Good morning, ladies and gentlemen, and welcome to the AvalonBay Communities Third Quarter 2019 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 call is Mr. Jason Riley, Vice President of Investor Relations.
Mr. Riley, you may begin your conference.
Thank you, Vicki, and welcome to AvalonBay Communities' 3rd quarter 2019 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 was 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 As usual, this press release does include an attachment of 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 This information during the review of our operating results and financial performance. And with that, I'll turn the call over to Tim Naughton, Chairman and CEO of AVODEX and Community for his remarks.
Thanks, Jason, and welcome to our Q3 call. With me today are Kevin O'Shea, Sean Breslin and Matt Birenbaum. Sean, Matt and I will provide brief commentary on the slides that we posted last night and all of this will be available for Q and A afterwards. Our comments this morning will focus on providing a summary of Q3 and year to date results, an update on operations, including some areas of innovation in operating platform and then lastly, review of the development portfolio. Starting now on Slide 4, highlights for the quarter include Core FFO growth of just over 2.5% for the quarter and 3.3% year to date.
Same store revenue growth in Q3 came in at 2 point 7% or 2.9%, including redevelopment, with most regions clustered in the 2.5% to 3% range. Year to date, same store revenue growth stands at 3.1% or 3.2% including redevelopment. We completed a $90,000,000 community in Seattle this quarter at an initial yield of just over 6%, $335,000,000 so far this year at an average yield of 6.3 $1,000,000 in the quarter, including our 3rd community so far in Southeast Florida, where we also have one development underway. We sold 4 communities in Q3 totaling $260,000,000 including the last two assets in Texas that were acquired as part of the Archstone transaction. Lastly, in late September, we entered into a forward contract with $200,000,000 of equity, which will be settled over the next year will help fund the remaining cost And with that, now I'll turn it over to Sean to discuss operations.
Okay. Thanks, Tim. Turning to Slide 5. This chart represents the trailing 4 quarter average rent change for our same store portfolio It shows the East and West converging to average roughly 3%. During Q3, however, rent change for our East Coast portfolio was 3.6%, 80 basis points greater than the 2.8 percent produced by our West Coast assets.
The last time our East Coast portfolio outperformed the West from a rent change perspective was Q4 2010. During Q3, the East Coast portfolio was led by a 4.6% rent change in New England, up 50 basis points year over year And 3.8% in the Mid Atlantic, up a very healthy 140 basis points year over year. On the West Coast, our Pacific West portfolio produced a lifetime rent change of 4.1%, which was essentially unchanged year over year. Northern and Southern California delivered rent change in the 2.5% to 3% range, each down more than 100 basis points year over year. Turning to Slide 6.
I'd like to highlight a few of the components of revenue growth in the first half and second half of this year. As indicated on the chart, We expect relatively stable rental rate growth, which is the primary driver of same store revenue growth throughout the year. However, as I mentioned during our Q2 call, revenue growth in the first half of this year benefited from the burn off of lease up concessions From new entrants into the same store pool, a reduction in bad debt and healthy revenue growth from our retail portfolio. In total, these components contributed an incremental seventy basis points to rental revenue growth during the first half of the year. We don't have much of a tailwind from those same components in the second half of the year and the benefit we are realizing is being offset by the impact of rent caps in LA and the recently adopted rent regulations in New York.
As a result, revenue growth in the second half of the year It's more in line with actual rental rate growth. Turning to Slide 7. I'd like to share a little bit about what we're doing on the innovation front, which will enhance operating margins and allow us to reach new customers. As indicated on the left side of Slide 7, we're leveraging various technologies, Our scale and new organizational capabilities to create value through a number of initiatives, including those identified on the right side of the slide. Some of our margin enhancement initiatives relate to leasing and maintenance service, which I'll address in more detail shortly, along with customized renewal offerings and centralized renewal administration.
In addition, we're studying opportunities to use AI, Digitalization and various other technologies to improve the productivity of our property management organization, including our call center Operation. We're also using our scale and technology to reach new customers. In the residential space, our segmentation studies roughly 10% of the renter market would prefer a furnished apartment home. We started offering furnished apartment homes in select locations about 18 months ago. Based on early results, we expect to scale up to 5% or more of our portfolio over the next couple of years.
In addition, we are pursuing a strategy to profitably serve the limited service segment of the rental market through the development of the new community featuring high quality apartment homes And amenity light design and limited community services. As compared to our typical development community, We expect to reduce capital cost per home via thoughtful design, choice of materials and the elimination of almost all the amenity space. On the operating side, we expect to reduce operating expenses by eliminating most of the on-site staff as most of the customer interactions would be facilitated by technology And the cost of maintaining what tends to be expensive amenity spaces. The net benefit to the customer is a rental rate approximately 10% to 20% below other new communities in the area. Our first pilot community is currently under construction and we expect initial results in the next 12 to 18 months.
Turning now to Slide 8 to provide more detail on a couple of initiatives. About 18 months ago, we mapped out all the We started implementing the first phase of our redesigned customer journey earlier this year, which includes the use of an AI powered automated leasing and the adoption of a more dynamic demand driven staffing model. Our automated agent is now fully deployed across the entire portfolio. The screenshot on the right side of Slide 8 represents a clip of a recent text conversation our agent had with a prospective resident. The automated agent operates 24 hours a day, 3 65 days a year, and we're seeing improved performance metrics as a result of our adoption of this technology, including about a 700 basis point improvement in leads to our conversion ratios.
We have limited our new staffing model in 2 regions this year expect similar results in our other regions. Other components of the new leasing model included more self guided tours and self-service move ins. Overall, we expect to realize about a 50 basis point improvement in our same store operating margin as a result of our new approach to leasing, Which is primarily driven by an increase in the productivity of our leasing teams. Turning now to Slide 9. We've also created roadmap for our new maintenance service model.
There are several phases to the plan, but it includes digitalized workflow and procurement, Automated scheduling via a new optimization platform, the application of data science to predict demand and enhanced associate performance metrics. We're in the process of integrating the new maintenance platform with our other enterprise systems, which would allow us to implement the first phase in Q1 2020 and realize stabilization at roughly midyear 2021. We expect another roughly 50 basis point improvement in our same store operating margin from our new maintenance service model, Which is primarily driven by an increase in the productivity of our maintenance teams. And lastly, turning to Slide 10, I'd also like to provide an update on some of our Environmental initiatives. Over the past few years, we have invested in a number of opportunities to reduce energy consumption and carbon emissions across our portfolio, Including LED lighting, which is already generating more than $3,000,000 in annual utility savings and on-site solar generation, which we have started to install more broadly after completing several pilots.
We are on track to have almost 6 megawatts of carbon free power generating capacity installed by the end of next year, providing strong returns on a $20,000,000 investment and with more opportunities to extend solar to additional assets in future With that, I'll turn it over to Matt to talk about development in Columbus Circle. Matt?
All right. Great. Thanks, Sean. Our development activity continues to be a strong driver of both NAV and earnings growth even this far into the business cycle. As seen on Slide 11, we currently have $975,000,000 of development that is currently in lease up has recently been completed across 10 communities with a weighted average initial stabilized yield based on today's rents and expenses of 6.1%.
