Good morning, ladies and gentlemen, and welcome to the AvalonBay Communities' first 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 session 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, 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 call is Mr. Jason Reilley, Vice President of Investor Relations. Mr. Reilley, you may begin your conference.
Thank you, Jessica, and welcome to AvalonBay Communities' first 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 Timothy Naughton, Chairman and CEO of AvalonBay Communities, for his remarks.
Tim?
Yeah. Thanks, Jason. Welcome to our Q1 call. With me today are Kevin O'Shea, Sean Breslin, and Matthew Birenbaum. Sean, Matt, and I will provide some brief comments on the slides that we posted last night, and then we'll all be available afterward for Q&A. Our comments will focus on providing a summary of Q1 results, an overview of development activity, and lastly, progress in our expansion markets of Denver and Southeast Florida. Now starting on slide four, it was a solid quarter. Highlights include core FFO growth of 5.5%, driven by healthy internal growth with same store revenue and same store NOI growth coming in at 3.4% and 4.9% respectively. Interestingly, every region posted 3% plus same store revenue growth for the first time in over six years.
As you recall from last quarter's earnings call, we expect little contribution to earnings in 2019 from external investment activity, primarily due to significantly lower apartment deliveries from our development portfolio this year. Secondly, the relatively higher cost of capital raised in late 2018, most of that being through dispositions. In Q1, we completed two communities in the very attractive suburban towns of Sudbury and Hingham in the Boston market, totaling $150 million at an average initial yield of 6.3%. Lastly, we raised $220 million of capital, external capital in the quarter, two-thirds of that being raised as equity from the CEP, and the balance from a D.C. area disposition. The initial cost of this capital was 4.5%, and our leverage remains at a cyclical low of 4.6 times debt to EBITDA.
With that, I'm going to turn it over now to Sean, who will discuss portfolio operations, including performance on our lease-ups. Sean.
All right. Thanks, Tim. Turning to slide five, apartment fundamentals continue to support healthy rent change in the portfolio. This slide represents same store rent change on a trailing four-quarter average, which reached the high 2% level during Q1. As we've highlighted in the recent past, we believe the current pace of job and wage growth, combined with new supply of roughly 2% of stock, supports rent growth in the 2.5%-3% range for our portfolio. Turning to slide six to address Q1 specifically, same store rent change was 2.4%, or 80 basis points above what we achieved during Q1 of 2018. This improved performance was primarily driven by our East Coast portfolio, which represents 52% of the overall same store pool and produced roughly 150 basis points of improvement compared to last year.
On the West Coast, we also achieved better rent change in the tech-driven Seattle and Northern California regions. Job growth has been quite healthy in both markets. In fact, it's actually running ahead of last year's pace through March. Southern California is the only region where rent change fell short of Q1 2018. While job growth in the region was roughly 1.25% for the full year 2018, it's fallen to about half that rate in the last six months and is off to a weak start in 2019. Turning now to slide seven in the development portfolio, our performance has been solid. For the five communities in lease-up during Q1, rents are trending about 3% ahead of pro forma.
The total capital cost is projected to be within 1% of budget, and the weighted average stabilized yield is expected to be roughly 10 basis points ahead of plan at a very healthy 6.8%. With that, I'll turn it over to Matt to talk further about development underway in our expansion markets. Matt.
All right. Great. Thanks, Sean. Turning to slide eight, we expect the $2.4 billion in development currently underway to generate $145 million in annual NOI once those communities are completed and stabilized
As we talked about last quarter, this year is a bit unusual for us in that very little of that NOI has begun to flow through to earnings yet, given the timing of the individual lease-ups and deliveries. It should be a good source of growth over the next few years as those projects move to completion. While there is still some capital to fund to complete construction, the pickup in NOI should easily exceed the cost of the capital remaining to be sourced. Slide nine shows the projected value creation from this development underway. If we apply a 4.5% cap rate to the $145 million in stabilized NOI, the value of these assets on completion would be $3.2 billion, which exceeds their projected cost by $800 million, or roughly $5.75 per share.
I also thought I would give a brief update on our progress in our new expansion markets of Denver and Southeast Florida. About a year and a half ago, we announced a strategic expansion of our market footprint and indicated our intention to begin to rotate capital out of some of our legacy markets in the Northeast to these higher-growth regions of the country. As shown on slide 10, we've begun this effort in Southeast Florida, acquiring two brand-new stabilized communities and breaking ground on a development community in partnership with a local sponsor. These three properties represent a $350 million investment in over 1,000 apartments and are a good start on assembling a diversified portfolio spanning three different submarkets and three different product types, from garden to mid-rise to high-rise.
Turning to slide 11, we have been even more active in Denver, where we currently own four completed communities and one development site, with two additional development rights in the pipeline. This activity puts us on track to a portfolio of over $600 million and 2,000 units, again, diversified across a variety of different submarkets with a generally more suburban footprint so far. We have indicated a long-term goal of a 5% allocation to each expansion market, we expect to continue to grow our presence meaningfully via acquisitions, development, and joint venture hybrid structures with local developers over the next few years. With that, I'll turn it back to Tim for some concluding remarks.
