Earnings Call: Q2 2019

Aug 1, 2019

Good morning, ladies and gentlemen, and welcome to AvalonBay Communities' second 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. You may enter the question and answer queue at any time during this call by pressing star one. If your question has been answered or you wish to remove yourself from the queue, please press star two. If you are using a speakerphone, please lift the handset before asking your question, and we ask that you refrain from typing and have your cell phones turned off during the question and answer session. Your host for today's conference call is Mr. Jason Riley, Vice President of Investor Relations. Mr. Riley, you may begin your conference. Thank you, Cody, and welcome to AvalonBay Communities' second 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's a discussion of these risks and uncertainties in yesterday afternoon's press release, as well as in the company's Form 10-K and Form 10-Q filed with the SEC. As usual, this press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms which may be used in today's discussion. The attachment is also available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during the review of our operating results and financial performance. With that, I'll turn the call over to Tim Naughton, Chairman and CEO of AvalonBay Communities, for his remarks. Tim? Thanks, Jason. With me today are Kevin O'Shea, Sean Breslin, and Matthew Birenbaum. Sean, Kevin, and I will provide a brief commentary on the slides that we posted last night, and then all of us will be available for Q&A afterwards. Our comments will focus on providing a summary of Q2 and the year-to-date results, an update to our 2019 outlook, a review of portfolio performance, and then lastly, a discussion of risk management. Starting now on slide four, highlights include the core FFO growth of just under 2% for the quarter and 3.6% year-to-date. Same-store revenue growth in Q2 came in at 3.1%, or 3.3% including redevelopment, with most regions, except Seattle, clustering in the 3% range. Year-to-date, same-store revenue growth stands at 3.3%. We completed a $90 million development deal in New Jersey this quarter at an initial yield of 6.5%, and $240 million so far this year at an average yield of 6.4%. Meanwhile, we started another $430 million in three communities located in the Mid-Atlantic, Southern California, and Boston markets. Lastly, we raised almost $600 million this past quarter in external capital at an average rate of 3.9%, and have raised roughly two-thirds of our projected capital needs for 2019 in the first half of the year. Turning now to slide five and our revised outlook for the full year. We expect a core FFO growth of 3.9%, or $0.05 a share and 60 basis points above our original outlook. Same-store revenue growth remains unchanged at 3%, NOI growth is up 25 basis points to 3.25%, driven by lower than expected OpEx, which is down 60 basis points from our initial outlook. Development starts are expected to be down modestly in the $900 million range. Lastly, in terms of acquisitions, we're projecting $300 million for the year, which really reflects what we've closed so far through Q2, plus what is expected to close in Q3. Acquisitions are roughly offset and funded by an increase in dispositions and opportunistic GP activity that took place in the first half of the year. Turning now to slide six. The upward revision to core FFO growth is being driven primarily by the unbudgeted acquisitions in a favorable interest rate environment on newly issued and existing floating rate debt. Projected outperformance in our same-store portfolio is being offset by shortfalls in the redevelopment and lease-up portfolios. Turning to slide seven, which provides many of the key assumptions underpinning our revised outlook. I'm not going to go through this entire chart, but economic growth is moderating as expected, with the recent print of Q2 GDP growth of 2.1%, which is down 100 basis points from Q1 and the rate that was experienced for much of last year. The consumer remains in good shape, but is also showing signs of moderation, with retail spending decelerating from its healthy pace of last year and auto and home sales flattening in recent quarters. Consumer confidence remains at a healthy level for now, supported by a very healthy labor market. Business investment has been relatively healthy so far this year as well, although business confidence has recently declined to a cyclical low as the prospect of trade wars weighs heavily on the psyche of many executives and capital allocators. This and other leading indicators have caused the Fed to reverse course with its rate cut earlier this week. Let's now turn to slide eight to see how this economic backdrop is impacting fundamentals in our markets. Job growth is expected to be in line with our initial outlook of at 1.3%, with most regions in the low 1% range, with the exception of Northern California and Seattle, which are projected to produce job growth in the low to mid 2% range. While wage growth is projected to remain healthy at around 3%, this is 50 basis points below our initial assumption. Then lastly, while completions remain healthy at 1.9% of stock, this projection is down 40 basis points due to the continuation of project delays experienced over the last few years, mostly from shortages in skilled labor. Fundamentals are a little mixed from what we expected at the beginning of the year. Job growth is in line. Deliveries are projected to be lower than expected, and wage growth is expected to be slightly less than our initial outlook. With that, Sean will now discuss our markets and portfolio performance in more detail. All right. Thanks, Tim. Turning to slide nine, we've seen a steady convergence in the performance of our markets over the past few quarters. The East Coast has accelerated as a result of improved rent growth in both the New York and Mid-Atlantic regions. While the West Coast has decelerated due to slowing growth across the majority of the markets in Northern and Southern California. Rent change for our same-store portfolio is following a similar pattern of convergence, with every region producing like-term effective rent change in the 3%-4% range during Q2. Turning to slide 10 to address our same-store revenue outlook. We tightened our range and maintained a