We believe these assets would be worth roughly $1,300,000,000 in the private market, generating $325,000,000 in value creation on completion, which translates directly into corresponding growth in NAV. Slide 12 illustrates the future NOI growth we expect as we complete of the development currently underway. On the left hand side of the slide, you can see that at stabilization, we anticipate $60,000,000 in NOI From the $975,000,000 worth of assets shown on the previous slide that are currently in lease up, plus another $103,000,000 in NOI And as shown on the right hand side of this slide, this activity is almost completely match funded between our recent forward equity deal, Free cash flow and cash on hand. In addition, the projected sources of capital as shown does not include proceeds from pending asset sales or condominium unit sales, which we expect to realize in Q1 2020 and which exceeds $100,000,000 remaining to fund. With initial yields well above short term cost of capital, this development activity is projected to contribute meaningfully to earnings growth over the next 2 to 3 years.
Speaking of condominium sales proceeds, Slide 13 provides an update on our mixed use building at Columbus Circle in Manhattan, which has been renamed the Park Logia. As we have discussed on prior calls, we began marketing individual apartments in the building as for sale condominiums back in April. And based on the market response to our offering, We can now confirm that we are proceeding with the condominium execution for the residential component. The Park Loge has been the top selling property in Manhattan since the sales launch And we currently have 40 signed contracts, which we expect will move to settlement in early 2020 once the individual tax lots have been recorded with The retail component also continues to be well received by the market with our anchor tenant target opening for business Any day now. Of the 67,000 square feet of total retail space available for lease, about 45,500 has been leased so far And we are in advanced negotiations for another 10,300 square feet on the 2nd floor, which would leave us with about 11,000 from the retail component of this project once it reaches stabilization in 2021.
And with that, I'll turn
it back over to Tim for some concluding remarks.
Okay. Thanks, Matt. So in summary, apartment markets remain quite healthy with most markets in balance Producing consistent revenue growth of 2.5% to 3%. For the first time, as Sean mentioned, since late 2010, the East Coast is performing Either in line or slightly ahead of the West Coast. We are investing aggressively in our operating platform, leveraging scale, technology and capabilities to Grow margins by driving efficiencies in leasing, maintenance and utility costs.
We expect our investments in these areas to stabilize over the next several quarters. And we continue to create significant value to our sector leading development platform, an activity that's consistently delivered 30% plus value creation margins Over this 10 year expansion cycle and combined with our practice of match funding should contribute meaningfully to earnings growth over the next Couple of years. With that, Vicki, we are ready to open the call for Q and A.
Thank you. We'll take our first question today from Nick Joseph with Citi. Please go ahead.
Thanks. Shami highlighted the rent growth converging. Given what we're seeing today, what are your expectations for the East and West Coast from here? Do you think we'll see sustained rent outperformance from the East Coast
over the next 12 months?
Yes, Nick, Sean here. Good question on that topic. I mean there's a number of factors out there that kind of relate to the outlook for demand and supply as we move into 2020. On the supply side, if you want to think about it, where we're seeing some benefit on the East Coast going into next year for the most part In New York City, where supply is coming down projected to be roughly in half in 2020 as compared to deliveries in 20 19, 20 So we expect a little bit of benefit there. That may be muted to some degree obviously by the rent regulation.
The first half of next We're going to see some impact from that as it bleeds through. As you know, it started mid year, so we had the back half of twenty nineteen and the first 2020, we'll see a little bit of dilution from that. But from a pure market fundamentals perspective, you don't look at it that way. I'd say New York City looks pretty good. Boston, we are going to see more supply in the urban submarkets of Boston next year.
And then as you come down to the Mid Atlantic, for the most part things will be roughly at par from a supply standpoint. And if you pivot to the West Coast with the same question, We're expecting more supply in Northern California across all three markets San Francisco, the East Bay and San Jose And a little bit more in L. A. So if you think about sort of the supply side of it assuming the demand side was relatively stable and there's A number of reasons why you'd expect it to potentially decelerate a little bit from a job growth perspective, etcetera, based on macroeconomic Sort of factors, those are the markets we're probably going to see some change either to the upside or the downside based on the deliveries. The one interesting component I'd point to is sometimes it's not all just embedded in the jobs data that we see or the supply data that we see.
So the Mid Atlantic as an example, it's had a nice tailwind this year. Jobs and supply has been about what we've expected, That federal procurement is up quite a bit and that tends to bring a lot of contractors to the region. So there are some of those factors that come into play. So net net, you'd have to look at it sort of market by market, but there are good reasons to expect the East Coast to continue to perform well based on what we see, Whether it's at par or above the West Coast is yet
to be seen. So I don't know if you
want to add anything to that, Tim.
Yes. No, I think that's all right, Sean. Yes, I think Nick, I think one of the things that's sort of remarkable is just how tightly clustered all the markets are, while East is Slightly outperforming the West. I think what's really striking to us is that it does seem like all the markets performing within 50 or 100 basis points, which I just can't remember a time to cycle where that's occurred. It just seems like we're pretty close to equilibrium almost across the board, which again is Kind of remarkable when you think about how supply sort of moves up and down through the course of a cycle in any one market.
So it's I don't know if there's a firm house view that East or West is going to outperform next year as much as the markets are basically In balance and approaching equilibrium from our view.
Thanks. That's very helpful. And then just on the Upper West Side condo sales, for the forty Signed contracts, what's the average sales price?
Yes. Hi, Nick, it's Matt. I don't want to give too much detail, but We do have 40 signed contracts. The average price of those particular units is about $2,750,000 and they're in different parts of the building.
Okay. Thanks.
And we'll go to Rich Hightower with Evercore.
Hey, good morning guys. Good
morning. So just a question on some of the tech spending that it looks like you guys are ramping up on. I know you expressed this in terms of basis points of NOI growth impact, but could you Maybe translate that into sort of an old fashioned ROI. What incremental spend do you expect to roll out? And what's sort of the Estimated ROI on all of that if we take all the categories together?
Yes. Rich, this is Don, I want to give you just a little bit on that in terms of where we are. A number of these things That we're doing particularly, I'll just focus on the leasing and maintenance side for the moment because they're pretty far along As compared to say the development communities, they all have their own independent capital budgets that are different when you look on each one or each one kind of on a per home basis. But In terms of sort of the backbone of it on the leasing and maintenance side, the expected investment to deliver the kind of margin enhancement we're talking about, which is roughly 100 It's about $10,000,000 So for a $10,000,000 investment, you can run the math pretty quickly on a 100 basis point improvement in operating margin. That's a pretty good ROI.
Okay. Yes, we can do that. And then maybe Secondly, just in terms of I think there was an uptick in R and M expense last quarter in a couple of markets. And I know this is part of the larger conversation That we're having in terms of technology and efficiency spending. But maybe just if you could talk to labor expense Growth not only is a function of the tight job market in general, but also is a function of new supply in your markets.
How do those two Factors sort of interplay with the labor expense growth in some
of those
categories? Sure. Yes, happy to address And maybe a couple of broad comments to begin with. One is, when you look at each quarter here, things can be pretty lumpy. So we tend to ask people to really consider focusing on sort
of where we are from a year to
date basis, since there's a lot of different things that are happening. So when you look at As an example, there's a lot of lumpiness in R and M spend. Q2 late Q2, Q3 is sort of the peak for when you're completing Maintenance projects given the weather, particularly in some of the markets in the Northeast as an example, and even here in the Mid Atlantic. And so there tends to be greater spend there. Obviously, there's seasonal patterns to turnover that relates to R and M.
On the marketing side, as an example, we had a substantial call center credit Q3 of last year. So if you went and looked at Q3 numbers for OpEx Last year, marketing was down about 21%. So there's a big increase this year. So you have to kind of look at it over a period of time. But to address your specific questions around labor, I mean to give you some sense for us as an example on the Payroll side, and we're starting to see some efficiency there.