Yeah. Thanks, Matt. Overall, Q1 was a very good quarter, with results a bit better than expected. Same-store performance continued to improve, with revenue growth generally in the 3%-4% range across our footprint. The development portfolio is performing well and in line with our expectations, delivering or projected to deliver meaningful NAV growth over the next couple of years, as Matt just mentioned. Lastly, we're making solid progress in our expansion markets at Denver and Southeast Florida, having redeployed or committed almost $1 billion of capital through acquisitions and development to these markets over the last several quarters. With that, Jessica, we're now open the call for Q&A. Thanks.
Thank you. As a reminder, ladies and gentlemen, press star one if you would like to ask a question. We will now take our first question from Nick Joseph of Citi. Please go ahead.
Thanks. You discussed the strength and acceleration in the East Coast markets, within your portfolio, what are you seeing in terms of trends of urban versus suburban or A versus B?
Yeah, Nick, it's Sean. Happy to chat about that a little bit if you like. When you look at our portfolio specifically, one thing to keep in mind is the mix of As and Bs is not necessarily representative of the market. In our portfolio, for the first time in about 15 quarters, in Q1, A did outperform B assets by about 50 basis points. The majority of that is really supported by some acceleration in some of the higher price point assets on the East Coast, which had been a little bit softer over the past few years. We certainly have seen that change the outcome in terms of the A/B mix.
If you look at it in terms of broader sort of market coverage and look at Yardi or Axiometrics, they're showing it pretty much in balance at this point between A and B across our footprint, also supported by improvement in the A side of the product on the East Coast. In terms of urban, suburban, those spreads are still relatively wide. Suburban's outperforming urban by about 50, 60 basis points in our portfolio. If you look across sort of the market footprint, again, looking at Yardi or Axiometrics, that spread is closer to about 100 basis points. Still seeing outperformance but varies by portfolio and market.
Thanks. Just curious if you can give an update on Columbus Circle, both in terms of where you are in the marketing process on the residential units and also the retail leasing.
Sure, Nick. This is Matt. I'll take that one. On the retail side, just to remind folks, we have 67,000 square feet of retail there in total across four floors. About 43,000 square feet of that is leased, including all of the two subfloors, a little bit of the ground floor, and a portion of the second floor. Since last call, activity actually has picked up, and we are in, what I'd say, is advanced discussions for 17 of the remaining 24,000 square feet of space, including the remainder of the second floor and a good portion of the ground floor as well. Hopefully, those deals will proceed to lease, and we'll have more to report on that in the quarters to come. We are seeing strong activity there.
On the residential side, we did open our sales office there earlier this month, starting out really just with presales to broker contacts that were on the list. We're not kind of open to the general public yet for walk-ins off the street. We're probably still a couple of weeks away from that. We're really just now starting to get a read on the early sales activity. I'm not going to comment on that yet. It's too early, but we do expect, and we will provide a more detailed update on the residential sales activity on our second quarter call.
Thank you.
We will now take our next question from Jeffrey Spector of Bank of America. Please go ahead.
Hi, how are you? Hopefully you can hear me.
Yes.
Great. Sorry.
Hi, Jeff.
How are you? Sorry, there was an interruption there. I guess just big picture, Tim, if we could talk about the macro. I think you maintained the estimates, but just listening to your opening remarks, again, solid quarter, healthy internal growth. Every region posted 3% rev growth for the first time in six years. I know none of us are economists and can't predict exactly the future, but everyone's trying to figure out any weakness in the economy or when a recession will come. I guess from where you sit, things seem pretty strong.
Yeah, Jeff, I'd say things are more or less played out so far as we would expected or projected when we gave our guidance a quarter ago. I think our job growth outlook was down from the prior year at 1.2% for our markets. On the other hand, we do expect stronger wage growth. We're projecting wage growth, as you recall, of 3.5% and supply growth in the low 2% range. Not much has really changed from that. We did say on the call, though, that we do expect economic growth to moderate over the course of the year and to be a bit of a mirror image from what we saw in 2018. I don't think we've changed our view on that. Just based upon the little bit of slowdown in the global growth, just the stimulus from the tax reform starting to wear off.
I know Sean spoke a little bit about job growth. If you look at what we've seen over the last six months and three months, more or less in line with our expectations. There are regional differences. Northern California, New York area have been a bit stronger than we anticipated. Southern California, weaker, as Sean mentioned. Probably the other thing that's maybe a little different than what we expected three months ago is the for-sale has slowed down a bit, both in terms of volume and pricing. I think you may have seen just in the last 24 hours, just homeownership rates actually came down for the first time, I think, in the last couple of years. It's just one data point.
