AvalonBay Communities, Inc.

Good morning, ladies and gentlemen, and welcome to the Avalon Bay Community's fourth quarter 2020 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, please press star 2. If you're using a speakerphone, please lift the handset before asking your question, and we ask that you refrain from typing and have your cell phones turned off during the question and answer session. Your host for today's conference call is Mr. Jason Riley, Vice President of Investor Relations. Mr. Riley, you may begin your conference.

Thank you, Allie, and welcome to Avalon Bay Community's fourth quarter 2020 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 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 remarks. Tim?

Thanks, Jason, and welcome to our Q4 call. With me today are Kevin O'Shea, Sean Breslin, Matt Bierenbaum, and for the first time, Ben Shaw. Shaw and Kevin and I will provide commentary on the slides that we posted last night, and all of us will be available for Q&A afterwards. Before turning to our prepared remarks, I'd like to take a minute to introduce Ben, who many of you have met either during his previous job or since the announcement in early December. Most recently, Ben served as the CEO and President of Ceritage Growth Properties, where he led the company from its inception and oversaw the transformation of the company from a portfolio of Sears stores into a mix of shopping, dining, entertainment, and mixed-use destinations. Prior to Ceritage, Ben was CEO of Rouse Properties, an owner of regional shopping malls, and before that, he was SVP with the Bernado Realty Trust. Ben brings a deep background in developing, operating, and activating real estate, in addition to a broad experience in many of the markets in which we do business. This is only Ben's second week on the job, so he'll likely have a limited role on the call today, but I thought I'd give him the floor for a couple minutes just to share a few comments. Ben?

Thank you, Tim. It's terrific to be here, and I'm truly honored by the opportunity to join this team and organization. Avalon Bay is one of a rarefied group of companies, in my mind, led by Tim and the senior team that have been able to successfully shape, build, and grow an enterprise of this quality and scale and do so with a core culture with a focus on integrity, caring, and continuous improvement that remain a real differentiator for the organization. And for me, in terms of why Avalon Bay, it very much started with what I believe to be the strong overlap between those values embedded here and my personal values and those that I look to bring to teams and organizations. I'm also passionate about creating real places that connect with people and communities, and there's not a purpose more powerful than Avalon Bay's core purpose of creating a better way to live. And to be a leader as an organization in providing better quality housing environments that are safe, healthy, gauging and at the appropriate price point, fulfill such a meaningful need in so many communities. And to do that in scale across the country, it's a very special place for me to have the opportunity to be a part of. My official first day was not quite two weeks ago on Monday, January 25th, and my early transition is in full swing. On a personal front, I'm now a Virginia resident, having moved with my family into an Avalon community nearby. Not only is it a wonderful home and community, I also get to be fully immersed in the Avalon Bay experience living and breathing our offerings each and every day and witnessing how much the Avalon ownership mentality comes through as a differentiator on the ground. Much of my time over the first 90 days is focused on listening, learning and building relationships across the organization. My early listening tour also includes our shareholders and investment community and I will be coordinating with Kevin Jason and team on that front. and look forward to connecting with many of you over the coming months. I'm very excited to be part of the Avalon Bay organization as we collectively help shape the future of the company and stay on the forefront of creating better ways to live. And before turning it back over to Tim, I want to give a heartfelt thanks to the wider Avalon Bay team and associates for how you've welcomed me and my family to the Avalon Bay family. Thanks, Tim.