Year to date, we're up 2 70 basis points on payroll. About 140 basis points of that just relates Benefits and workers' comp and things like that, they were very lumpy in terms of claims activity and things like that versus 130 basis points. It's really the sort of organic underlying growth related to the associates in the field. And if you consider that wage growth, Pickasaurus is running anywhere from say 3% up to for our types of folks, if you look ADP data maybe even more so, it's pretty constrained labor cost growth on a year over year basis. So we've been able to mainly through leveraging on the office side some of the operating model work that we're doing, some of the innovation work that we're doing, yes, taking some FTEs out of on the office side so far to help contain that, which is good because the merit pool for our associates is still in the 3% to 4 That range on a year over year basis for our population.
The one other thing that I would comment on is there is some pressure in certain markets As it relates to minimum wage regulation and things of that sort, that's putting pressure on the maintenance labor side for outsourced services. So Even though turnover was down, as an example, labor rates in some of the markets, Northern California is an example, Seattle, Etcetera, labor rates are up. So the labor component of some of those vendors is up more so That you might like. So we have to try to be as efficient as we can. That's one of the reasons we're investing in the maintenance initiative Just to make sure that we're being as efficient as we can, not only with our own labor, but with the systems of procurement for the outsourced labor as well.
So hopefully that addresses a number of your topics there.
Yes. That's great color. Thank you, Sean.
Yes.
We'll We'll go to Rich Hill with Morgan Stanley.
Hey, good morning, guys.
A couple of
things. Getting back To rent regulation, we've heard some mixed commentary with some of your peers. So I was wondering if maybe you could think about the impact Breaking down California and New York City or if it's too early to sort of think through that detail.
Rich, this is Sean. And when you say breakdown, what are you looking for? Just kind of what the expected impact is
this year or next year? Well, really next
Yes. So I thought the color in your pitch book post earnings was really Well, where there was an offset, so that was helpful to understand. But I'm trying to understand, do you think California or New York is more onerous? We I look at New York City as being more onerous and obviously you've talked about decreasing your exposure to that market. I think the market was thinking California at 5% plus inflation wasn't that big of a deal.
It sounds like it's having some headwinds. So I'm just trying to quantify that offset and how much of it's driven by California versus New York? Okay.
So yes, let me give you just a brief summary on each one to give you some perspective. So what we talked about on the last quarter call as it relates to New York Is that we expected the same store impact in the second half of twenty nineteen to be about $1,000,000 and about 80% of that Is derived from loss of all fee income that we can generate for application fees and things of that sort, As you may recall, so it will reduce the growth rate in the New York, New Jersey region by about 25 basis points for the Full year and the growth for the full year in the same store portfolio is really about 6 or 7 basis points. But since it's all concentrated in the second half, the impact is about 10 or 11 basis points. So for New York, that's for the second half of this year. We would expect a similar impact roughly in the first half of next year until you get to the second half of twenty twenty where you have year over comps that are a little more stable, because you have an impact second half of twenty nineteen, the impact will be in place second half twenty twenty.
So So then projecting that beyond that, it's a little bit of a mathematical jigsaw puzzle in terms of different things that you would expect where you are in terms of legal rent today across your portfolio, etcetera. So I do think you're going to get different answers from each of the REIT Owner operators as it relates to their assets and the potential impact. So I'm not surprised as you're hearing different things about that. But that's sort of how it looks And keep in mind for us, as it relates to the rent stabilization component of it as opposed to the fee component, which is statewide, The stabilization side impacts about 2,100 units. And for us about 10 years from now those 421a programs burn off and then we'd be free of that.
So that's how to think about it for our portfolio in New York. In terms of AB-fourteen eighty two in California, there's a couple of different ways to look at it. First is, we went back and sort of back tested our portfolio in 2018 2019 and said if 1482 Has been adopted in either one of those years, what would the impacts have been? And if you back to that way, For us, it would have been about a 20 basis point impact for each of Northern and Southern California. That's about 40% of our portfolio is to call it 8 basis points roughly for the full year.
And then probably the other relevant question is, given the read On January 1, 2020, how does it impact your embedded growth rate for 2020? And what we've done today is we we said, look, if it went into effect October 1 and we had to reset leases back to Q1 of 2019, which is the regulation, It has about a 5 basis point drag on our embedded growth. So it's not that's on the same circle overall. So it's not terribly meaningful, But it's going to look certainly a little bit more meaningful in those markets. And then beyond that, it's really a function of the market environment, whether you're hitting the caps or not.
But The piece that tends to come into play that people don't always think about is not just the CPI piece, but there are short term lease extensions, month to month leases, Various things like that, that have kept our ability to generate more premium revenue. And so I'm not sure if everybody is Recognizing that at this point, but it tends to be a material impact. And we mentioned that this year as an example, the impact of some of the rent caps in LA because Fire was about $1,000,000 because we couldn't do those short term leases very profitably. So you have to look at all those different components. There's a lot of detail.
Yes, maybe more than you need, but that's kind of how we're looking at it right now.
No, that's I think the transparency that I was Arun, see that I was certainly looking for. So thank you for that. One quick follow-up question. I apologize if you mentioned this on prepared Maybe I missed it. And I recognize you don't give quarterly guides, but it looks like the full year guide Implies some pretty healthy growth in FFO year over year in 4Q 2019.
Is there anything specific driving
that, that we should think about?
Hey, Rich, this is Kevin O'Shea. We typically do see a
ramp in core FFO as
we progress through the year because of our development of Specifically, as it relates to the ramp from 3Q 2019 to 4Q 2019, the sequential growth in expected Core FFO is being primarily driven by seasonally lower operating expenses and by development in the life of lease up communities. So those are the 2 main drivers of the impact.
Got it. Thank you, guys. That's it for me.
We'll go to Jeff Spector with Bank of America.
Good morning. Thank you. I had a follow-up question on supply. You mentioned New York City next year, I think in your for your exposure down 50 Can you put some numbers around some of the West Coast markets you discussed that you said You mentioned some, I guess, qualitatively, some comments around ZUPAI, but do you have any stats?
Yes. Sure, Jeff. This is Sean. Happy to do that. So on the West Coast market specifically, We are expecting basically flat deliveries in Seattle.
But in terms of Northern California, I mentioned supply deliveries All the market is about 1,000 units more in San Francisco, about 1800 in East Bay, about 1500 in San Jose. Then in LA, it's about 2,800 units. A lot of that concentrated in and around downtown Koreatown, Hollywood, best Hollywood, a little bit on the West side. And in the other markets, happy to go through some of the submarkets with you offline, if that's helpful. But Those are all kind of really the big chunks.
That's helpful. Thanks. And we've seen slippage Each year for the last few years, is there a chance that any of that slips into 'twenty one? Or is this Is the supply more front loaded first half twenty twenty?
No, it's pretty Yes. It's spread relatively evenly across the quarter. So to your point based on what we've seen historically, we would expect some of that to Absolutely. Our rule of thumb has been somewhere in the 10% to 15% range based on what we've seen sort of historical experience. So give you some perspective.
And I'd say more delays in kind of the urban high rise product more so than the suburban wood frame.
And then just one follow-up on demand. I know you talked about, obviously, unemployment Is low and so job growth has slowed, but wage growth for your renter has been strong. So how are you thinking about that in terms of pushing rents? I don't know if you can give any comments on maybe what you're Putting out for renewals over the next 30, 60 days out.