When you combine that with consumer confidence being down a little bit, those are probably the things we're watching right now for in terms of as leading indicators, but really have been reflected, certainly, in terms of portfolio performance to date.
Okay, thanks. My one follow-up, just on the Northeast region, I guess in particular, maybe New York City or Manhattan, I believe someone commented that the luxury end was maybe better than expected in 1Q. I guess, what are you seeing in the Northeast, the East Coast that was better than expected year-to-date?
Yeah, Jeff, Sean, happy to chat about that a little bit. I think the way to describe it is that pretty much across the East Coast footprint, things are, I would say, about what we expected, maybe slightly better in a couple of areas. For the most part, somewhat in line, as Tim mentioned, too, as it relates to his response to the prior question. In terms of specific markets or sub-markets within regions, there are differences. To give you some examples, in the metro New York-New Jersey area, as an example, Long Island is quite strong, doing almost 5% year-over-year. The other markets in and around New York City, New York suburban, be in Westchester, Northern New Jersey, are more like 1%-2%. That's certainly better in the case of New York City than maybe what we've seen.
In terms of absolute price points and where there's improvement, I'd say, as I mentioned in the last response, we are seeing some pretty good acceleration in some of the higher-end price points in some of these sub-markets, which has been helpful. If you dissect it's really more a question about where the pockets of supply are most plentiful, where the impact is greatest on the higher-end assets. That's really what's driving it in terms of the difference in pricing power between the higher end and, say, the more moderately priced assets. A specific example is D.C. proper is on the weaker side as opposed to suburban Virginia or Northern Virginia, suburban Maryland are much more healthy at this point, and it's just a function of the amount of supply being delivered in the District right now.
Great. Thank you.
Yep.
Our next question comes from Richard Hightower of Evercore ISI. Please go ahead.
Hey, good afternoon, guys. I know we've talked about this earlier today, but maybe just for the benefit of everyone on the call, just to kind of walk through the bad debt accounting change and its impact on same store during the quarter. Can you help us just collectively understand the breakdown in better-than-expected performance across the accounting change, across occupancy, market rent, other revenues, and just help us understand the building blocks so we're all on the same page?
Yeah, this is Sean. Why don't I go through it at a fairly high level to the extent there's a lot of detailed questions about drivers of other rental revenue and things like that that may be more appropriate to take offline. In terms of the broad view of the TRR growth or rental revenue growth in Q1, the impact from the change in bad debt is 30 basis points. Regionally, the range is sort of between zero and, call it 60, 70 basis points, depending on the specific region. That is a reflection of underlying changes year-over-year in bad debt, which are really driven by a couple of factors. One is some investments we've made in data analytics to improve our bad debt profile on the residential side, both in terms of people coming to our communities as well as our collection processes.
The second piece of that is in certain regions, in particular, we had some write-offs as it relates to retail tenants in Q1 2018 that we don't have in 2001 and 2019, and that really accounts for some of those regional differences that occur. The overall broad impact, again, is the 30 basis points. We had mentioned that, when we were at the Citi conference, that we were trending about 20 basis points ahead of what we had expected in terms of revenue growth through January and February. If you look at the full Q1 number in terms of our outperformance, basically about half of it is in just raw performance, mainly driven by occupancy, and the other half essentially is the bad debt component, is the way I look at in terms from a revenue perspective.
On the OpEx side of things, we reported Q1 OpEx growth of 20 basis points that actually would have been down 90 basis points year-over-year in Q1 if bad debt had remained expensed. That's the full impact on Q1. Hopefully, that's clear.
Okay. Yeah. I appreciate the detail there, we'll probably have a few follow-ups. I'm going to take a stab at the next question here, and feel free not to answer, because I know Avalon's policy on guidance and everything. Is it fair to say that on an all else equal basis, given everything that you just described in terms of the building blocks, that a same-store range should go up because of what you described, or is it not fair to say that, and we can interpret that as we wish?
Hey, Rich. This is Kevin. I guess at the outset, just to say, what we said before. We're not intending to update guidance until the second quarter, we don't really have any additional comment on that. I think one question that's embedded in what you're asking is, if we had known back in the beginning of the year when we gave our initial guidance that bad debt would need to be moved geographically up into revenue, would we have changed our guidance? The answer is no, because we did not forecast at that point in time a material improvement in bad debt recoveries. Those are probably the two points that I'd emphasize for you to consider.
Okay, got it. Thank you very much.
Our next question comes from Austin Wurschmidt of KeyBanc Capital Markets. Please go ahead.
Hi, good afternoon. You guys have sustained a positive spread on like-term lease rates now for the past three quarters, I believe. Does the same-store revenue guidance assume that those lease rate spreads converge by year-end, or that you continue to sustain some level of a positive spread each quarter throughout the year?
Yes. Austin, this is Sean. I think what I said in my prepared remarks in last quarter is that on average, throughout the year, we expected rent change, like-term rent change, to be 20 basis points greater in 2019 as compared to 2018. We didn't specifically go into the quarterly numbers, but that's what we expected for the full year.