midpoint of 3% revenue growth for the full year. In terms of the regions, we expect the Mid-Atlantic and Pacific Northwest to trend to the upper end of our original range, while Northern and Southern California are projected to come in closer to the lower end. Within the regions, better performance in the Mid-Atlantic is being supported by continued improvement in both suburban Maryland and northern Virginia. Each market posted greater than 3% year-over-year revenue growth in Q2. The District of Columbia remains weak due to the volume of new supply, and revenue growth is running in the low 1% range. The Pacific Northwest has certainly exceeded our expectations for performance, with annualized job growth of 3% plus the last six months, supporting stronger demand as roughly 9,000 units are being delivered into the market this year. In Northern California, San Jose has been leading the way, supported by roughly 3.5% annualized job growth over the past six months. Job growth in San Francisco has also been healthy, but performance has been a bit more mixed given pockets of new supply in certain submarkets. The East Bay has been the weakest performing market in Northern California due to more modest job growth and the impact of new supply. We're projecting roughly 4,700 new units will be delivered into East Bay submarkets this year, which is more than what's expected in San Jose and San Francisco. In Southern California, we've experienced weaker performance in Los Angeles, San Fernando Valley, and to a lesser degree, San Diego. Some of the weakness in the Los Angeles and San Fernando Valley markets relates to slower job growth earlier in the year. In addition, the governor extended through mid-November, the anti-gouging protections that were adopted following the wildfires last year. These protections cap rent increases at 10% above the lease that was in place immediately prior to the fires, so we can't profitably serve the segments of the market looking for shorter-term leases during the summer months. The absence of the rent premium and incremental occupancy associated with short-term leases has negatively impacted our expectations for performance in the greater Los Angeles market through Q3. In Boston, job growth in the low 1% range and a reduction in the volume of new supply has resulted in relatively steady performance across our portfolio. The slightly weaker for-sale market and more modest demand for temporary workers has tempered the demand for short-term leases, which has modestly impacted our outlook in Boston through Q3. In New York, New Jersey, we've seen a steady improvement in market fundamentals as job growth has accelerated to an annualized rate of roughly 2% the past 6 months, and the pace of new deliveries, particularly in New York City, has slowed. While performance has improved, we are expecting our revenue growth in the region to moderate in the back half of the year, in part due to the recently adopted rent regulations, which will impact both rental rate growth and the generation of fee revenue. I thought I would also provide a little more insight into the key drivers of our overall same-store revenue growth, particularly as it relates to the first half of the year versus our expectations for the second half. During our first quarter call, I mentioned that roughly half of our same-store revenue outperformance was supported by the reclassification of bad debt, and the other half from better occupancy. Through mid-year, our same-store revenue growth of 3.3% was roughly 30 basis points ahead of our expectations, 20 basis points of which related to the reclassification of bad debt, and an incremental 10 basis points from better occupancy. Looking forward to the second half of the year, we don't expect a material change in fundamentals. In fact, we expect overall rate growth in the second half of the year to mirror what we generated in the first half. The deceleration of revenue growth is a result of tailwinds we benefited from in the first half of this year that won't support incremental growth during the second half of the year. Most notably, as I mentioned, bad debt was a roughly 20-basis-point lift in the first half of the year, but is projected to be net neutral in the second half. The benefit resulting from our investment in data analytics to better screen prospective residents and enhance our collections effort was primarily realized in the second half of 2018 and the first half of 2019. Second, as we noted during the earnings call this past January, new entrants into our same-store pool from development, redevelopment represented a larger than normal % of our same-store asset base this year. The amortization of concessions from this pool of assets in the first half of last year provided a roughly 20 basis point lift to our revenue growth rate in the first two quarters of this year. That benefit dissipates during the back half of 2019. Finally, the combination of the N.Y. rent regulations and the extension of the anti-gouging protections in the Greater L.A. region is projected to result in about a $2 million shortfall on revenue in the back half of this year, which represents about 22 basis points of growth for that period. Turning to slide 11. Our development communities and lease-up continue to perform well. During the second quarter, we averaged 32 leases and 38 occupancies per month. Average rental rates were about 2% ahead of pro forma, and yields are up 10 basis points to a very healthy 6.6%. Our performance at certain communities has been quite strong. At AVA at Serra Park in Redmond, Washington, occupancies averaged 53 homes per month for a total of 160 for the quarter, and rents are currently trending about 5% ahead of pro forma. The projected yield is 6.3%, easily a couple hundred basis points above market cap rates. At Avalon Teaneck in Teaneck, New Jersey, new residents occupied 49 of the 80 homes we delivered during the quarter. Average rental rates at Teaneck are also about 5% ahead of pro forma, and the projected yield is 6.6%, leading to healthy value creation. With that, I'll turn it over to Kevin to talk further about our development portfolio and the balance sheet. Kevin? Great. Thanks, Sean. Turning to slide 12, we highlight the significant future earnings growth expected to be generated from development underway. Specifically, we have $2.7 billion in