Yes. This is Sean. Happy to jump on that and Tim Brothers can Chime in. But yes, historically, when we look at a wage growth, it is most highly correlated with rent growth. Job growth is the number 2 variable in that equation.
And so we are seeing people come in with healthy Wage gains, what we tend to look at is for the people that move into our apartment communities, January of 2019, what their income level is relative to those that will move in, in January of 2020 and how much is it moving as an That's kind of how we measure it. We don't necessarily get income levels from every renewal, but people are seeing healthy wage growth. It's certainly in line with what we're Seeing in the raw data, whether it's the BLS data or the ADP data, I kind of referenced kind of 3.5% earlier when we're talking about wage growth. But in the Speed data, professional services, financial services, etcetera, tech that those numbers on paper are being closer to 6%, 7% wage growth That may or may not include some of the stock option income things of that sort. But we're seeing healthy wage growth and certainly that influences how we think about it.
But to the extent of supply in a market, they have choices. So it really comes down to how we think the demand supply environment looks. Right now, in terms of renewal offers though to answer the specific question, we're talking about stuff in the mid high 5% range mid to high 5% range November December in terms of where renewal offers are going out. Renewals have been relatively flat all year kind of in mid to high 4% range. And I would expect that to be the case as we continue to
move through the Q4 as well. Hey, Jeff, Tim, just maybe one thing to add. I think you're right. In terms of our population, the net income growth has been quite decent relative to the so maybe the 3%, 3.5% for the Overall population. I think one of the things to consider is what's happening on the for sale side.
Affordability has Become more challenging is up until the last quarter or 2, where the Case Shiller I've been outpacing rent growth. So I think that's helped rental demand, some of the margin. You're now seeing I think, Casey, you had a print this morning, right around 2%. You're now seeing sort of for sale inflation, housing inflation start to fall more in line with rent growth. So Well, I think our outlook is it's a pretty balanced housing market, not just across each of the geographic markets, but between for sale and for rental.
You're starting The relatively flattish movement in homeownership rates might be up 1 quarter, down the next quarter. So it's it really is remarkable just in terms of the overall housing market just kind of how In equilibrium, it is right now. And maybe that shouldn't be a surprise sort of 10 years into an expansion, but It's about as stable as I can remember seeing it.
Thank you.
Austin Schmidt with KeyBanc Capital Markets is next.
Hi, good morning, everyone. You guys have spent some time talking about the convergence in like Term rent change across kind of the East Coast and West Coast, but this was really the Q1 this year that we've seen that like term Effective rent change be below where it was at this time last year. And I wouldn't think some of the headwinds you've talked about To same store revenue growth related to other incomes and poor bad debt would necessarily show up in that figure. So I'm just curious What's driving that moderation? And how should we think about that moving forward?
Yes. Austin, this is Tim. I think it's Demand overall, I mean, you've seen an economy sort of downshift from 3% growth to roughly currently 2% growth. Job growth more in the 1.5% range now running about 2,000,000 jobs versus we were in the mid-2s before. Household formation has been pretty good, but I think it's just overall economic activity being down a little bit.
The supply, as Sean mentioned, has been relatively stable. Obviously, there's shifts from market to market, but overall, across our market footprint has been relatively stable. I think just economic activity and job risk down a little bit. That's probably what's impacting the margin the most.
And so it's safe to assume that's mostly on the new lease side because you've talked about kind of that mid to high 4% range for renewals being fairly stable. So Just traffic overall is down a bit?
Yes. No, this is Sean. I mean, I wouldn't think too much about traffic. Traffic is something that we can either engineer up or down depending on how much you spend and things like that. I think if you look at really what's happened with rent change Where you're seeing lift, the lift is in the Mid Atlantic.
And as I mentioned, job growth has been about the same, but there's been Increased in procurement from the government that brings in a lot of contractors. It gives you a little bit better lift than we might have anticipated. But Where it's down in Northern and Southern California, it's more just a function of the demand because the supply is Pretty much what we expected. And if you see where it is, it's pretty widespread. So you can't just point to one particular market or submarket and That's kind of driving it.
It's pretty broad, which generally is more macroeconomic oriented.
Okay. Appreciate the thoughts. And then just second one for me is, Matt, you provided a good bit of detail on kind of the limited spend you've got within the development pipeline here. But I'm curious what does that figure on the remaining spend look like once you commence the remaining starts you've targeted for 2019? And I think you've got north of $1,000,000,000 being completed in 2020.
So can
you if you factor all
of that in, what's kind of that future spend look like?
Yes. I'll speak to that quickly and then I don't know if Ken wants to add anything. Obviously, we haven't provided any guidance in terms of what Starts might be next year. I think this year we're expected to start $400,000,000 or $500,000,000 additional here in the Q4. So Some of which has been spent already, but most of which has not.
So I guess if you projected out to year end, you'd probably add that and then you'd take out Spend that we incur over this quarter on the stuff that's currently underway. So it might tick up a little bit. But as I mentioned, we also have Not only condo sales, but pending disposition asset sales proceeds coming in the Q1 as well that aren't even in those numbers.
I mean, Austin, this is Kevin, one way to
think about our business is if we're kind of
starting somewhere close to $1,000,000,000 a year in development spending about $100,000,000 $150,000,000 or redevelopment, we're spending about $100,000,000 on the investment side of the house every month. So it certainly moves around a little bit, but if you're trying to get a general sense of kind of what that flow of investment activity looks like for us. It's probably a ballpark number somewhere in the $100,000,000 a month in terms of investment spend.
That's helpful. Thanks guys.
Next is Nick Yurecko with Scotiabank.
Yes. Hi, good morning. This is Trent on with Nick. Matt, going back to the Park Logia condos, You mentioned the average sales price so far is a little lower than the average targeted sales price for the building. So with perhaps some Higher priced units still left to go and some softness in the higher priced market.
What kind of sales trajectory do you anticipate Whether on a monthly or quarterly basis?
Yes, sure, Trent. Yes, so first of all, it's going great. Over the past 6 months, we've been running 27 visits a week. Corporate Sunshine is marketing them for us. Their average across all the deals they're marketing in Manhattan is 7 visits a week.
So we're getting a lot of traffic. It really helps The product is there and people can actually see it and we're close to being able to have people buy and settle. So if they're not buying Plans are not buying and particularly going into next year, not going to be buying and having to wait a significant amount of time. So, yes, I I think when we launched, we said we figured the average price across the whole building was roughly $3,000,000 a unit. The ones we sold so far Our 2.75.
So you're right. I mean that average is skewed a little bit by some super premium units at the very top of the building And those will sell when they sell. So it's hard to predict or project when those might sell and they will move the needle a little bit. So what we sold so far on average, there's been a nice balance across the building, but a little bit more kind of at the bottom of the building than the top so far.
We hope
to be able to We think we've got a compelling value proposition to the market. Obviously, we'll have to see how it goes. Right now, where we stand is we are any gain out, we expect the plan to be declared effective by the Attorney General, which is a process that Frankly, we thought it would take 2 or 3 weeks. It's probably more like 5 or 6. And then we have to go to getting the tax lots recorded By the City Assessor's Office and that process is taking a little longer than we had originally anticipated.
So the market Everything has been as we expected, kind of even as of the beginning of the year. It's just taking us a little longer to get to Legal place where we can start settlements because of that 2 step process of the AG and then the city assessor's office and there's a I guess there's a backup of the City of Desires Officer, that's taking just a little longer than we had thought projected going in. But again, we're well on track for And we continue to make sales at that pace of roughly 4 to 6 a month and we've seen that. We haven't seen any slowdown yet in our sales pace Even here through October.