Got it. Can you just provide a little bit of an update on what you've seen into April as far as lease rate trends?
Sure. Thus far through April, rent change is running 3.1%, which is about 50 to 60 basis points above April of last year. The renewal offers are basically going out in the 5% range for May and June.
Great, appreciate that. Just last one for me. As far as leverage, you kind of have held steady within that 4.6 times range now for the last couple of quarters. Just curious if we should expect that to continue to tick up, or has the opportunity to issue a little bit of equity under the ATM given you ability to kind of sustain lower leverage and that's really your intention now moving forward?
Hey, Austin, this is Kevin. I think as I indicated the last quarter, our net debt to EBITDA fell to around 4.6 turns, which is where it is today and where it was last quarter. That was primarily driven by the closing of our New York City joint venture transaction among the other dispositions that we completed last year, as Tim alluded to in his opening remarks. That was sort of an outcome of a portfolio set of activities that we undertook. It wasn't really a direct objective of ours, it sort of came about as a result of selling those assets. As we've mentioned in the past, over a full cycle, we'd like to have our leverage run somewhere between five and six turns. We're comfortable being a little bit above or a little bit below that.
At this point in the cycle, our preference is to be more around five turns. We happen to be a little bit below that today. I guess what I'd say is, we're relatively comfortable with where we are now. It may be that it probably ticks up a little bit. I don't think there's any great haste in doing so. While we are where we are, we feel like we have incremental financial flexibility to take advantage of opportunities that might be out there.
Kevin, maybe just remind Austin sort of what the capital plan was for this year, just in terms of sort of mix.
Sure. Yeah, just as a reference, when we began the year, our capital plan for 2019 contemplated sourcing $1 billion of external capital, with roughly half of that to come in the form of newly issued debt.
The other half in the form of equity, which we planned would be net disposition activity. In terms of where we are today, as you know from reading the release, we sourced $150 million in equity issuance. Then in terms of net disposition activity, we sourced an additional $80 million. We've got probably a couple hundred million dollars or so of assets that are in the market today. I'd say the capital plan, while it can certainly change based on market conditions and changes in capital uses, in terms of where we stand today, I think we're kind of roughly intact in terms of where we are in the capital plan.
Great. Thanks for the detail, Kevin.
Yeah.
Our next question comes from Nicholas Yulico of Scotiabank. Please go ahead.
Hi, thanks. Just a question on the same-store expense growth, looked unusually low this quarter, I guess, you did have that 3% year-over-year drop in payroll and office costs. You talked about lower bonuses, lower overhead. I guess I'm just wondering, hear a little bit more about what drove that and how we should think about that versus the same-store expense guidance this year, which was 3%, and you only did just over flat in the first quarter.
Yeah, Nick, this is Sean. Happy to take that one. As it relates to Q1, as you pointed out, we certainly had some things go our way as well as a pretty good comp as it relates to last year. Certainly had some benefit on the marketing side, certainly on the utility side, as you noted, maybe property taxes were basically 1% in the first quarter. As we move through the year, you start to see things pick up in some of these other categories. For example, over the next couple of quarters, you'll see merit increases kick in on the payroll side. You'll see more normal property tax growth. In the first quarter, we had the benefit of an appeal that kicked in, which was helpful to us, as well as a rate reset in Seattle.
You've got some of those one-off things in the first quarter that helped us that will not recur in the second quarter. We have a tougher comp on utilities in Q2 and things like that. We certainly had a benefit across multiple categories in Q1, except expect to see it pick up a little bit in Q2, you'll start to see that pattern. As it relates to maybe payroll and some other things and how you should think about it over the next couple of years, maybe just a couple of things to mention. Certainly on the property tax side, assessments have grown materially this cycle. We don't have a lot of 421-a exposure. I expect I'd see property tax growth should be less over the next couple of years than it's been the last two or three years.
Maybe just to touch on a couple of other things that are certainly working well for us in terms of being able to contain OpEx growth. Maybe mention a couple of categories. One is payroll, which as you know, is about 24% of our OpEx. We've been investing in a number of initiatives that will continue to allow us to contain payroll growth in the future, and just to cite a few examples, through additional podding and other consolidation efforts, we reduced on-site office headcount by about 3.5% year-over-year in Q1. In addition, during Q1, we launched an AI platform to facilitate interactions between an automated agent and our prospects. While it's still early, we're seeing better conversion rates from a platform that runs 24/7 and doesn't require interaction with our on-site staff.
Overall, we're investing in other opportunities to use technology to enhance the self-service experience for our customers, but also allow our staff to be more efficient and effective. That's all being done by leveraging both automation and centralization, which is allowing us to think about maybe a little bit different sales and service model at our communities. That's certainly helpful, not only as we think about payroll this year, but over the next couple of years. We're also making investments in other areas in terms of utilities, in our renewable energy efforts and other sustainability initiatives.