new part of the communities that are under construction, recently completed with a projected 6% yield on stabilization. These communities are expected to generate $165 million in annual NOI upon stabilization, of which only about $3.5 million in NOI is reflected in our second quarter earnings. This external investment activity, which is already 80% match funded with long-term capital, will provide us with a durable source of high-quality earnings growth from brand-new, well-located communities that will enhance our portfolio for many years to come. Turning to slide 13, we show our $3.8 billion pipeline in future development opportunities, which are controlled at a very modest cost and offer a lot of flexibility as it relates to timing the start of construction. Only about half of our development rights are conventional conditional agreements or options to purchase land with private third-party land sellers. The other half are roughly evenly split between asset densification opportunities, where we are pursuing additional density at existing stabilized assets, and public-private partnerships, which are generally long-term development efforts that span a number of years. These types of projects allow more flexibility to align the start of construction with favorable market conditions. In addition, it's worth noting that in creating this pipeline, we've been careful to limit our financial exposure so that we enjoy an attractive set of development opportunities at a modest upfront cost. At the end of the second quarter, land held for development was a mere $19 million, and pursuit costs represented an additional $60 million, allowing us to control nearly $4 billion of future development across our markets for an upfront investment of only 2% of projected total capital costs. Collectively, this investment in our pipeline is as low as it has ever been as a percentage of our total enterprise value. While we've been active on development, we've also been disciplined in maintaining a strong balance sheet. On slide 14, we show several of our key credit metrics and compare these to the sector average for unsecured multifamily REIT borrowers. As you can see with net debt to core EBITDAre of 4.8 times, unencumbered NOI at an all-time high of 93%, and a weighted average years to maturity on our debt of 9.3 years, our credit metrics remain strong in both absolute and relative terms, reflecting our superior financial flexibility. With that, I'll turn it back to Tim. All right. Great. Thanks, Kevin. In summary, our business plan remains more or less intact for the year. Our expectation for core FFO is increased modestly. The portfolio is performing slightly better than expected with full-year NOI growth of 3.25% projected, 25 basis points higher than initial outlook. Rent growth continues to converge to the 3% ± range across our footprint. Lease-ups are performing well, as Sean mentioned, and are projected to contribute meaningfully to FFO and NAV growth over the coming quarters. Lastly, 10 years into the current expansion, we are intensely focused on risk management on both sides of the balance sheet. On the investment side, we are positioned to deliver growth from new development, but in a risk-measured way, with modest pursuit costs and land inventory exposure, and match funding development as we start construction. In terms of our capital position, our credit metrics and liquidity are at cyclically strong levels and better than industry averages. With that, Cody, we are ready to open the call for Q&A. Absolutely. If you'd like to ask a question, please signal by pressing *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that's *1 if you'd like to ask a question. We'll hear first from Nick Joseph with Citi. Please go ahead. Thanks. I want to better understand the deceleration of same-store revenue growth in June. At Nareit, you reported same-store revenue growth of 3.4% for April and May, which was 40 bps ahead of your expectation at the time. With 2Q growth only at 3.1, that implies June growth in the mid 2% range, and then guidance was maintained. What exactly happened in June relative to the first two months of the quarter? Nick, it's Sean. Happy to elaborate on that. As you pointed out, April and May basically came in at 3.4, which backing into it means June was essentially 2.6 or an 80 basis point reduction in the year-over-year growth rate. Really three components driving that. First is economic occupancy in June was down about 30 basis points to 95.9 versus the 96.2 in April and May. Occupancy normally does decline in June, just given the volume of activity and lease expirations. It was probably down about 10 basis points more than we anticipated. That's 30 basis points total, though. Bad debt was a tailwind of 20 basis points in April and May due to the write-off of some straight-line rent in our retail portfolio last year at that same time that provided a lift as compared to June. It was a headwind of 20 basis points as it more normalized. The total swing in bad debt from +20 tailwind in April and May versus a drag of 20 in June is a reversal of 40 basis points. The balance of 10 basis points really relates to decelerating tailwind from other residential revenue as the New York rent regs kicked in mid-month, slightly less of a lift related to concessions, and a couple other just miscellaneous things. The big bulk of it was a 30 basis points change in economic occupancy, and then the 40 basis points swing related to the issues on bad debt that were kind of lumpy. Thanks. That's very helpful. you mentioned. Yeah lease-up continues to perform well, but you're expecting marginally lower new development and lease-up NOI this year versus initial expectations. What's causing the variance versus your initial guidance for that bucket? Sure, Nick. It's Matt. I guess I can respond to that one. The lease-up NOI for this year was very back-loaded. Even today, we don't have that many assets in lease-up. I think we have eight. First quarter, it was something like five. We do expect it to build over time. We're opening some new communities actually next month and this month. It's basically delays in getting those first C of Os in a couple of large West Coast communities in the East Bay and in Hollywood, which are pretty big communities. We're just opening the doors a month or two later than we had