That's very good detail. Thank you. Maybe just sticking with that a little bit on the retail space. Looks like you're making progress on that as well. Can you talk about the new tenants being added or maybe how you're viewing the overall mix and what you're targeting On the remaining available space?
A little bit, sure. I mean, we have Target, as I mentioned, I think should be opening any day now. Our tenant on the 2nd floor our 1st tenant on the 2nd floor, Financial Services, I think they're getting ready to open here before the end of the year as well. We have one of the additional ground floor space that's leased to a high quality credit tenant that Should start their build out here probably in January. And we've got a couple of tenants we're talking to actually in pretty Our advanced negotiations about the remaining space on the 2nd floor, different use groups.
One is kind of a restaurant use group, another is more of a fitness use group. So we have some interesting options there. And then we'll see about the remainder of the ground floor space. We continue to get interest from various folks. So it's kind of an interesting mix of different tenancies.
We do think Target will attract Further interest just because they're going to drive a lot of traffic. Now obviously that location gets a tremendous amount of street pedestrian traffic anyway. But so Again, things are proceeding nicely. We are getting nice interest and the NOI from that is going to take a couple of years to Phase in as those final spaces get leased.
Okay. And maybe just one more if I may. With the development rates increasing It's over $4,200,000,000 How are you, I guess, viewing that development pipeline if that pilot initiative you mentioned about an amenity light If that's successful, does that change how you're looking at where to develop or how to develop? But maybe some color on that would be helpful.
Yes. This is Matt again. It's probably a little too early to say. We do have one community under construction. It's kind of our pilot test case for it and we're going to see what the market response is.
We're going to validate kind of what those margins look like. So the way I would think about it is it's another tool in the toolkit. We haven't really underwritten any of the deals in the pipeline to that model, but I think Could improve or particularly on larger sites where we might have multiple phases, it gives us the opportunity to segment the market a little more and kind of different price points and different service offerings, which can help on the development economics. And If it's validated, it could open up other sites for us over time.
Great. Appreciate the color. Thanks for the time.
We'll go to John Kim with BMO Capital Markets.
Thank you. Your expected development yield Your development pipeline has been trending down below 6%. I'm wondering if this is a reflection of higher costs, the mix of Projects or have you changed any of your rental functions at all?
Sure, John. This is Matt. I mean it is a reflection of the basket that's Under construction at any given point in time, some of which is product geographic mix. So that will tend to move around a little bit over time. It is in some respects a reflection of we are 10 years into the cycle.
And certainly as we've said for a while Construction costs have been growing faster than rent, so it is getting harder to find deals and deals on balance might be a little tighter, although there's still very strong value creation And the stuff that we're cleaning as we've talked about. And by the way, our cost of capital is down quite a bit over the last 2 or 3 quarters as well.
Got it. Okay. And then a follow-up on the limited service offering that you're testing out. How do you think this will impact returns? Do you foresee this being a lower growth product with a higher exit cap rate offset by lower costs?
Or do you think basically the IRRs will be pretty similar to your
It's really too early to tell, John. I mean, again, we view it as there's a customer segment out there that's Probably being underserved today because 99% of the new product that's built is being heavily amenitized And the concept is to provide the same apartment itself, high end finishes and strong layouts, but Just less of the other trappings, the bells and whistles that our research would suggest. There's lots of customers that want the nice apartment, but Don't necessarily value all those other things, which have a lot of first cost and a lot of hidden costs over time as well, which maybe are underappreciated by the market. So it's hard to say how that might impact valuation or cap rates. I don't see any reason why rent Growth would be significantly different than the rest of the market.
And it does seem like asset valuation is primarily just driven by The cash flow can generate size. Not sure I would expect anything significantly different there, but time will tell.
Is there another developer or developer doctor who You are emulating for that product or are you becoming a leader?
Yes. I mean, it does require some upfront in technology to enable it and some back of house service. For example, one of the reasons we think we can do this Profitably is because it really leverages our call center down in Virginia Beach. So we may not have an on-site presence for leasing. Some of that's tech enabled, but some of that's also can call the CCC and interact with somebody that way.
So I'm not familiar with others Hey, John.
I guess this is Tim.
I guess what I'd add to that, I mean, still most of the production is coming from merchant builders. It tends to be a little more risk averse. And if they've got a customer, an institutional buyer who's accustomed to buying a highly amenitized building, they're less likely to sort of take that risk In terms of doing something different, but as Matt mentioned, we around customer research, we have plenty of customers That are paying more today in our existing assets and sort of a value, because they're not necessarily using All the amenities or all the services that we're providing and we've done enough research to know that they would like something less, Yes, but they want they don't want to compromise, say, on the quality of their unit and the quality of the finishes. So it's really just even taking the existing customer base we have today and continue to segment it and provide them something we think that's a better match for what they value.
It is also one of the advantages we've talked about being such an active developer. We do have the ability to create the product that Maybe more in tune with what certain segments of the market will value as opposed to just being limited to buy what somebody else has built.
Thanks for the
color. We'll
go to John Guinee with Stifel. Please go ahead.
Great. Thank you. Quick question. If you look at your retail, I think you said maybe a $10,000,000 stabilized NOI and you cap that at 5%, so you say that's worth $200,000,000 It looks like your basis in the multifamily, now condos is about $426,000,000 $2,500,000 a unit. Is it safe to say that you breakeven on this one is all said and done if you value the retail at
$200,000,000 John, this is Tim. I think our expectation, I think we've shared before is that We thought there was between $100,000,000 $150,000,000 of incremental value here. So no, we do expect to make money. If the retail were valued at $200,000,000 Matt mentioned the average unit that's sold today is about 2.75, but That's not where the average unit is priced today. So based upon current pricing, there is incremental profit over and above a breakeven scenario.
Great. Okay. And then a follow-up on
your furnished units. Are you going from 0% to 5% in a couple of years? And what's the big change of heart to decide that furnace units have merit?
Yes, John, this is Sean. A couple of things. One is in terms of why it has merit. As I mentioned in my prepared remarks, we do a fair amount of consumer research and We identified about 10% of the market actually that has some level of interest in a furnished apartment home, either expressed interest or would consider it. And so and we've just anecdotally, we've had that people come in looking for furnished apartments.
So But we have tested that the last 18 months across a sample of communities in our portfolio. We are seeing some pretty steady demand And therefore, we do think it's a profitable opportunity. So to be able to scale it, we'll have a team together here to do that. And getting to that 5% mark, it could take yes 2 or 3 years depending on the pace at which we decide to go. So as we scale it From where we are today, which is call it 300, 300, 400 units type of thing, just something that'd be more substantial, it probably won't Grow in a linear fashion, it'll probably get to about 1,000 and then we'd go much faster.
Hey, John. John, maybe just to add a couple of things. I think there's a couple of other things that work and Just changing consumer preference, particularly among those under 35 who just don't want to own as much stuff as or don't need to own as much stuff as perhaps As generations pass. So I think that's feasible. I think another piece of it is there just aren't that many companies that have the scale that we do that can Actually make a business out of this.
So if you're a fund that owns 5,000 or 10,000 units, you're probably not going to make a big investment Into this business versus somebody that owns 80 or 100,000 units. So I think it's kind of a combination of those two things that's Great. What we think is a feeling business
opportunity. Great. Thank you.
