AvalonBay Communities, Inc.

Good morning, ladies and gentlemen, and welcome to the Avalon Bay Community's 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 1. If your question has been answered or you wish to remove yourself from the chat, press star 2. 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 Reilly, Vice President of Investor Relations. Mr. Reilly, you may begin your conference.

Thank you, Jessica, and welcome to Avalon Bay Community's first quarter 2019 earnings conference. 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 first 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 forward slash earnings, and we encourage you to refer to this information during the review of our operating results and financial performance. And with that, I'll turn the call over to Tim Naughton, Chairman and CEO of Avalon Bay, to please make his remarks. Tim?

Thanks, Jason, and welcome to our Q1 call. With me today are Kevin O'Shea, Sean Breslin, and Matt Bierenbaum. 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. So 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, and 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%. And then 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 is 4.5%, and our leverage remains at a cyclical low of 4.6 times debt to EBITDA. So with that, I'm going to turn it over now to Sean, who will discuss portfolio operations, including performance RLE subs.

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% to 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 one and a quarter percent 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 PERFORMA. 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%. And with that, I'll turn it over to Matt to talk further about development underway and 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. But 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, to pick up an NOI should easily exceed the cost of the capital remaining to be sourced. Slide 9 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 have 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 sub-markets 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 sub-markets with a generally more suburban footprint so far. We have indicated a long-term goal of a 5% allocation to each expansion market, so 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. And with that, I'll turn it back to Tim for some concluding remarks.

Well, yeah, thanks, Matt. So 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% to 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. And lastly, we're making solid progress in our expansion markets at Denver and Southeast Florida, having redeployed or committed almost a billion of capital through acquisitions and development to these markets over the last several quarters. And with that, Jessica, we're now open the call for Q&A. Thanks.

Thank you. As a reminder, ladies and gentlemen, press star 1 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 of the East Coast markets, but within your portfolio, what do you see in terms of trends of urban versus suburban or A versus B?

Yeah, Nick, it's Sean. I'm happy to chat about that a little bit if you like. I mean, when you look at our portfolio specifically, you know, one thing to keep in mind is the mix of A's and B's is not necessarily representative of the market. But in our portfolio, for the first time in about 15 quarters in Q1, A did outperform B assets by about 50 basis points. But the majority of that is really supported by some acceleration, some of the higher price point assets on the East Coast, which had been a little bit softer over the past, you know, few years. So we certainly have seen that change in 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 yard-year exit metrics, they're showing a pretty much imbalance 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. Suburbans are performing urban by about 50, 60 basis points in our portfolio. And if you look across sort of the market footprint, again, looking at your action metrics, that spread is closer to about 100 basis points. So still seeing outperformance, but varies by portfolio and market.

Thanks. And then 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 at least, including all of the two sub floors, a little bit of the ground floor, and a portion of the second floor. Since the 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. So, you know, hopefully those deals will proceed to lease and we'll have more to report on that in the quarters to come, but 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 pre-sales to broker contacts that were on the list, so we're not kind of open to the general public yet for walk-ins off the street, we're probably still a couple weeks away from that. So we're really just now starting to get a read on the early sales activity. So 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 Jeff Spector of Bank of America. Please go ahead.

Hi, how are you? Hopefully you can hear me. Yes. Great, sorry. 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% rep 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 have more or less played out so far as we would have expected or projected when we gave our guidance a quarter ago. I mean, I think our job growth outlook was down from the prior year. at 1.2% for our markets. But 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 to be maybe a little bit more of a mirror image from what we saw in 2018. I don't think we've changed our view on that. I mean, just based upon the the, you know, a little bit of slowdown in the global growth, just the stimulus from the tax reform starting to wear off. If you look at, 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, you know, in line with our expectations. But there are regional differences. Northern California, New York area have been a bit stronger than we anticipated. Southern California weaker as the as Sean mentioned. And probably the other thing that's maybe a little different than what we expected three months ago is the per sale has slowed down a bit, both in terms of volume and pricing. And I think you may have seen just in the last 24 hours just home ownership rates actually came down for the first time, I think, in the last couple of years. It's just one data point. But 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, you know, in terms of as leading indicators, but really, you know, have been reflected certainly in terms of portfolio performance today.