On the marketing side, doing a lot of great things with organic search for our website and a number of self-service tools that we launched about 18 months ago, where we're seeing great penetration from our customers so they can schedule tours online, bypassing the call center, which is reducing some of those costs. Overall, while we're facing pressure in some areas, maybe like repairs and maintenance, we do think investments in some of these other areas are going to pay off for us over the next couple of years.
Okay. That's very helpful. In terms of rent control taking more of a focus in New York, there's going to be some changes that could happen in June. Can you just break out for when we look at your metro New York portfolio, how much is subject to, let's say, rent stabilization in New York City, if any of the suburban assets, any of the units there are also subject, and I guess just separately, within New York City, how much of the 80/20 buildings you still own where you're getting the 421-a tax abatement?
Yeah. Happy to chat about that a little bit. As you know, it's a complicated issue in New York because there's different classifications of buildings that are regulated and for what purpose. There's certainly buildings at very low rent that are rent-stabilized at very different types of levels. In terms of what we're talking about, which is essentially a market-rate portfolio, subject to 421-a with stabilized units, for us, our same-store pool is about 3,800 apartment homes. Of that, about two-thirds, roughly, are what's considered market-stabilized. Of that two-thirds, there's only about 20% of it that's capped at what is known as the legal rent. The others are paying what's known as a preferential rent, if you understand the terms, where they effectively are in a loss-to-lease position, is probably the simple way to describe it. That's what we have in terms of our same-store assets.
There's a lot of things being talked about in New York in terms of what would be impacted, for the most part, based on what we're hearing through a pretty strong organization in REBNY, is that the target is typically much more of the lower price point assets that are regulated, where people are spending a lot of energy trying to figure out what should happen with the policies associated with those assets, and not as much time on the market-rate side. There's certainly some chatter about the market-rate side, but based on what we know, there seems to be a greater focus on the lower price point, particularly, issues of displacement and things like that. We'll know more certainly as we get to June, but there's some debate on that as we get into May as well.
Thanks. Appreciate it.
Yes.
Our next question comes from Drew Babin of Baird. Please go ahead.
Hey, good afternoon. Quick question on L.A., drilling in a little bit. Obviously, supply in downtown L.A. has been elevated and concessions are pretty aggressive. Given that you don't have many properties or any properties really in downtown L.A., I thought I'd ask kind of where within L.A. you're maybe seeing some of the softness that occurred in the first quarter and, if you could also give an update on how things are kind of progressing in April, that'd be very helpful.
Sure, Drew, this is Sean. Happy to chat about that. You are correct in that we have one same-store asset in downtown L.A. in Little Tokyo. It fortunately is at a price point where it's actually performing quite well right now. In terms of the rest of the assets, I'd say, the slowness that we're seeing in L.A. is relatively widespread. It's a little bit more in the San Fernando Valley specifically. When you look at the individual assets across the San Fernando Valley and L.A. and say, there are certain pockets where it's weaker, maybe at the margin a little bit. I'd say, we expected some slowdown in Southern California as reflected in the chart that we presented during the Q1 call, where we showed sort of the distribution of anticipated revenue growth. Southern California was the only region where we expected it to be down.
Job growth had already started to slow. We forecasted that for the most part. I would say at certain pockets in San Fernando Valley, as an example, it might be a little bit weaker than what we anticipated. I think, the issue that will play out in Southern California this year a little bit that people may not be as clear about is there are some anti-rent gouging caps in place, throughout parts of Los Angeles right now as a result of the fires from last year. Those caps are in place through November of 2019. While it's a 10% cap and you don't think of it being material, what it does impact is your ability to generate and execute short-term leases at premium through the summer season.
Some acceleration that you might typically see in L.A. through the summer as you generate short-term leases for a variety of different types of customers, that incremental revenue is not anticipated to come through this year at the same extent that it did last year because of the nature of these caps, where you can't increase the rent by more than 10% of the amount the prior customer was paying for that specific unit. Some of those nuances are at play as well. In terms of the environment, I would say across L.A., it's been a little bit weaker than we would've anticipated, but not too far off.
Okay. That's helpful. Just one quick follow-up on East Bay. Obviously, it was one of the slower revenue growth markets during the first quarter. I guess it would be helpful if you could talk about kind of, in the context of Northern California doing better than expectations, would you say that Oakland East Bay is sort of performing in line with what you expected going into the year, given supply? Or has it been a little bit weaker than you had expected?
Yeah. No, good question. We certainly expected San Jose and San Francisco to perform better than the East Bay. Combination of several different factors, including just the nature of the job growth that we expected across the footprint there, as well as certain pockets of supply. I'd say the assets in 103 are performing quite well, but assets in Pleasanton Dublin, not quite as much. It's one of those places where, as you probably know, the East Bay sort of lags performance in San Jose and San Francisco. We've seen a rebound come through in both of those market areas, and the East Bay tends to lag, and it is this year lagging as well. Not a surprise.