We'll go to John Pawlowski with Green Street Advisors.
Thanks. Sean, on Page 5, the like term effective rent change, if You swapped out the East Coast versus West Coast and just showed urban versus suburban. What does the 2019 recent trajectory look like
if you zoomed in on that?
Yes. So if you're looking just for our portfolio, John, as compared to the market overall? Just AvalonBay suburban versus urban portfolio. Yes. So suburban versus urban, they basically were flat on a year over year basis at 2.7%.
When you look at it from that perspective and that has changed And that doesn't include all the assets because they're classified different ways. There's infill suburban, suburban. So this is true definition of strictly urban We're strictly suburban and throwing out COD and all those kind of things. So it's not going to line up with the 3.2 for the full quarter. But you look at the pure urban and pure urban way we define it, they're similar.
Not in the past, obviously, that's been very different over the last But it has converged as well. So as Tim indicated, whether you're looking at AV, you're looking at urban or suburban or you're looking across different markets, Sort of similar pattern of conversion across all those variables. Okay. Tim, curious to get your thoughts on how you're thinking about the trajectory of starts moving forward, have you waited tug of war between the improved cost of capital that Matt alluded to and then Perhaps some flashing yellow lights in the economy and just which two
of those variables are weighing out in your mind right now?
Well, John, I mean, it's one of the reasons why we do match fund. So to the extent you're match funding, in some ways, it's not that Different than your stabilized portfolio. You got the risk right of the assets that you That's the 80,000 apartments that you already own, but those are completely funded to finance. But the same is pretty much true Everything that we start from a development standpoint. So if anything, I think it as you get later in the cycle, it just puts us more positioned of what we've talked about in the past.
Just be flexible, try to have as many option contracts as you can to give yourself flexibility potentially to either to drop a deal or to renegotiate a deal Or to push it out. And we don't have any land inventory to speak of, so we could always, if we had to, sort of buy the land and sit on it. But right now when you're talking about 6% projected yields against where our incremental Yes. Marginal cost of capital is we think it still makes sense and that asset tags are still well above replacement cost And most of our markets, so it's more it's been more of the opportunity set. We've been adding about $1,000,000,000 a year in new development rights and we've been starting about About $1,000,000,000 And I probably would focus on that probably as much as anything when that pipeline starts to Maybe start to dry up because we're just not seeing value in the land markets.
Okay. Thank you.
Pardeep Goh with Gellman and Associates is next.
Hey, guys. How are you? Thanks for taking my question. I've just got 2 for you. Matt, you've been a veteran of Multicamity Development for a long time and just wanted to get your thoughts on how you see the regulatory environment Today versus maybe 5, 10, maybe even 15 years ago, across all markets, not just California, and maybe talked about which markets have the greatest barriers on a regulation standpoint versus which ones are the best.
Sure. There's some interesting crosscurrents there. And you see it obviously in the other side of it, which Just the rent control. And in many ways, it's the regulations that have created in many of our markets part of the environment that's Provided for supply constraints that in turn have driven rent growth to be well in excess of inflation over a sustained period of time. The barriers to entry are still very, very high in California.
The CEQA process, In turn, makes it very difficult for merchant builders to hang in there through that time period, the legal challenges that we see. So the barriers in California, I think, are as high as ever. They may be higher in L. A. Now with JJJ passing couple of years ago and some of the labor requirements that have been put on top of that.
If you think about Like around here in the mid Atlantic, I'd say the barriers this cycle are even lower than prior cycles. And some of that frankly is better landings planning as some of the local jurisdictions here have been Focused on transit oriented development and frankly from a public policy point of view, one of the benefits has been West rent growth this cycle. It hasn't been great as a landlord, but Maybe it improves the economic competitiveness of the region long term. So some crosscurrents there. And then in some of our very constrained markets in the Northeast, They're just different crosscurrents both directions in New Jersey.
There's kind of a one time once every 20 year opportunity get a little more supply in the suburbs inland suburbs because of some affordable housing litigation and regulation, which is having some teeth. And we've been able to take advantage of that and get a bunch of sites in some submarkets that haven't seen much supply for a generation. So you may see a little bit More there over the next 5 or 10 years. Conversely in Boston, suburban Boston where we've had success for a lot of years What they call Chapter 40B there, which is a similar provision that forces small towns and to take a certain amount of affordable housing, which we then integrate into our market rate communities. For the 40B, a lot of the suburban Boston jurisdictions Have met their obligation now.
So if anything we've seen, we saw more supply there over the prior couple of cycles than we may see over the next cycle because of that. So Yes, it really does vary from region to region.
I guess I have one thing to add and
maybe it's implied in Matt's comments. The regulatory barriers are just higher in the suburbs than the urban areas, maybe with the exception of L. A, as Matt mentioned. Certainly true in the Northeast, Certainly true in California. What has been remarkable this cycle is urban markets, it's certainly been an economic barrier, financial barrier, Not a regulatory bearing.
That's certainly been the case. And one of the reasons why you've seen why we've seen elevated supply in our markets This cycle versus prior cycles because it's made financial sense and oftentimes it's been highest and best use Relative to condominium, relative to office, relative to hotel, I think this cycle condos They've only accounted for about 5% of multifamily supply and prior cycles has been closer to a quarter of new supply. So I think there's been A few things that are a bit more unique about the cycle, but I think it still continues to be largely the suburban Northeast California markets that are toughest to finish right from a regulatory standpoint.
Thanks guys. That's probably the best response I received to that question. So thank you for that. And just My second one is pretty easy. It's just putting out the blended lease over lease rent by new and renewal and maybe talking about pricing power in the 4th Realizing that low leasing volume quarter?
Yes. In terms of Q3 specifically, In terms of the breakout, as I mentioned, it was a blended 3.2%. It was 4.6% on renewals. And for my comment earlier, it's been pretty stable all year. We It's expected to be also relatively stable in the 4th quarter.
And then on move ins, it was 1.7% during the quarter, That typically is the metric that on a seasonal basis tends to drift down as you move through Q4 and Q1 And peaks as you get into kind of late Q2, early Q3. And we don't see any reason for that pattern
Drew Babin with Baird is next.
Good morning. This is Alex on for Drew. Just one quick modeling question for us. It looked like a pretty sizable When it came to asset preservation CapEx, if I run rate the current year to date piece, it looks like year to year growth could be over 18%. Obviously, rising costs and some seasonality is
at play here. But I
was just curious what's driving that growth? And if you have any color
you could provide us on how
we should expect that to trend in 4Q and into 2020?
Yes, Alex, this is Sean. Similar to what I talked about on maintenance projects, there tends to be seasonality of the CapEx as well. The way I'd probably think about it from a modeling perspective is that 2019 maintenance CapEx is probably going to be in the range of 5% to 6% of NOI. There's a piece of that that we call remerchandising that is sort of a refresh of amenity spaces and such that You could probably say it has some return to it, although hard to quantify. But if you use that 5% to 6% of NOI as sort of a run rate, That's about right.
It will be a little bit lumpy from year to year, but that's sort of how we're looking at it. That's helpful. Thanks.
Yes.
We'll go to Alexander Goldfarb with Sandler O'Neill.
Hey, good afternoon and thank you for taking the questions. Just two quick ones for me. First, upfront, I didn't hear it, but maybe it got lost. Your OpEx for the year, Your guidance is 2.1% to 2.7%. You're trending 2.8% for the year.