Okay, thanks. And then 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 one queue. 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 mean, I think the way to describe it is that pretty much across the East Coast footprint, things are, I would say, about where we expected, maybe slightly better in a couple of areas. But for the most part, somewhat in line, as Tim mentioned, too, as relates to his response to the prior question. You know, in terms of, you know, specific markets or sub-markets within regions, there are differences. So to give you some examples, in the metro New York, New Jersey area, as an example, you know, Long Island is quite strong, doing almost 5% year over year. And the other markets in and around, you know, New York City, New York Suburban, being Westchester, Northern New Jersey are more alive, 1 to 2 percent. That's certainly better in the case of New York City than maybe what we've seen. But in terms of absolute price points and what is 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 submarkets, which has been helpful. And if you dissect it, 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. So a specific example is DC 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 Rich Hightower of Evercore ISI. Please go ahead.

Hey, good afternoon, guys. So 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 the same store during the quarter. So can you help us? just collectively understand the breakdown in better than expected performance across the accounting change, across occupancy, market rents, 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. But 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, and 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. And the second piece of that is in certain regions, in particular, we had some write-offs as it relates to retail tenants in Q1 of 2018 that we don't have in 2001 and 19. And that really accounts for some of those regional differences that occur, but the overall broad impact, again, is the 30 basis points. We had mentioned that when we were at the city conference that we were trending about 20 basis points ahead of what we had expected in terms of revenue growth through January and February. So 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 it 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. So that's the full impact on Q1. Hopefully that's clear.

Okay, yeah, I appreciate the detail there, and we'll probably have a few follow-ups, but 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, but 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, you know, what we've said before, you know, we're not intending to update guidance until the second quarter, so we don't really have any additional comments 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. So 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 Wardsmith of KeyBank 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. So 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?

Sean Esterly Yes, 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. And then can you just provide a little bit of an update on what you've seen into April as far as lease rate trends?

Sure. As far as through April, rent change is running 3.1%, which is about 50, 60 basis points above April of last year. And the renewal offers are basically going out in the 5% range for May and June.

Great, appreciate that. And then 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 quarters, and 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. And 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. So that was sort of an outcome of a portfolio set of activities that we undertook. It wasn't really a direct objective of ours, and so 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, and 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, and I guess what I'd say is we're relatively comfortable with where we are now, but It may be that it probably ticks up a little bit, but I don't think there's any great haste in doing so. And 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 us 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 a billion dollars of external capital with roughly Half of that's come in the form of newly issued debt, and the other half's in the form of equity, which we planned would be net disposition activity. And in terms of where we are today, as you know from reading the release, we sourced $150 million in equity issuance. And 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 during the market today. So 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.

Our next question comes from Nick Ulickel of Scotia Bank. Please go ahead.

Hi, thanks. Just a question on the same-store expense growth. It looked unusually low this quarter, and I guess you did have that 3% year-over-year drop in payroll and office costs. You talked about lower bonuses, lower overhead. So I guess I'm just wondering what, 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 he 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. So, 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. So 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 a an appeal that kicked in, which was helpful to us, as well as a rate reset in Seattle. So you've got some of those one-off things in the first quarter that helped us that will not recur in the second quarter. And then we have a tougher comp on utilities in Q2 and things like that. So we certainly had a benefit across multiple categories in Q1, except expect to see it pick up a little bit in Q2. And so you'll start to see that pattern. As it relates to maybe, you know, payroll and some other things and how you should think about it over the next, you know, couple of years, maybe just a couple of things to mention. Certainly on the property tax side, you know, assessments have grown materially this cycle. We don't have a lot of 421 exposures. So, you know, I expect I'd see, you know, property tax growth should be less over the next couple of years than it's been the last two or three years. And then 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, you know, through additional potting and other consolidation efforts, you know, we reduced onsite 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. And overall, I mean, 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. And 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. So that's certainly helpful, not only as we think about payroll this year, but over the next couple of years. And we're also making investments in other areas in terms of utilities and our renewable energy efforts and other sustainability initiatives. And on the marketing side, You know, 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 by passing a call center, which is reducing some of those costs. So 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, you know, within New York City, you know, how much of the 80-20, you know, buildings you still own where you're getting the 421A 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. So there's certainly buildings at very low rent that are rent stabilized at very different types of levels. But in terms of what we're talking about, which is essentially a market rate portfolio subject to 421 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. And of that two-thirds, there's only about 20% of it that's capped at what is known as the legal rent. So 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. So that's what we have in terms of our same-store assets. You know, 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. And 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 LA drilling in a little bit. You know, obviously supply in downtown LA has been elevated and concessions are pretty aggressive. Given that you don't have many properties or any properties really in downtown LA, I thought I'd ask kind of where within LA 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 would 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 LA and Little Tokyo. Fortunately, it is at a price point where it's actually performing quite well right now. But in terms of the rest of the assets, I'd say, you know, the slowness that we're seeing in LA is relatively widespread. It's a little bit more in the San Fernando Valley specifically. But when you look at the individual assets across the San Fernando Valley and LA and say, you know, there's certain pockets where it's weaker, maybe at the margin a little bit. But I'd say, you know, 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. And so we forecasted that for the most part. I would say certain pockets in San Fernando Valley, as an example, 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. And 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 premiums through the summer season. And so some acceleration that you might typically see in LA 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 increased the rent by more than 10% of the amount the prior customer was paying for that specific unit. So some of those nuances are at play as well, but in terms of the environment, I would say across LA it's been a little bit weaker than we would have anticipated, but not too far off.