expected. Thanks. It's more of a timing issue in 2019 versus anything on the stabilized yield for those assets? Absolutely. Great. Thank you. Thank you. We'll take our next question from Rich Hightower with Evercore ISI. Hey, guys. How are you? Good. Sean, I wanted to quickly backtrack on the bad debt comp there. I just want to understand- Yeah the mechanics of Okay, the negative 20 basis point headwind in June, but in the prepared comments, you said that would be basically a neutral for the second half. I'm just wondering how that would work. What happened last year that would make that a net neutral for the second half of 2019, just so we understand that? Yeah. As we had talked about, I think, earlier in the year, we had made some pretty nice investments in data analytics that impacted both how we were screening prospective residents as well as our collection efforts. We've realized the benefits of that kind of in the second half of 2018 and first half of 2019. Any tailwind from that is not present in the second half of 2019. It's basically sort of a net neutral. Then in addition to that, I mentioned the noise within the second quarter as it relates to retail defaults that basically sort of propped up April and May growth rate because the write-off occurred last April and May. As compared to June, we didn't benefit from that. It was really kind of a plus 20% and minus 20% for the quarter. It was essentially a net neutral. You see that continue as we move into the second half of the year as well. We got a nice lift out of the investments we made, but the benefit is now burned off as we moved into basically June through the balance of the year. Okay. That's helpful. I know you mentioned earlier that there was an impact to rents due to some changes in the short-term rental maybe restrictions. L.A. Yep. Yeah, in L.A. Can you quantify the impact there for the second half as well? Is that something that matters? There just wasn't a number attached to it. Yeah. Good question. Our expectation is really there's two issues out there that will impact the second half that were not anticipated. One is the rent regs in New York, which for the consolidated portfolio in same-store is a little over $1 million. It's $1.05 million. We're also expecting about a $1 million shortfall on revenue across Southern California, mainly focused in Los Angeles, as a result of the lost rent premiums and incremental occupancy that's typically associated with short-term leases that we can't profitably offer to those customers because we're limited to a 10% rent premium based on the rent caps that are in place. It's not a profitable bet to make for a two or three-month lease to do that for a 10% premium when you consider the incremental downtime, vacancy, turn cost, different rents when they're done. Okay. I know that maybe one or two of your peers have kind of ramped up focus on the short-term rental program. is that- Yeah would you say that their success maybe in the last couple quarters on that front is attributable to markets outside of L.A.? It sounds like it has to be. If you're complying with the anti-gouging laws related to 10% rent caps, I suspect that people are not offering short-term leases in that market. At least in our view, it wouldn't be a profitable offering. Okay, got it. Thank you. Yep. Thank you. We'll take our next question from Richard Hill with Morgan Stanley. Hi, this is Lauren Weston on for Richard Hill. Could you just provide a little bit more color on what drove expenses higher? Specifically, in California, we see same-store expenses up nearly 7%. Could you just provide some more color around what drove that? Sure. Happy to do that. This is Sean. Lauren, as it relates to Southern California and Northern California, both up north of 7%, a number of sort of unusual things going on there. In terms of Southern California, there was a supplemental property tax assessment that came in that's responsible for about 30% of the increase. We had our insurance renewal. It's about 15% of the increase. The other thing is we had a pretty soft growth rate last year. It was a little bit of a tough comp as it relates to the timing of maintenance projects and stuff. It's kind of one-off items, if you look at it. In Northern California, some of the specifics there, in terms of property taxes, it's about 20% of the increase. Utilities are about 15% because of a rebate last year, sort of a year-over-year comp issue. In both regions, we were hit harder with benefits based on some claims activity in the second quarter that impacted those numbers. That's what's happening specifically in the California markets. In terms of just overall expense growth, maybe sort of high-level comments on things that are sort of outside the normal range. Payroll was up. About two-thirds of that relates to the increase in benefits cost that came in late in the quarter based on claims activity. The balance of it was related to merit increases. If you look at payroll on a year-to-date basis, about 90% of the growth in payroll is due to benefits, but it's been offset by headcount reductions on-site as part of our operating model work, and headcount on-site is down about 4% year-over-year. That's what's happening in that category. In the things like marketing, on the positive side, certainly, reduced costs for ILS and PPC marketing, along with material reductions in our call center costs as a result of our adoption of AI for lead management earlier this year. Those are some of the outliers. Thank you. That's really helpful. Okay. Thank you. We'll take our next question from Shirley Wu with Bank of America Merrill Lynch. Hey, guys. Thanks for taking the question. I have some questions based on the macro assumption changes that you made. Your delivery assumption is now down 40 basis points to 1.9. I was just curious if you could give a little bit more color on which markets those were in, and have you seen any material benefits in 2019? Yeah, Shirley, Sean, happy to address that. In terms of delays, the delays were most pronounced in New York City and Northern New Jersey. About 1,500 units in New York City, 1,900 in Northern New Jersey, about 2,800 units in San Jose. I mentioned in my prepared remarks that San Jose is kind of leading the way in Northern California. It's been a healthy market, certainly supported by reduced deliveries. About 3,900 units