Okay, great. That's all for me. Thanks.
Yes.
Our next question comes from John Kim of BMO Capital Markets. Please go ahead.
Thank you. On the uncollectible lease revenue or bad debts, has this figure been trending down over the last few years, how does this really compare to historic levels? Is it something that you're going to be breaking out in future years, or is it just this year because of the accounting change?
John, happy to chat about that. In terms of the year-over-year change, I'd say what we're seeing right now, or what we saw this year, Q1, to be specific, is a little bit more than normal in terms of the year-over-year reduction in bad debt, which fueled the 30 basis points increase in the revenue numbers that we put out. It's really driven by two things. One, I mentioned some investments we've made recently, over the last year or two, in data analytics, and that has led to some pretty good outcomes as it relates to both how we screen residents coming into our communities, as well as the collection efforts at our customer care center in terms of sort of our queuing theory and how we pursue customers on the collection side.
Both of those have had a meaningful impact in terms of cohorts of move-ins over the last 12 months. You'll see that play through over the next couple of quarters in particular. Certainly most meaningfully in Q1, I would say. That's had a big lift. Certainly Q1, I think I mentioned earlier, we had a couple of retail write-offs in Q1 of 2018 that we don't have in Q1 2019. That also helped us. I would say the bad debt, it certainly cycles with the economy. It's come down quite a bit from the Great Recession, but I'd say the incremental improvement that you're seeing now is really primarily a function of our investment in data analytics and screening customers better and the collection side.
Are you going to provide this figure going forward, or is it just for-
Oh, yeah, sorry, I didn't address that. It's really just for this year. We don't anticipate doing that going forward. It's just a sort of a transition year for us.
Okay. Looks like you didn't have any development starts this quarter. I was wondering if you're still on track for the $950 million of starts in your guidance for the year.
Hey, John, it's Matt. We'll see. I think there were specific projects identified, and they're all moving through. We certainly are going to start at least a couple of deals this quarter. The exact timing on some of these does tend to move around a little bit. We may hit it, we may have a couple of deals that slide a quarter or two, which cause us to miss it, but it's too early to tell.
John, we'll certainly update as part of our mid-year guidance update as well. As Matt said, it's kind of premature to update you on that at this point.
Okay, great. Thank you.
Our next question comes from John Guinee of Stifel. Please go ahead.
Great. Thank you. A couple quick questions. One is, Oakwood Arlington, sort of surprised to see you sell that given all the hype in Arlington. Can you pinpoint exactly where that's located in your thought process and pricing?
Sure. This is Matt. That's a very unusual asset or was a very unusual asset in our portfolio. It's a late '80s vintage, so 30-year-old asset located in Rosslyn, so here in Arlington in Northern Virginia. We actually acquired that asset through the Archstone acquisition, and it was master leased to Oakwood, who was operating it as furnished housing. That master lease was actually nearing the end of its term. When we looked at taking it back to market operations, a combination of the capital that would be required and where we expected the NOI to go, we think it was about a 4 cap, which is lower than, I think, if it had been a conventionally operated community. Oakwood actually was the buyer, so kind of fit with their program of actually starting to buy some assets as well as operate assets.
It was just a unique combination of events there. We weren't necessarily looking to sell it. We were just as part of the negotiation of the lease extension, it became clear they had an interest in owning the real estate, and at that price, we had an interest in selling it.
Great. Then the second question regarding hard costs, Washington, D.C. in particular, but elsewhere, what did you see in the last year, and what's your projection for the next 12, 24 months in terms of hard cost increases?
Yeah, it's Matt again. I guess I can take a shot at that one, and others feel free to chime in. The D.C. market has been, certainly hard cost inflation has exceeded rent growth, which has been very modest. Compared to most of our markets, it's been somewhat more muted, so I'd call it probably 3%-5%, maybe. We're just getting ready to break ground actually on a wood frame project in suburban Baltimore this quarter, so we do have some fairly current numbers on that. Other markets we're still seeing mid-single digits and the West Coast is still probably high single digits in terms of the inflation of hard costs. Commodities, lumber actually has come down, so that hopefully will start to help, but still the overwhelming driver is labor.
One of the things we have seen just very recently is labor availability pick up a little bit on the West Coast and better subcontractor coverage on our bids. That has not yet chased its way through into a cessation of pretty aggressive inflation, but that's, I'd say, a necessary but not sufficient precursor. Maybe it comes down a little bit looking forward over the next 12 to 18 months, but it's very speculative.
Hey, John. This is Tim. As you know, D.C., it's always been sort of a deeper subcontractor market here, even when we've had periods of elevated supply, we tend not to have the same kind of swings in construction pricing. We never really saw what we saw on the West Coast, even when production levels got up to sort of cyclical highs here. I don't think we anticipate
dramatic construction inflation in the Mid-Atlantic over the next year.
Great. Thank you.