Okay, that's helpful. And then 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, you know, 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 expected?

Yeah, no, good question. We certainly expected San Jose and San Francisco to perform better than the East Bay, a combination of several different factors, including just the the nature of the job growth that we expected across the footprint there, as well as certain pockets of supply. You know, I'd say the assets in Walnut Creek are performing quite well, but assets in Pleasanton, Dublin, not quite as much. So it's one of those places where, as you probably know, the East Bay sort of lagged 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, so not a surprise.

Okay, great. That's all for me.

Thanks. Yep.

Our next question comes from John Kim of BMO Capital Market. Please go ahead.

Thank you. On the uncollectible lease revenue or bad debt, has this figure been turning down over the last few years, and how does this really compare to historic levels? And 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?

Yeah, 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 point increase in the revenue numbers that we put out. It 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 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. So you'll see that play through over the next couple quarters in particular, certainly most meaningful in Q1, I would say. So that has had a big lift. And then 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 of 2019 that also helped us. So I would say the bad debt, it certainly cycles with the economy. so 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.

And then are you going to provide this figure going forward, or is it just working?

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 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 deals this quarter. The exact timing on some of these does tend to be around a little bit, so we may hit it. We may have a couple deals that slide a quarter or two, which causes us to miss it, but it's too early to tell.

And, John, we'll certainly update, you know, as part of our mid-year guidance update as well, what we expect. 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 Guinea of Steifel. Please go ahead.

Great. Thank you. A couple quick questions. One is Oakwood Arlington. I'm 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 30-year-old asset that located in Roslyn, so here in Arlington in Northern Virginia. We actually acquired that asset through the Archstone acquisition, and it was master leased to Oakwood, who is operating it as furnished housing. And that master lease was actually nearing the end of its term. So when we looked at taking it back to market operations, combination of the capital that would be required and where we expected the NOI to go, we think it was about a four cap, which is lower than I think if it had been a conventionally operated community and Oakwood actually was the buyer. So, you know, kind of fit with their program of actually starting to buy some assets as well as operate assets. So 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. And 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?

Yes, 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. But compared to most of our markets, it's been somewhat more muted, so I'd call it probably 3% to 5% maybe. We're just getting ready to break around 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 you know, 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, you know, that's, I'd say, a necessary but not sufficient precursor. So, you know, maybe it comes down a little bit. Looking forward over the next 12 to 18 months, but, you know, it's very speculative.