in terms of fewer deliveries in Los Angeles. Those are the ones that are most pronounced. Yes, our expectation, if that's sort of the heart of your question, is that we would expect these deliveries to bleed into 2020. Okay. That's good color. On job growth and wage growth. Wage growth, your assumption came down 50 basis points versus job growth that was only up 10 basis points. I was curious as to how you guys think about that dynamic between those two drivers in relationship to demand. Hi, Shirley, this is Tim. First of all, those aren't our numbers. Those are third-party numbers that we rely on. The wage growth number is for the entire population. I think it's a fair question, what's happening with our resident base? Our resident base probably has seen a bit stronger wage growth than that, just given the disproportionate number of four-year college grad degree folks in our unit. I'm not really sure why it's falling short from maybe the 3.5%-3%, what's the driver there, just given the shortage of labor and the tightness of the job market. I guess the point of that slide from our standpoint is it's more or less, from a demand standpoint, the big demand drivers are more or less coming in as expected, a little bit better on job growth, a little weaker, just marginally. When you talk about 50 basis points, I think it's almost rounding error, honestly, but marginally weaker than originally anticipated. Got it. Thanks, Tim. Thank you. We'll take our next question from Nicholas Yulico with Scotiabank. Hi, good afternoon. This is Trent for Hugh on with Nick. Sean, going back to the revenue growth from June, what drove the occupancy drop beyond expectations? Is that from pushing a little bit too aggressively on rent or not enough demand, move-outs to buy or some other factor? Yeah, I'd say generally it just relates to us having our foot on the gas earlier in the year. As we mentioned during Q1 and the early part of Q2, occupancy was running ahead of plan. That would ignite a price response in terms of us being somewhat more aggressive. When you're talking about ±10 basis points, it's a little hard to call it that close in any one given month. I think I mentioned in my prepared remarks that normally you see declines in occupancy as you move into June, and so it was an incremental 10 basis points or so as a result of what was primarily that effort. In addition to that, the only other thing I'd point to is you start seeing some of that short-term demand in L.A. show up in June, and we didn't have that this year. Okay. Are you able to disclose the spread between asking rents and what was accepted, what was signed? In terms of renewal offers? Yeah. Yeah. In terms of renewal offers, those numbers typically run anywhere from 60 to 80 basis points. If you're in a really soft market, as much as 100 basis points, if that's what you look at in terms of overall acceptance. Okay. I guess shifting a little bit, I'm sorry if I missed this, but if you haven't spoken about it yet, on Columbus Circle, can you give an update on the condo sales process and how you're positioning that asset given a generally slowing high-end condo sales market in New York? Sure. This is Matt. I can give you a little update on that, as well as on the retail leasing. On the residential, we've been open for sales for roughly three months, call it, and we do at this time have 23 executed contracts. That's pretty consistent with the pace we would've expected. Again, the average sale price is around $3 million, and 80% of the units are less than $5 million. It's really above $5 million where I think you've seen more softness. We're continuing to take market feedback, and we'll continue to see how it goes. As it relates to the retail, we do have another lease that's been executed since the last call for 2,600 sq ft on the ground floor. That brings us up to 69% leased by total square footage and roughly 55% by revenue. Again, to remind everyone, we have about 66,400 sq ft of rentable retail there. At this point, we've leased 45,500, call it, which leaves us with about 21,000 left to lease. Of that, about 12,000 is on the second floor, and we are in active negotiations on that space with a potential tenant. There's another roughly 9,000 sq ft remaining on the ground floor in two separate demise or future-demised spaces. Things are proceeding there as we had hoped, and we'll continue to make progress there. All right. Appreciate the detail. Thank you. Thank you. Our next question comes from Drew Babin with Baird. Good morning. This is Alex on for Drew. Given softness in Southern California, I'm curious if you could give some commentary on why you're choosing to both buy and start developments on assets in the region. Are pricing and yields adjusted to reflect the conditions today, or are you guys expecting some incremental improvement in your underwriting? Sure, Alex, this is Matt. I can speak to that one. Southern California is still doing fine. As Sean mentioned earlier, kind of all the regions' performance is converging. Southern Cal has historically been among the most steady and solid performers of all of our regions. It's probably the most diversified economy and has an excellent long-term track record. It's not a market that frequently is going to see 5% and 6% and 7% rent growth like you might see in strong years in Northern Cal or Seattle. By the same token, it doesn't see a lot of years where rents drop. It's actually performing pretty consistent with its long-term history and pattern right now. We like that. We did buy one asset there last quarter, relatively small asset, and we did start a big deal there in Orange County this quarter, and we probably will start one more deal in Southern Cal later this year. The development pipeline is more a function of when those deals are ready to start. Those are both deals that we signed up two to three years ago. We haven't actually signed up a new development, a new land position in either Southern or Northern California in quite some time now, just given the development economics are more challenged there. We do have a pipeline of deals that we put together earlier in the cycle where the numbers still work, and we're also focused on some of these asset densification plays. We actually have one that we added in our pipeline in Southern Cal that fits that description late last year that might