Our next question comes from Richard Hill of Morgan Stanley. Please go ahead.
Hey, good afternoon, guys. Why don't you just come back to New York for a second. You've been vocal in the past about maybe allocating away from New York City to higher growth markets. You obviously had a pretty nice rebound in this market. There was some commentary that led me to believe that it was widespread. I'm curious, is it as widespread as maybe I perceived, or do you think it's reflective of the fruits of your labor, pruning your portfolio, and really focusing on properties that make the most sense in the greater New York City area?
Yeah, Rich, this is Sean. I'm happy to provide a couple of comments on that. As I mentioned, I think earlier, the suburban markets are probably performing a little bit better. New York City is starting to show some life, let's just say. It's not going gangbusters. Rent change in the city in Q1 was only 1.5%, as compared to, say, Long Island was 5%, as an example. I would say that the assets that we have in the same-store pool today are pretty well-positioned. For example, the two high-rises on the waterfront in Long Island City, sort of leading the charge in terms of revenue growth. Our Brooklyn assets are doing fine as well, particularly Fort Greene, which is at a different price point from a lot of the newer product that's being delivered in and around that sub-market.
I'd say overall, we're seeing improvement, and depending on where you are, and the amount of supply being delivered in that particular neighborhood has a material impact on the performance of assets in the city specifically.
Okay. Helpful. One of the things that you had highlighted in your investor presentation, was the increase in effective rents, which has been ongoing for, I guess, a couple of quarters now. I'm curious, as you head into the peak leasing season, how are you thinking about occupancies versus rents? Do you think your portfolio is particularly well-positioned to push rents from here?
Yeah, happy to take that one. That's a process that is ever ongoing, I guess I would say. That we feel like we're in a position from an occupancy standpoint, certainly to push rents. It is not only a sub-market-by-sub-market, it is an asset-by-asset process, that has a lot of discipline behind it in terms of revenue management, blended with efforts from our market research group to try to optimize the revenue growth from an asset. It's not necessarily one answer to solve all of that. In some cases, it's more protecting occupancy, like in the District, where there's a lot of supply right now, and trying to extend lease duration. That's one strategy. In a market that's rebounding, maybe more like a San Francisco or parts of Boston, we might yield slightly more occupancy to generate better renewal rates or movement rates. It's an ongoing process.
We're comfortable with how we're positioned and the strategy changes from asset to asset, depending on the nature of the environment. Hey, Rich, Tim here. Just maybe just to add a little bit to that. Occupancy is healthy across our markets, but it's been healthy really the entire cycle. Ultimately, it's going to be a function, I think, mostly of, as Sean said, supply and demand within that particular market. What's interesting is you look across the entire housing market, including for sale and single-family, housing vacancy is at a 30-year low, which does provide some additional support, I think, to continue to sort of push pricing.
Got it. Helpful, guys. Thank you.
Our next question comes from John Pawlowski of Green Street Advisors. Please go ahead.
Thanks. Circling back to your comments on the political scene in Albany. If the Real Estate Board of New York's most likely scenario plays out, I guess, what % of your New York units would feel some sort of impact?
John, this is Sean. It depends on how it plays out, if the focus is really on the very low rent regulated units, there's zero risk for us, in terms of impact on what we can charge for assets that we own. I think the date on that is 1974, is my recollection, in terms of the date of construction. There's also a rent threshold as well. There's kind of two variables that go together. The impact would be negligible. It'd be zero in that specific case.
Sure. Your political contacts aren't concerned at all about the vacancy control threshold being strengthened?
I wouldn't say that they're not concerned. I would say that, in the case of both California and New York, there's some pretty strong organizations there with deep relationships in the sort of political apparatus, if you want to call it that they're working those relationships. They're working to make sure people are educated about the unintended consequences of certain policy issues that could be adopted. So we think the efforts, particularly in those two states with the organizations that we have been successful in the past, and hope that they would be successful in the future. No guarantees by any means, that's just based on what we know today.
Understood. Sean, your comments about the Orange County being off to a slow start, has the sluggishness persisted in early 2Q, and can you share some leasing stats for Orange County in April?
Yeah, I'd say generally across Southern California, as I mentioned earlier, we anticipated it to be weaker than the other markets. Just if you look at year-over-year revenue growth that we had laid out, that certainly has been the case across all three markets in Q1 and continuing into April, L.A., Orange County, and San Diego. If you look at it from a perspective of rent change, for example, in Q1, in the L.A. and San Fernando Valley, it's kind of the 2%-3% range. It was weaker, actually, in Orange County and San Diego, more in the mid 1% range. We're seeing some acceleration into April, but that's more seasonal than anything else. To give you some reference points, we're averaging more like 3% in L.A. right now on a blended basis for April. Almost 3% in Orange County and about 2.5% in San Diego.
There's some seasonal component to that, obviously, in terms of the lift. When you compare that to healthier environments where we would have had better job growth, we certainly would be putting up better numbers in terms of rent change across that geography.