Hey, John. This is Tim. As you know, in D.C., it's always been sort of a deeper subcontractor market here. And so even when we've had periods of elevated supply, we tend not to have the same kind of swings in construction pricing. So we never really saw what we saw on the West Coast, even when production levels got up to sort of cyclical highs here. So 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 Rich 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, but you obviously had a pretty nice rebound in this market. And there was some commentary that led me to believe that it was widespread. So 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. I mean, as I mentioned, I think, earlier, the suburban markets are probably performing a little bit better, but New York City is starting to show some life, let's just say. I mean, it's not going gangbusters. Red change in the city in Q1 was only 1.5%, as compared to, say, Long Island was 5%, as an example. So I would say that the assets that we have in the same store pool today are pretty well positioned. So, for example, the two high-rises on the waterfront in Long Island City, sort of leading the charge in terms of revenue growth. But 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 submarket. So 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. And then one of the things that you'd highlighted in your investor presentation was the increase in effective rents, which has been ongoing for some, I guess, for a couple quarters now. I'm curious, as you head into the peak leasing season, how are you thinking about occupancies versus rents? And do you think your portfolio is particularly well positioned to push rents from here?

Yeah, happy to take that one. You know, that's a process that is ever ongoing, I guess I would say, that, you know, we feel like we're in a position from an occupancy standpoint certainly to push rents, but 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. So 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 were positioned and the strategy changes from asset to asset, depending on the nature of the environment.

Hey, Rich. Tim here. Maybe just to add a little bit to that. I mean, Oxy is healthy across our markets, but it's been healthy really the entire cycle. And ultimately, it's going to be a function, I think, mostly of, as Sean said, supply and demand within that particular market. But what's interesting is you look across the entire housing market, including for sale in single-family housing vacancies 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, So if the Real Estate Board of New York's most likely scenario plays out, I guess, what percent of your New York units would feel some sort of impact?

John, this is Sean. It depends on how it plays out, but 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. But there's also a rent threshold as well. There's kind of two variables that go together. So the impact would be negligible, zero in that specific case.

Sure. So 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, 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. And so we think the efforts, particularly in those two states, with the organizations that we have, have been successful in the past and hope that they would be successful in the future. No guarantees by any means, but that's just based on what we know today.

Understood. And then, 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 for 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, LA, Orange County, and San Diego. If you look at it from a perspective of rent change, for example, in Q1, in the LA and San Fernando Valley, it's kind of the 2% to 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. So to give you some reference points, we're averaging more like 3% in LA right now on a blended basis for April, almost 3% in Orange County, and about 2.5% in San Diego. So there's some seasonal component to that, obviously, in terms of the lift. But 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. Yep.

Ladies and gentlemen, for your last chance to enter the queue, please press star one 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. So 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, so we're still digesting it, but a couple things. Number one, I believe buildings with rent-regulated units in them may be exempt which would be most of our buildings. But there are a few that are not, and it's perhaps still unclear exactly how wide that net might get cast. But 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 24 to 29 targets. There's a few that are a little bit over, but we continue to make investments in cogen and solar and other things. So we've actually been leaders in this area, 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 gonna clear.

Okay, that's helpful. And then 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 that you would, where you would invest, whether it's acquisition or development, and then submarkets, has anything changed now that you've put a billion dollars 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 did not You know, 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. You know, we know there's a lot of merchant build activity in both of those markets, so there have 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 the 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. But 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. So 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 Zellman & 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 Rental Guideline Board meets in June in New York. And, you know, something similar in D.C. with regards to people, the transaction market just being sluggish.

Yeah. Hi, Hardik. It's Matt. You know, we're not active in the New York transaction market right now at this moment. Obviously, we were last year. So 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. And 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. So there were some changes there that may have slowed that transaction market a little bit. But 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. So any transactions you see closing in D.C. are transactions that were struck anywhere from six to 12 months earlier. So 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 quarters.

Got it. And 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. And 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 the rough range?

Yeah, this is Sean. For the 2019 same store pool, the entrance into that pool from development, redevelopment activity that had stabilized previous to that is a little greater than it normally is. It's almost 10% of the pool. And the growth rate on those assets coming into the pool was in the low 6% range. So they are growing faster than the base. So that, some changes in other rental revenue associated with those communities that's coming through that nudges that up a little bit more even. And then the bad debt change are sort of the big components, as you pointed out.

Got it. Thanks. That's it for me. Yep.

This concludes today's question and answer session. At this time, I would like to turn the call back to Tim Norton for closing remarks.

Well, thank you, Jessica, and 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. Thank you for your participation. You may now disconnect.