AvalonBay Communities, Inc.

Good morning, ladies and gentlemen, and welcome to the Avalon Bay Community's fourth quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. Following remarks by the company, we will conduct a question-and-answer session. You may enter the question-and-answer queue at any time during this call by pressing star 1. If your question has been answered or you wish to remove yourself from the queue, 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. Today's conference is being recorded. Your host for today's conference call is Mr. Jason Riley, Vice President of Investor Relations. Mr. Riley, you may begin your conference.

Thank you, Nadia, and welcome to Avalon Bay Community's fourth 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 made 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, Form 10-Q, followed with the SEC. As usual, this press release does include an attachment with definitions of reconciliation, 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 Communities, for his report.

Well, thank you, Jason, and welcome to our fourth quarter call. With me today are Kevin O'Shea, Sean Breslin, and Matt Bierenbaum. Sean, Kevin, and I will provide some comments on the slides that we posted last night, and then all of this will be available for Q&A afterwards. Our comments will focus on providing a summary of Q4 and the full year results and the discussion of our outlook for 2020. Starting on slide four, highlights for the quarter of the year include core FFO growth of 5.2% in Q4 and 3.8% for the full year. Same-store revenue growth came in at 2.5% for the quarter and 2.8% when you include redevelopment. Full-year same-store revenue growth came in at 2.9% or 3.1%, including redevelopment. We completed $335 million of new development in Q4 and $665 million for the year at a 6.5% yield and started just under $800 million last year. And lastly, we raised $1.3 billion in external capital for the year in the mix of asset sales, new debt, net of redemptions, and common equity at an average initial cost of 4.3%. The next few slides will provide a little more detail on 2019 performance and provide context for our 2020 outlook. Turning first to slide five, During the year, we saw the East Coast surpass the West Coast in rent growth for the first time in eight years. In Q4, the East outpaced the West by over 100 basis points, led by Boston and the D.C. metro area, while we experienced some softening conditions in California. Turning now to slide six, development continued to be a big contributor to NAD growth in 2019. Development completions of $665 million created approximately $300 million in incremental value. And at 30 percent margins, margins remained very healthy 10 years into the expansion. Moving now to slide seven and eight, we made good progress in southeast Florida and Denver over the last year, our expansion markets. To date, we've committed roughly $600 million to each market through a combination of acquisitions, development, and partnering with local developers. These portfolios are comprised of new assets, and as you can see from the maps on slide 7 and 8, are spread across a broad geography within the markets. Turning now to slide 9, we believe to be a great company, we need to take a multi-stakeholder approach to our business. We can only deliver strong financial results over a sustained period of time by having engaged associates, satisfied customers, and the support of local communities by taking an active leadership role in addressing important environmental and social challenges. And while we always strive to be better, we've been recognized for doing a good job in many of these areas over the past year. Starting with our associates, as engagement scores were in the top decile, and we were named the Glassdoor's list of top 100 best places to work for the second consecutive year in 2019. With our customers, as we rank number one nationally among apartment REITs for online reputation for the fourth consecutive year. And then lastly, with our communities, where our efforts on the ESG front have been recognized by several organizations, including Gresby, who recognized ABB as the U.S. and global leader in the residential sector, by the Carbon Disclosure Project, or CDP, an international organization that creates companies under carbon emissions disclosure practices across all industries, and who recently awarded the ADB a grade of A-, one of four REITs and the only apartment company to receive such a grade. By the Science-Based Targets Initiative, we reviewed and approved ADB submittal for targeted reduction in carbon emissions by 2030. We are one of 11 real estate companies globally and one of five REITs that have completed this process. And lastly, by CR Magazine, who ranked AVB in the top 100 corporate citizens globally for the second consecutive year out of the universe of over 1,000 companies. Turning now to slide 10, and now that the calendar has turned to 2020, we thought it made sense to look back on our performance over the last decade. In short, it's been a great decade and cycle for the apartment sector and for Avalon Bay. Avoided by strong demand fundamentals and attractive capital marketing conditions, we have seen healthy growth in earnings and NAD since 2010. For ADB, core FFO growth has averaged 10% on a compounded annual basis since 2010. We're about 200 basis points above the sector. The absolute level of growth has been fueled by both strong internal growth, as same-store revenue growth has averaged over 4%, And this can be seen on slide 11 by strong