start next year, as well as several in Northern Cal and one in Seattle. Great. That color's really helpful. Looking at the Belltown Towers, the WhyHotel deal, curious if the initial leasing activity is what motivated that, or was it already in the hopper? Kind of while you're talking about it, I know we're only dealing with 50 units right out of the gate, but just curious if you could give us some color on how that agreement works and kind of where you guys could see that going if it turns out to be a success. Sure. This is Matt. I can speak to that one as well, I guess. Yeah, no, that's been in the works for probably we've been talking to them for a year and a half, and I think they're a great way on large assets, particularly high-rises, where just the way the nature of the building, the way it turns with the fire code units, you wind up with a lot of units turning in a short period of time. You wind up with a lot of standing inventory regardless of how strong the market is. It's well-suited to situations like that, and this would be one of them, where we're turning all of those apartments over a fairly compressed period of time, and it just creates excess capacity, and it's a way to temporarily get some revenue out of that capacity. It's a deal with a kind of a base rent and then a participation. Based on how they do. I think the initial term is six to 12 months, six months, there's some extension options. We'll see how it goes. Typically, we try and manage the lease-up to be full within a year-ish, a year, give or take. If we're consistent with that, they'll probably be there for roughly nine or 10 months. I think they're going to open later this month in August. Great. That's really helpful. Thanks for taking my questions, guys. Sure. Okay. Thank you. We'll now take our next question from John Pawlowski with Green Street Advisors. Thanks. Tim or Matt, just curious to get your thoughts on your long-term outlook on your Connecticut portfolio and then suburban Jersey, central and northern New Jersey, three to five years, will you be net growers, shrinkers in those markets? Sure, John. Tim, I think we've talked generally about capital allocation, particularly as it relates to our expansion markets of Denver and Southeast Florida, and that we'd fund those in part out of selling out of some of our Northeast markets. We have been selling some of our Connecticut communities. In the case of New Jersey, we've always had a deep and robust pipeline. It's created a lot of value. It's just going to make sense to sell some of those assets over time and recycle capital within that region. I think probably New Jersey will continue to be more active from an investment standpoint than Connecticut. It's a healthier economy than Connecticut. If you look at what we have left in Connecticut, it tends to be the stuff kind of closer, southern Fairfield, closer to Westchester, where it feeds more off of the dynamics in the city in Westchester County. Okay. I know you've pruned in Connecticut the last five years, give or take. Is Connecticut a full exit in the coming years? We've not made that decision. Certainly, again, like I said, most of the stuff we have left probably shares more the properties of what's going on in the stuff that we own in Westchester. We own in places like Darien and New Canaan that are pretty protected from a supply standpoint. If the state finances really continue to spiral out of control in Connecticut, we'll continue to assess kind of our ownership position there. Okay. The last one from me, just the land bank going forward and sites we don't yet see on attachment nine, I guess, in two or three years when they roll in, is the mix more suburban or less suburban than the sites currently under construction? Hey, John, it's Matt. I'd say it's probably pretty similar, probably more suburban. We don't have a lot of urban under construction now, and we have, I think, one high-rise in the pipeline at this point, of those 28 development rises, so one or two. We're continuing to find much better value in the suburbs, much better risk-adjusted returns. Again, our sweet spot is really high-density wood-frame product, and I would expect that to continue really until the cycle turns. Okay. Thank you. Thank you. We'll take our next question from John Kim with BMO Capital Markets. Thank you. I think, Sean, you mentioned in your prepared remarks that New York rent regulations will contribute to a $2 million shortfall in the second half of this year in revenue. Can you just remind us or clarify what exposure you have to rent-stabilized units that are not 421-a units in New York? Yeah. John, this is Sean. Clarify a couple of things. The $2 million actually represented two different components that I quoted. One is a little over $1 million in terms of the impact in the second half of the year of the New York rent regulations. The other $1 million is the loss of short-term lease revenue, both premium and occupancy in L.A. That's the shortfall in the second half of the year of the $2 million. As it relates to the New York reg specifically, in New York City, we have four assets representing about 2,100 market rate rent-stabilized units, that basically have another 10 years to run sort of on a weighted average basis to maturity. That would be impacted in terms of the cap on taking preferential rents to legal rents when people move out, things like that, if that's what you're looking for in terms of information. What will be that impact going forward? Yeah. We haven't modeled it beyond this year. As you get out 6 months, 12 months, 18 months, there's a lot of different assumptions that go into turnover rates and things of that sort. We've not done a complete modeling on that over a longer period of time. At this point, we're providing what we believe is the second half of 2019 impact. Once we see the market response to what's been adopted in the way of turnover, the potential impact on OpEx, the potential impact on the spreads between preferential rents and our ability to go to legal, what they would have been versus where they come in based on the RGB guidelines. There's just too many assumptions to model until we start to see some market response to the regulations that were adopted. Sure. Okay. If I could ask a couple of questions on your blended lease growth rate. The easier one first. A, do you provide