So what
are the items in the Q4 that
are going to bring it down? Or is the trend sort of what it is, but within your overall FFO guidance, you're able to manage the higher OpEx?
Yes. Alex, this is Sean. We haven't changed our guidance. And so as I mentioned earlier, every quarter is a little bit lumpy. Q3 was lumpy for a number of reasons related to R and M projects that are done in certain seasons of the year.
I mentioned marketing was up dramatically because of a substantial credit we received last year when marketing was down 21%. The insurance renewal bleed through payroll. We continue to see good reductions in FTEs as a result of the initiatives I mentioned. So Okay. This is Mike.
We're pretty comfortable with where we are.
Okay. Kevin, one more thing to think about as you evaluate The year over year growth rates in OpEx is just obviously when you look at what happened in the prior year and last year in the Q3 2018, we had a pretty tough comp with year over year growth OpEx of 50 basis points. So that's probably a key driver of the 4.2 This year, so I think the lumpiness that China loses not only in terms of what we spend, but sort of what happened in the
prior year, so you need
to kind of incorporate that into your
Okay. That's helpful. And then second is just going back to the new initiative you're trying on the sort of Amenity light and people light properties. I understand the point about amenities. You walk the buildings and certainly there's a lot of space that doesn't get used.
But I would think that part of what makes the REITs different from others, especially you guys to be able to charge premium rents is sort of that in person customer service. So in your testing, is there no diminishment of what the tenants will pay relative to not having the people around them They feel they're being catered to or how do you make that trade off between the premium rents versus giving people that experience that they're actually being catered to If they have a maintenance request or have a package request or anything like that?
Yes. No, Alex, I'll respond to that one anyone else can chime in if they like. But we've done a fair bit of work on this in terms of consumer research both through Surveys, focus groups, shadows, a lot of different things. We engaged some consultants to work with us on this. And What you find might be a little surprising, which is if you think about kind of consumerism today what people experience, whether it's Buying a car today, whether it's shopping through Amazon, whether it's a lot of other things, they kind of want to be able to do things when they want to do it on their own as opposed to Being dependent upon someone else holding their hand all the way through.
And for the most part, they actually don't want that unless they specifically need it for a purpose. And so all of our consumer research has said that like from a leasing standpoint, do they want to come in and meet a salesperson and spend an hour touring Community with a salesperson and kind of selling them along the way for the most part the answer is no. They want to see everything they can online and if they want to schedule a tour, they want to go there when they want to go there, regardless of the office hours, they really don't want someone to show us Or show them around except for one segment kind of a mature social segment. So that's it. And then on the maintenance and service side, it's more What's the right level of service?
You're absolutely correct that some segments want the 24 hour response in the white glove service, but there is a decent chunk of the market that It doesn't necessarily value that and they'd be perfectly fine with they have picked Something is the dishwasher isn't working today. They don't cook a lot. They're fine if it's 24 to 48 hour service. As long as you give them the option to tell you how important it is for them To have that thing fixed, they never responsive to their demand. The network is just fine.
So I think it's just segmenting the market in A more fine way so that the people that really do value those things are paying for it and the people that don't value those things aren't paying for it. And as I mentioned in my prepared remarks, Absent the amenity space, which not only has capital costs, but pretty heavy recurring costs for OpEx and CapEx And sort of the on demand service as opposed to the continuous service is highly responsive. They can see rents that's 10% to 20% lower than a brand new building down the street and there's definitely a segment of the market that would prefer that option. So I Tim, do you want to add?
Yes. No, I think you hit it at the end. Well, I was going to jump in. I mean, lower rent is part of the value proposition here. And I don't think necessarily low touch Necessarily means low levels of service.
I think you can have high level of service with high-tech and sort of a low touch Kind of offering. So I think it depends on the issue, Alex, but part of the value proposition is absolutely that they would pay a lower price than a comparable community that would have Be more amenitized and more fully staffed.
Okay. Thank you.
We'll go to Linda Saye with Jefferies. Hi. Thanks for taking my question. The technologically driven efficiencies you're driving in leasing and maintenance, apologies if you've discussed this previously. Is this across the entire portfolio or just a portion?
I'm just wondering how much opportunity exists to reduce expenses further through these types of initiatives.
Yes. Linda, this is Sean. The expectation is that we would deploy it across the portfolio. It might have slightly different nuances Across certain buildings, depending on the customer segment that's in that building. So as we were just talking about the limited service program, if I'd be at one extreme, There'd be another building maybe as a high touch, very high rent building that could be at the other extreme.
But we expect to deploy a lot of it across 95% of our portfolio where people have the option to self serve that's sort of the default. But if they would like a tour, they can schedule 1 at a time that's convenient for them and things like that. So we're taking advantage of the opportunity across the entire portfolio Yes. We may just see different usage of certain services or needs for leasing etcetera based on the customer profile at each one.
Thanks for that clarification. And then on the Parklogia, could you talk about the different how different the retail rents are between the four levels shown on Slide 13? And then what's the average term for the leases you've signed?
Yes. Linda, this is Matt. The rents are very different between the four levels. I think we provided some high level thoughts about that Maybe a year or so ago on a call, but you're talking about if the highest rents are on the ground floor with the Broadway frontage, The 2nd floor might be 40% to 50% of that rent and then the basement and subbasement would be maybe the basement's a little bit less than that and the subbasement is quite a bit less than that. So it really does vary based on the specific space.
The lease terms are generally longer term leases. I think one of our anchor lease, The first two leases were I don't remember exactly. I think they were probably 20 year terms or I think with some extension options beyond that probably I probably can't get into terms for specific leases, but generally speaking, they've been relatively long term.
Thanks for that. And then just a Final one. The demand for fully furnished apartments, can you or can we assume the economics are more attractive for leasing these units There are fewer of these units available across the market?
Yes. There's less supply of those units. There certainly would be Premium associated with the furnished product, of course.
Okay. Thanks. We will now go to Heidel St. Juste with Mizuho. Please go ahead.
Hey, good morning or good afternoon.
I just want to follow-up
on Linda's question. Can you talk about The premium you're looking for here or maybe give us some sense of acquired ROI. We're talking about a lot of furniture here and also curious if you're Thinking, or should we expect that to be expensed, capitalized? Thanks.
Yes. Hannah, this is Sean. So just a couple of things. We've been testing a variety of different premiums. What I could tell you that's out there is if you went to a 3rd party operator, Marriott has a product some others do.
Typically what you'd find is the rent for a furnished unit relative to the base rent of typical unit That's comparable with the about double. That's a company that is taking inventory risk and signing different leases Things like that, we already own inventory risk. So we probably think about it a little bit differently. But I wouldn't be surprised if we said we could generate say 50% premiums The base rent for a unit to that customer to include the various services maybe some bulk of utilities and The cord cutting may not need to provide cable, but in some cases you do. And then as it relates to your specific question around the furniture, That would be capitalized, but then depreciated over probably a 5 to 7 year period.
At this point, we're depreciating it over 5. We think that's We've been talking to others including some of the student housing rates in terms of what to expect in that area. It seems to be 5% to 7% is sort of the expected Range, pretty useful life, so it's going to come back at you at 9% a year. So you handle Tim here. Just to be clear, in
terms of premium, if you get a $0.50 premium some of that would be for the furniture. Some of it would be a premium based with a short term nature. These leases tend not to be on average it tend to be less than A year or 24 months, which are average residence days. I think to date it's been closer to 6 or 7 months, Sean. So there is a return sort of for that additional The vacancy exposure that's factored into that 50% premium as well.
