're working through the process with them just as we would with other residents in terms of There's a deferrals, payment plans and things like that. But that's why the 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 slides that we address.
Yes, that's helpful. Thank you. So, just wanted to be clear that 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. But their ability to pay certainly is based on What occupancy rates they have across their portfolio, and to the extent that they're, like 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 3 or 4 months without prepayments or 25%, 50% occupancy. So the nature of the pandemic How long it lasts and the impact on the business travel of a really sort of changing capability to pay over the next few months.
Got it. Thanks. So can you also help us understand What percentage of the tours you've been conducting here in April early May have been virtual? And how the conversion rates on those virtual tours compares to more traditional Historically, and are you finding that you need to offer a bit more incentives to get these virtual tourists to sign official leases?
Yes, good question. I don't have that right in front of me in terms of the composition of it. But I mean, I would say that virtual tours For our business, are not nearly as effective as the self guided tours or an escorted tours. But given the nature of the pandemic, it was It's actually nice to see a rebound in activity in April where people were getting more comfortable with the virtual tour, but that was online Through our website or in some cases, we had community consultants that would basically do FaceTime type tours through individual units. And 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. So I think it's evolving, but certainly reflects the nature of the business and where it's going in the future in our view Yes. 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 And 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 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. So 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.
Yes. Thank you for that.
Yes.
As 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, Cassie, and 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 in NAREIT, but I don't think that's going to happen, but hopefully we'll talk to some of you during that week and Maybe even see you on a Zoom call somewhere. So take care and stay safe. Thank you.
That concludes today's presentation. Thank you for your participation. You may now disconnect.