a guidance for what this will be this year? Secondly, when I look at page 10 of your supplemental, it shows 3.3% this quarter and then 3.2% in the second quarter of last year. If I look at last year's supplemental, I apologize, you may not have this in front of you, last year's supplemental said it was at 2.8%. Is that difference of 40 basis points just change in mix? Yeah, change in basket. As we mentioned earlier on this call and in the earlier call back in January, the number of new entrants into the same-store pool from development and redevelopment is unusually large for the same-store pool this year. Those assets tend to have a little bit greater performance as it relates to lease renewal changes and new move-ins, because of both burn-off on concessions. You're only leasing half the units on turnover as opposed to the whole building the first year, a number of different drivers, that tends to have an outsized influence on rate growth in the subsequent year. What's your expectation for this year? Our expectation for this year was blended rent change of 2.8% for the full year, which is up about 20 basis points from what we achieved last year at 2.6%. That's still our expectation for this year. Great. Thank you. Yep. Thank you. We'll take our next question from John Guiney with Stifel. John Guiney here. Just one curiosity question. I think one of your slides has $19 million of land which shows up on the balance sheet, plus another $60 million of pursuit costs. Where do the pursuit costs show up on the balance sheet? Are you expensing those? John, this is Kevin. They would show up on our other assets category, which we provide detail on in connection with our 10-Q. Great. Okay. Other assets. All right. Second, looking at a lot of your recent starts, as you mentioned, your sweet spot is high-density wood frame. Looking at Marlborough, Owings Mills, Brea, can you talk a little more about the product? Is this a surface park? Is it a wrap? Is it podium? By the way, when's the last time you actually started a high-rise? Sure. This is Matt. Those deals, Brea and Owings Mills are both wrap deals. Marlborough is a small second phase that's actually garden and direct entry product. It's kind of a piece of land adjoining a community we completed there a couple of years ago. The last high-rise we started was the Avalon Harbor East in downtown Baltimore, which we started last year. Southeast Florida is different because everything's concrete there because of the hurricane codes. We did start the deal in Doral last year, which is seven stories, eight stories. That would be right on the verge between what you call mid-rise or high-rise, although technically it's the mid-rise code for Southeast Florida. Great. Okay. Thank you. Sure. Again, that is star one as the last chance to enter the queue for questions. We'll hear now from Hardik Goel with Zelman & Associates. Hey, guys. Thanks for taking my question. I've got two for you. The first one, just broadly speaking, taking a step back from the quarter, we asked some of your peers about suburban versus urban kind of exposure, EQR kind of mentioned they don't like the suburban areas because once supply hits, there's not enough demand to absorb it. UDR kind of focuses on just the first ring. What's your perspective on it? Obviously, we've heard from you before, just how do you see that playing out when the cycle turns? Hardik, hey, this is Tim. First of all, I'd say probably a lot of our suburban I would qualify as first ring as well. Kind of think of it as infill, kind of city adjacent, if you will, urban adjacent. Our portfolio is pretty, for the most part, are located in employment center locations. It is where there's economic activity. It is where the jobs are. It is where the people are. As we said in the past, we're somewhat agnostic between suburban infill and urban. We kind of allocate capital within the markets, trying to look for the highest risk-adjusted returns, and that tends to rotate over time. Sometimes urban gets overdone, sometimes suburban gets overdone. We find there are different points in the cycle, even within a market, there's better bets to make on one over the other, and it's not always one or the other. That's really sort of fundamental to our strategy. If you look over a longer period of time, from just a pure rent growth standpoint, they pretty much track one another, but within the cycle, they oftentimes can run a little countercyclical. I think actually right now, urban is running at or just above suburban in terms of rent growth. It's the first time we've seen that in two or three years. First time in four years, I'm sorry. While there's still more supply in urban markets, it does suggest that demand is a bit deeper in urban markets. We don't disagree with that. It's just supply has been overdone for the last four or five years in urban markets. I think we're just starting to see at the point where a lot of the urban sub-markets are really starting to catch up, and in some cases, pass some of the suburban markets. As Matt mentioned, generally, if you look at just total returns on invested capital, generally our sweet spot has been on kind of that infill suburban. A lot of that often has to do with it has the best development economics, and then it tends to be pretty healthy from a supply-demand standpoint at the steady state. Got it. Just as a quick follow-up to that, are you seeing other developers kind of incrementally shift their focus to the suburban infill markets that you guys have been involved in since, I guess, 2017 and maybe even earlier? Yeah, I think to some extent. The average developer is a merchant builder. It's not an investment builder. They're generally going to be looking at deals where they think they can get the highest risk-adjusted initial going-in return, maybe not quite as focused on what the long-term return will be, because they tend to exit pretty quickly. I would say it's probably been just because of construction costs and some of these urban markets have kind of gotten out of control, that there's probably been, on balance, a bit of a shift from urban to suburban because it's been more economic, at least from an initial yield standpoint. Got it. Thank you. Thank you. We'll take our next question from Alexander Goldfarb with Sandler O'Neill. Oh, hey. Good morning. Or sorry, good afternoon. It's