external growth, mainly from contributions to new development as we consistently delivered new development at initial yields well above the marginal cost of capital and roughly 200 base points above prevailing cap rates. As you can see on the right-hand side of the slide, development deliveries since 2010 of just over $8 billion have generated more than $3 billion in initial value creation, or roughly $26 per share. Turning now to our outlook for 2020 on slide 12, we're projecting core FFO growth of just over 5% this year, mainly from a combination of same-store NOI growth of 3% and from stabilized new development, which is expected to generate more than 60 million NOI in 2020. Turning to slide 13 and double-clicking on this a bit, The stabilized portfolio is expected to contribute roughly 3.5% of total core FFO growth in 2020. External growth, or NOI from new investment net of capital costs, is expected to contribute 2.7%. And overhead growth and loss of JD and fund income will actually provide a drag of about 110 basis points to growth. With about one-third of that 110 base points coming from a loss of JV and FUNTI income, about a third from normal overhead growth in our base business, and the remaining third coming from expense overhead that represents investment innovation or other overhead that is projected to generate future ROI, some of which we will benefit from in 2020. At 5.1%, the level of core FFO growth is expected to be 130 BIPs, higher than 2019. The biggest driver for this is stronger external growth of roughly 200 basis points on a net basis, driven by higher levels of deliveries in late 2019 and 2020, as well as a lower cost of capital raise last year. This is offset in part by the headwind from the loss of JV and fund income as we wind these vehicles down. Turning to slide 14, This slide provides a summary of the key economic factors driving much of our outlook. I won't go through everything here, but simply say while GDP and job growth is expected to moderate from 2019, the strength of the consumer should provide a tailwind with tight labor markets, rising wages, healthy balance sheets bolstering confidence, healthy consumption, and household formation. The business sector is expected to provide more crosswinds in 2020 versus 2019, as sluggish business investment should be offset in part by less concern surrounding a potential trade war. And lastly, the government sector should bolster the economy in 2020, as the lack of fiscal constraint and an accommodated Fed should provide added support to economic growth. So overall, it's shaping up as a good macro backdrop to support the economy and the housing sector for the year ahead. I'll now turn it over to Sean, who will provide more color on our outlook for the portfolio. Okay, thanks, Tim. Turning to slide 15, this chart represents the actual 2019 and projected 2020 components of total personal income growth, both for the U.S. and for our markets. As Tim noted, the consensus forecast is for decelerating job growth throughout 2020, in part due to continued structural factors constraining growth in the labor force. Consumers, however, are feeling reasonably confident given the low 3% wage growth they experienced in 2019 and the outlook for even stronger wage growth in 2020, which supports healthy demand for our business. Turning to slide 16, new supply for our market footprint is projected to be consistent with what we experienced during 2019, with increases in urban Boston, northern New Jersey, Los Angeles, and across the northern California markets being offset by reductions in the Mid-Atlantic, Pacific Northwest, and in New York City. Turning to slide 17, we expect same-store revenue growth of 2.7% for 2020. On a quarterly basis, revenue growth is projected to be strongest in the first quarter of the year due to a number of unique factors, but should be relatively stable throughout the balance of the year. On the East Coast, we expect a material improvement in performance in the Boston and the Meneladic regions, both supported by a decline in the pace of new deliveries in our submarkets. Results in Metro New York and New Jersey, however, will continue to be weighed down by the impact of the New York rent regulations adopted in mid 2019. Shifting to the West Coast, we expect continued healthy performance in the Pacific Northwest. Job growth exceeded 3% in 2019 and consensus expectations reflect a job growth rate that's roughly one and a half times the national average in 2020. Relatively strong demand, combined with a modest reduction in the pace of new deliveries, should continue to produce greater than 3% revenue growth in the region. Turning to California, we expect decelerating performance in both regions. In Northern California, job growth is projected to decelerate from roughly 2.6% in 2019 to 1% in 2020. In addition, new supply is projected to increase by roughly 800 units in San Francisco and between 1,000 and 1,200 units in each of San Jose and the East Bay, weighing on performance throughout the year. In Southern California, job growth is projected to fall from 1.6% in 2019 to about 80 basis points in 2020. On the supply side, while new deliveries are expected to be relatively flat year-over-year in Orange County and San Diego, deliveries in L.A. are projected to increase by roughly 1,500 units as compared to 2019. And from a broader perspective, we continue to expect a headwind from New York rent regulations that were adopted during mid 2019 and the implementation of Assembly Bill 1482 in California. The impact of these two rent regulations