Okay. Thanks a lot.
Yeah.
Ladies and gentlemen, for your last chance to enter the queue, please press *1 to ask a question. We will now take our next question from Alexander Goldfarb of Sandler O'Neill. Please go ahead.
Hey, good afternoon, and thank you. My first question is, Tim, just going again back to New York with the recent energy efficiency legislation they passed. I don't know if you guys have had a chance to assess the legislation versus your buildings, but if you have, can you just give us a sense for how you guys would trend towards the initial 2024 mandates?
Sure, Alex. This is Matt. I can speak to that a little bit. It is obviously hot off the press, we're still digesting it. A couple things. Number one, I believe buildings with rent-regulated units in them may be exempt, which would be most of our buildings. There are a few that are not, and it's perhaps still unclear exactly how wide that net might get cast. As we've looked at it, our buildings score pretty well. Most of our buildings are actually probably performing today in a place that they would meet the 2024-2029 targets. There's a few that are a little bit over, but we continue to make investments in cogen and solar and other things. We've actually been leaders in this area, and I think we're pretty well-positioned.
Okay.
Alex, just to add on to that a little bit. There's really one building that matters for us that doesn't have regulated units, which is the Riverview buildings in Long Island City, and we have cogen there, so we're pretty comfortable that one's going to clear.
Okay. That's helpful. The second question is, as you ramp up more in Denver and South Florida, has there been any change in sort of what you guys initially thought where you would invest, whether it's acquisition or development and then sub-markets? Has anything changed now that you've put $1 billion in? Are you still according to plan, or have some things changed where you're finding out maybe it's easier to develop or maybe there are more developers who want to sell you their lease-up assets or something?
Yeah, sure, Alex. It's Matt. I would say it's been pretty much as we had expected and as we had hoped. We said that we were going to go into those markets with a goal of reaching that 5% for each, but that we didn't put any particular timeframe on it because we were going to do it in a way that was responsive to market conditions. We know there's a lot of merchant build activity in both of those markets, so there's been a lot of new assets to acquire, which we've been focused on.
I'd say we expected to be more active in vertical development sooner in Denver, just given some of our personnel and knowledge of those markets, and that's played out where we actually own one development site there that will start later this year, hopefully, and we actually have two others working their way through the due diligence process. All of the above. We continue to look for acquisitions, we continue to talk to developers about JVs, and we continue to look for development sites. It's been, I'd say, pretty much what we had hoped for, and we'll continue to proceed as market opportunities allow.
Okay. Thank you.
Our final question comes from Hardik Goel of Zelman & Associates. Please go ahead.
Hey, guys. Thanks for taking my question. I had two quick ones. The first one on the transaction markets in New York and D.C. Have you guys noticed some slowdown there? We heard some reports that investors were holding back before the Rent Guidelines Board meets in June in New York. Something similar in D.C. with regards to people, the transaction market just being sluggish.
Yeah. Hi, Hardik. It's Matt. We're not active in the New York transaction market right now at this moment. Obviously, we were last year, I can't comment on that specifically other than transaction market in general in our markets was down a little bit in the first quarter. There has been some concern in D.C. There has been a little bit of concern about some changes to the rent control ordinance as it relates to older assets. Again, I think that's pre-'78 construction. There were some
changes there that may have slowed that transaction market a little bit. It's hard to tell in D.C. because you have the TOPA law, which gives the tenants the right to organize to buy the building and match third-party offers. Any transactions you see closing in D.C. are transactions that were struck anywhere from 6 to 12 months earlier. To the extent there's an impact on the market with assets in the market today, you wouldn't necessarily see that in the closing statistics for another couple of quarters.
Got it. Just another quick one on your same-store revenue number. The way I understand it is if I roll up your sequentials, I'm getting to a 2.7% or 2.8% growth rate. The gap between the 3.4% and that is 75 basis points or so. 30 of that is your bad debt change, the reporting change, as you guys mentioned, and the remaining seems to be from the change in the same-store pool. Can you give me the growth rate for the incoming units into the pool or the units that are not comparable in the pool? Do you have just a rough range?
Hardik, this is Sean. For the 2019 same-store pool, the entrants into that pool from development, redevelopment activity that had stabilized previous to that, a little greater than it normally is. It's almost 10% of the pool. The growth rate-
Right
on those assets coming into the pool was in the low 6% range. They are-
Got it
That, some changes in other rental revenue associated with those communities that's coming through, that nudges that up a little bit more even. The bad debt change are sort of the big components as you pointed out.
Got it. Thanks. That's it from me.
Yep.
This concludes today's question and answer session. At this time, I would like to turn the call back to Timothy Naughton for closing remarks.
Well, thank you, Jessica. Thanks all for being on the call today. I know you're busy, given it's the beginning of earnings season, and we look forward to seeing many of you at Nareit in June. Have a good day.
This concludes today's call. Thank you for your participation. You may now disconnect.