been a long earnings week. Just two questions. First on New York, and maybe I missed it up front, but two parts to this. One, did you guys quantify the revenue hit from the new regulations as far as fees and all that stuff? Then two, on that front, given presumably we'll see less supply, given the tougher regulations, your 421-a assets, do those, in your view, become more valuable because eventually they'll be market rate, or the impact of the real estate tax abatement burn-off, coupled with maybe the length of time that the 421-a units are in existence, make it probably something that you'll look to continue to pare, just as you sold some 421-a's in the past? Alex, this is Sean. Why don't I start with that one, and then others can jump in as well. In terms of the dollar impact, yes, we did mention that in the second half of this year, we expect the impact on same-store sales, that entire portfolio to be just over $1 million across the state. About 90% of it relates to the loss of fee revenue across the assets, which is not just in New York City, as you know, but across the state. Modeling some assumptions as it relates to turnover and things like that, but we don't really have market feedback on that just yet. In terms of the 421-a, the assets, Matt could jump in on that. One of the things that we'll be trying to do is as we get market feedback about what happens to turnover rates, what happens with the RGB guidelines in terms of increases, that's going to help kind of give us a better sense of the profile of loss to lease over a longer period of time and what impact that may have in terms of value at the end of the expiration of the tax abatements. It's hard to predict what that looks like today. Matt Birenbaum, I don't know if you want to add anything to that. Yeah, no, I agree. The first thing is the Affordable New York Housing Program, which is the program that replaced 421-a, was not affected by all this. In theory, it doesn't, in the short run, change what might be on the horizon for new supply. In our view, the last couple of years, rental economics for new rental, certainly in Manhattan and even in the boroughs, doesn't make a lot of sense right now, just given where construction costs are relative to where rents are. Nothing in that equation necessarily has changed. You can speculate about the additional restrictions on how you operate as a landlord, the fees, the ability to charge late fees, the restrictions on evictions, those kind of things. Does that change the investment desirability of owning multifamily real estate over the long run? Does that in turn influence supply? That, I think, we're way too early to know. Okay. Then as far as your condo tower, the 15 West 61st, is that something that you think would now be more valuable as a rental, just given it's free of rent regulation? Or your view is it's still on an IRR basis, it's still more valuable to sell as condo? We've said from the start that the site offered a lot of flexibility, and one of the things it offered was not being subject to any particular regulatory regime as it related to the rents if it was a rental asset, and that was true before, and it's still true. Again, we're marketing condos and looking for that market feedback to validate what we think the difference in the value is between it as a condo and a rental, and trying to get as much data as we can on that before we finalize it. Okay. Thank you. Yeah. Thank you. We'll hear now from Austin Wurschmidt with KeyBank Capital Markets. Hi. Good afternoon. Just a couple of quick ones here. I was curious if there's been anything that you've seen on the demand front in terms of pullback or peaking early this year. Could you just provide any detail or thoughts there? Yeah, Austin, this is Sean. Nothing material at this point. Pretty normal seasonal patterns throughout the market this year. I think we'll learn more in the second half of the year in terms of some of the mixed macroeconomic sentiment that's out there and how it might influence demand, but at this point, not a material shift. Okay. Appreciate that. Secondly, you footnoted two acquisitions are expected to close in the third quarter to get you to the $300 million you've now assumed in guidance. I think you included one of the two in your release, can you provide some detail on the second deal, location, economics, et cetera? Sure. Austin, it's Matt. The second deal is in suburban Miami-Dade County, so it would be our third stabilized asset in Southeast Florida. We're pretty excited about that. We expect it to close later this month, and it's close to $100 million, and it's kind of a mid-four cap. Appreciate that. Just any other update on the acquisition opportunities in your expansion markets, be it South Florida or Denver, beyond the $100 million that you just announced? Yeah, we're continuing to look, and it continues to be a pretty active market. I'd say Denver slowed down just a little bit. There's a lot of deals in lease up that are having trouble getting full, and maybe they're waiting till they're truly full to come to market. Southeast Florida, seems like there's still been the same level of pipeline and volume, and we're continuing to look. I wouldn't say there's been any change per se. Overall, across the markets, if anything, cap rates across all our markets are probably down a shade over the last couple of quarters with interest rates. Everything we're selling, almost everything is below a five, almost no matter where it is or how old it is. Certainly we're seeing that on the buy side too. It's all in the kind of anywhere from mid-fours to high-fours for what we'd be looking to buy. Yeah, Austin, this is Tim. It is interesting. Both if you talk about operating performance or cap rates, it seems like everything's converging around 3% on the rent growth side and the mid to high 4% range on the cap rate side, almost without regard to market at this point. No, I appreciate the thoughts there. Thank you. Sure. Go ahead. Thank you. That does conclude today's question and answer session. I would now like to turn the conference back over to Mr. Timothy Naughton for any additional closing remarks. Yeah. Thanks, Cody. Nothing else on this end. Thanks for being on the call today, and enjoy the rest of your summer. Thank you. That does conclude today's conference. Thank you all for your participation.