on our full year 2020 rental revenue growth rate is estimated to be between 15 and 20 basis points. Turning to slide 18, our outlook reflects sub 2% same store operating expense growth in 2020. With increases in various controllable and non controllable expense categories, partially offset by a reduction in payroll costs. The reduction in payroll expense is driven by our innovation efforts, particularly those related to reimagining the leasing experience for our customers and associates. As I mentioned last quarter, elements of the redesigned experience include the use of an AI-powered automated agent for lead management purposes and a more dynamic demand-driven staffing model. Additional elements that are underway and projected to yield a benefit in 2020 include more self-guided tours and an express move-in process. Through year-end 2019, we have reduced our onsite sales and management staff by approximately 7.5% relative to our baseline staffing in 2018 and expect to stabilize at a roughly 10% to 12% reduction later this year. Of our total increase in same-store operating expenses, roughly 60% is related to growth in property taxes and insurance. Given the timing of tax appeals and supplemental assessments in various markets, along with the timing of certain items in various expense categories, we expect operating expense growth to be front-weighted in 2020, as noted in the text box on slide 18. And with that summary of our markets and outlook for the portfolio, I'll turn it over to Kevin to talk about our development activity and the balance sheet. Thanks, Sean. Turning to slide 19, since the middle of the last decade, when new development starts averaged $1.4 billion per year, we've reduced starts to about $800 million per year. This shift was driven by both a reduced opportunity set for attractive development and by a desire to limit development activity to an amount we could fund on a leverage-neutral basis without needing to access the equity market. For 2020, we expect to start about $900 million in new development on projects that we expect will not only improve the quality of our portfolio, but also generate compelling value creation in line with recent completions. Turning to slide 20, as Sean has just outlined, we continue to innovate across our operating platform, investing in initiatives that will allow us to better serve our customer while generating higher returns for our shareholders. For 2020, Our investment in these initiatives is expected to account for roughly half the increase in expense overhead costs adjusted for non-core items. Turning to slide 21, we show our $4.2 billion pipeline of future development opportunities, which are controlled at a very modest cost and offer a lot of flexibility as it relates to the timing of the start of construction. About half of our development rights are conventional conditional agreements, or options to purchase land with private third-party land sellers. The remaining half is split between asset densification opportunities, where we are pursuing additional density of existing stabilized assets, and public-private partnerships, which are generally long-term development efforts that span a number of years. These types of projects allow more flexibility to align the start of construction with favorable market conditions. In addition, it's worth noting that in creating this pipeline, We've been careful to limit our financial exposure so that we enjoy an attractive set of development opportunities at a modest upfront cost. At the end of the fourth quarter, land held for development was zero, an all-time low, and pursuit costs represented an additional $70 million. This allows us to control over $4 billion of future development across our markets for an upfront investment of less than 2% of projected total capital costs. Turning to slide 22, as we've discussed before, another way in which we mitigate risk from development is by substantially match-funding development underway with long-term capital. This allows us to lock in development profit and reduce development exposure to future changes in capital costs. As you can see on this slide, we were approximately 85% match-funded against development underway at the end of the fourth quarter of 2019. On slide 23, We show several of our key credit metrics and compare these to the multifamily REIT sector average. As you can see, our credit metrics remain strong in both absolute and relative terms, reflecting our superior financial flexibility. Specifically, at year end, net debt to core EBITDA was low at 4.6 times, unencumbered NOI was high at 93%, and the weighted average years to maturity of our total debt outstanding remained high at about nine years. And with that, I'll turn it back to Tim. All right, great. Thanks, Kevin. So, in summary, just on slide 24, 2019 played out more or less as expected, a good year for the apartment sector. We delivered 3% plus NOI growth. We completed $665 million of accreted development, and we made good progress in growing our presence in our expansion markets. In 2020, we expect the economy and apartment markets to remain healthy. For ABB, we're expecting same-store and high growth of 3%. External growth will be stronger than what we experienced in 2019 due to higher levels of deliveries and lower capital costs. And lastly, we plan to continue to operate the business, as Kevin mentioned, in a risk-measured way with respect to capital formation and deployment, recognizing that we are 10 years into the current expansion. And with that, Nadia, we'll open up the call for questions.