That's helpful. Thanks. Because I
was thinking some of those numbers sounded more like shorter term corporate units, But appreciate that color.
Yes. I think that's right. I think some of the premiums when you hear it like twice, 2x a lot of times that is a very short term
Yes.
There's a third party operator that might be taking a 12 month lease, but they're leasing it 30 days at a time type of thing. We would certainly have some of that business, but just we want to manage that exposure appropriately from a lease expiration profile standpoint. And so far we've been serving customers that are interested in something that's slightly longer.
Got it. Got it. Okay.
Thank you. Appreciate that. And then
I wanted to go back to some of
your earlier comments on supply. 1st, in LA, it seems like much of the supply coming online is more focused Downtown, so curious what you're thinking about and thinking about for your more suburban SoCal portfolio, you're a bit more in the Pasadena, Burbank, Orange County. So I'm curious how you're thinking about the performance of your more suburban portfolio versus, say, Downtown LA? And then maybe some similar commentary on Boston, where again your portfolio it more suburban versus the urban core there where the supply seems to become a lot more? Thanks.
Yes, sure. Happy to talk Briefly, maybe starting in reverse order. In Boston, correct, most of the increase in supply will be concentrated in and around, call it, the core urban So, Marcus, majority of our portfolio is suburban in Boston. We continue to develop a number of suburban communities that Forming quite well. So in that environment, we would expect our portfolio to hold up relatively well, given most of that supply is concentrated downtown.
In terms of L. A. And your specific comments about L. A, yes, I mean, the supply is and Entebius in Korea is down, but then Woodland Hills, Warner Center, kind of Hollywood and Mid Will Share, South Central, there's a little bit actually and then Southern Copper City and down by the On the coast, as I mentioned. So in terms of our portfolio, a little bit of exposure in Hollywood.
We don't have anything in South Central or Korea We have 2, 3 assets in Woodland Hills Warner Center, but that market has seen that submarket has seen a fair amount of supply over the last decade And it's done relatively well. Most of the assets we have there are more affordable price points, which tend to perform quite well in the face of new supply. So in terms of L. A, I think we are positioned pretty well given where the supply will be delivered in 2020.
Thank you. Yes.
We'll go to Nick Joseph with Citi.
Hey, it's Mike Bilerman. I just had a few follow ups. The first one is just back to the retail of the Park Loggia. Out of that $10,000,000 of forecasted NOI, How much is represented by the 45,000 square feet of leasing? So effectively, how much of the $10,000,000 have you secured?
Michael, it's Matt. I think it's probably roughly half, maybe a little bit more than half based on
Well, we had about $1,000,000 in our 3rd quarter note is really
Yes. That didn't include one
tenant. And it's a little bit early to kind of give guidance in terms of what will By the way, in calendar 2020, but most of it is a lot of the parking space.
Right. Arguably, I mean, that you went through the rent differential mean, 2nd floor and basement, I mean, so while you're 2 thirds leased, clearly, it's at lower overall rents relative to the street where you still have The 9,000 that you're marketing. So that's why I was just trying to get a picture of Correct.
Michael, that's Michael, correct. I mean, the lease rates, as Matt mentioned before, are all over the map depending upon what floor you're on. But I think it ranges to below $100 a foot to Well over $400 a foot if you're on the parts of the ground floor. So it's I don't think that's what we have pro form a dent to the balance of what's on the 1st floor. Some of the better parts of the first floor have already taken, but there is more high value space left to be leased in that building.
Right. And if I was trying The cash flow impact of what's been done and what's to come. So I take it 50% is a reasonable number than to use. And then part of that is, do you have intentions to I mean originally this was supposed to be a JV on the retail or even a sale. Now that you're doing selling at the condos above, where is your mindset on selling or JV ing The retail portion because arguably it would not be core anymore to the company.
Yes, Michael, I think at some point we would likely Sell this. It's really just a question of when we how to optimize the value and when we'd actually sort of pull the trigger on that. So And then there is a tax issue just in terms of balancing it versus the any profits that we might have on the conduct proceeds. And just given that this is now a taxable transaction, we'll try to manage it to minimize taxes.
And then if you think about Tim had asked earlier about development funding as you go into 2020 in terms of capital that you will need, You've squared away all of this year, and you also have the equity forward that you put in place as well. I guess how should we earmark on arguably that capital now sitting in the building upon which you'll start selling the condos? Are you going to earmark that next year? And I guess how should we think about that capital coming back to be able to fund developments you intend to hold?
Sure. So Michael, this is Kevin. You're right. I mean, we do anticipate receiving next year Proceeds from sale condos, that would be an important component of, call it, our equity need for next year's funding activity. There may or may not be additional asset sale disposition activity beyond that.
And beyond refinancing debt, we're likely Look to the debt markets as well. As you know from our leverage profile today and our target leverage, we typically target 5 to 6 turns of leverage. We're below that now at 4.7 turns. So kind of we haven't put our budget together for next year, but certainly I think it's fair to assume that we've got I spoke to some increase in leverage a little bit given how attractive the debt capital markets are today.
And then on the AI initiatives on Slide 8, is Sydney really responding this quickly to people's requests?
Yes. You can kind of program that what you desire. So it can be instant or it can be as long as you want. Typically, instant isn't good in terms of the feeling people get. So it's typically within about a minute, Michael.
All right. Last one is you made the decision earlier quarterly results since then in the first, second and now in the third quarter have been more volatile in terms of your stock price performance relative to the index. Now I know it's hard to separate out the results themselves from things because there's other factors at play. But Help us understand, I mean, are you going to reconsider this a 1 year trial?
And I guess, how do
you think about the short term volatility that may be
Yes, Michael, Tim here. It's not our expectation that we change our practice at this point. I hear what you're saying. There's maybe a little bit more volatility because people's projections may be a little bit more of a just a wider bigger beta just around different sell side projections on this. But again, we're trying to focus and we really do manage the business For the longer term, we really think about more annual plan.
It's how we talk at the Board. It's how we talk amongst ourselves as leaders in the company, And that's our intent to continue going forward.
And just to add one thing, Michael.
I mean, I understand we're not providing quarterly workflow and That's the phone numbers anymore, but to your comment about providing us information,
apart from that,
we still provide, as you can tell from even this call, A robust level of detailed information on the business and every 6 months we go through a very detailed reforecast, which It's akin to what we do internally here, advancing business, ourselves and communicating to our Board. So there is still just an off One information that we do try to provide transparency to investors, what we're not doing is providing the specific earnings number on a quarterly basis. And but we do think we give More than enough information for investors today to derive their own estimates if they do the work.
Yes. No, and I would concur with that comment. Your transparency and The new spend, I
mean, we're already at an hour and a
half on this earnings call, is very much appreciated and I think differentiates the company over the long term. I was just making a note that since you've changed the quarterly policy, your stock has reacted a lot more volatile relative to index, unfortunately, last 2 quarters has been much more negative. But just to think about whether you're achieving The right output with the change on quarterly numbers. That's all.
Fair enough. Thank you, Michael.
Okay. Thank you.
And there are no other questions. So I would like to turn it back to Tim Naughton for any additional or closing remarks.
Well, thanks everybody. As Michael just mentioned, we're about an hour and a half into this call. So we'll give you a quick goodbye and we'll look forward to seeing You with Nate Reed here in just about 2 or 3 weeks' time.
Thank you
very much. That does conclude our conference for today. I'd like to thank everyone for your participation and you may now disconnect.