Great. Well, thanks, Ben, and it's great to have you and welcome again. Our prepared comments today will focus on providing a summary of Q4 results and some perspective on 2021 and how it impacts our plans for this year. Before getting started on the slides, though, maybe just offer a few introductory comments on the quarter and the year. The fourth quarter was a tough end to what was already a very challenging year for the company and the business. The normal effects of an economic downturn on the apartment sector were magnified by work-from-home mandates, civil unrest in our city centers, and the growing strength of the for-sale market. The contraction of apartment demand in urban submarkets over the last year has been profound and unprecedented to anything we've experienced, except perhaps for the tech wreck in the Bay Area in the early 2000s. Over the last few weeks and months, we have begun to see some early signs of stabilization, with a steady improvement in occupancy, followed by effective rents beginning to level off in all of our markets. And yet, visibility for the business beyond the next 90 days or so remains challenged due to a combination of unique risk factors, including ongoing transmission of the virus and its variants, the rollout and efficacy of the vaccine, the continuation of work-from-home mandates, the regulatory extension of eviction moratorium in most of our markets, and lastly, the size, impact, and distribution of any potential additional federal stimulus that may be passed in the coming days. As a result, for earnings and operating metrics, we decided to provide quarterly guidance in lieu of full-year guidance. We are providing annual guidance, however, on a number of other items like lease up income, capital formation, development starts, and overhead. And we'll continue to update and share information with you as we move through the year. And if the environment changes such that we believe we can reliably expand our guidance, we'll do so. So now let's turn to the slides, starting on slide four. As I mentioned, Q4 was a tough end to a challenging year. Core FFO growth was down by almost 17% in the quarter on a year-over-year basis and 7% for the full year. Same-store revenue was down just over 7.5% year-over-year and 1.6% sequentially from Q3. For the full year, same-store revenue declined 3.2%. We completed almost $400 million of development in Q4 at a projected initial yield of 5%. And for the full year, we completed almost $800 million at a yield of 5.2%. While yields are down by almost 100 basis points due mostly to lower rents, they remain 75 to 100 basis points above prevailing cap rates. The two Northern California developments completed this year particularly weighed on results as rents have declined by double digits in that region over the last year. Excluding those two communities, the average stabilized yield for completed communities was 5.8%. In Q4, we started three communities in suburban northeast markets, which have been less impacted by the economic downturn. These were the first wholly owned communities started in 2020. We raised $465 million of capital in Q4, mostly through dispositions. For the year, we sold over $600 million at a weighted average cap rate of 4.4% and an unlevered IRR of 10.8% over an average 14-year hold period, which compares favorably versus the last two to three years. In addition, we raised just over $1.3 billion of debt this year, mostly to refinance maturing or near maturing debt of just over a billion. And lastly, we purchased or repurchased, purchased almost $200 million of stock for the year at an average share price of $150. Turning now to slide five, we thought we'd provide a little more color on the components of same-store revenue declines that we've experienced on a year-over-year and a sequential basis. On slide five, you'll see On a year-over-year basis this past quarter, we saw about half the decline in safe store revenue being driven by lower effective rents and about a half by increased vacancy and bad debt. And as we mentioned last quarter, future declines in safe store revenue this year will be driven by pressure on lease rates as the lower rents we've been leasing at over the last couple of quarters begin to roll through the portfolio and concessions, which have also been elevated over the last couple of quarters. and are amortized over the lease term. Turning to slide six and sequential same-store revenue, sequential same-store revenue was down 1.6% at Q4 from Q3, driven mostly by lower lease rates, which were down more than 2% sequentially, and concessions as a cumulative impact of amortized concessions continue to grow from Q3 to Q4. Lower lease rates and higher amortized concessions were offset by significant pickup and occupancy in Q4, which Sean will touch on in his comments. And with that, I'll turn it over to Sean to discuss portfolio performance in more detail. Sean. All right. Thank you, Tim. Moving to slide seven, you can see the impact of the pandemic on physical occupancy and the absolute effective rent we have achieved over the past year. broken out between urban and suburban submarkets. Chart one reflects our suburban submarkets, which makes up about two thirds of our portfolio. We experienced some deterioration in both occupancy and rate during the spring and summer of 2020, but have recovered most of the occupancy over the past four months. And as of January, effective rental rates were up about 1% sequentially from December and are roughly 4% below where we started 2020. The primary driver of the weakness in our suburban portfolio has been the performance of assets located in job-centered hubs, where employers have adopted extended work-from-home policies, and transit-oriented developments, where the use of mass transit has declined materially during the pandemic. Some examples include Assembly Row in Boston, Tyson's Corner in Northern Virginia, Mountain View in Cupertino in Northern California, and Redmond in Washington State. Chart two reflects our urban portfolio, which suffered from elevated lease breaks, turnover, and an overall reduction in demand in the late spring and summer months, which was prompted by employers extending work-from-home policies and major urban universities announcing the adoption of distance learning models for the fall term. Occupancy dipped to a low point of roughly 90% in September, but has since recovered by more than 300 basis points. We're still about 300 basis points below what we consider a more normal occupancy rate in urban submarkets, but likely won't experience that level until people return to work and major universities open for on-campus learning. You could also see that rental rates fell substantially the past three quarters, but it flattened out late in the year and ticked up about 2% from December to January. On a year-over-year basis, effective rental rates in our urban portfolio are still down about 18%. Moving to slide eight, you can see the trend of physical occupancy and the absolute effect of rent by region for the last year. Occupancy has recovered from the low point in every region except the Pacific Northwest, which continues to hover around 93%. Rents have leveled off in all of our regions over the past couple months, and we experienced a modest uptick in January in the metro New York, New Jersey, Mid-Atlantic, and Northern California regions. Also, in Southern California, effective rents have increased sequentially for the past three months. It's certainly too early to call the bottom in rents. It will experience year-over-year negative rent change for the next few months as we pass the one-year anniversary of the pandemic, but we'll continue to highlight sequential trends in both rents and occupancy as key indicators of a bottoming. Now I'll turn it to Kevin to address our outlook, development, and balance sheet. Kevin. Thanks, John. Turning to slide 9, we highlight our financial outlook for 2021. Although we prefer to provide our traditional full year outlook, the uncertain resolution of the pandemic and the related regulatory orders, including evictions moratoria across our footprint, has reduced our visibility on a performance later this year. Consequently, for 2021, we are providing operating and earnings outlook for the first quarter only, and we are providing guidance for development, capital activity, and other select items for the full year. Nevertheless, to assist investors in deriving their own perspective on our outlook for the year, we have enhanced our disclosure on expected performance in the first quarter of 2021. Specifically, we identify actual residential revenue performance in January 2021 for our same-store communities, which reflected a year-over-year decrease of 7.8% and a sequential decrease of 40 basis points from December 2020. We also provide ranges for projected residential performance for revenue, operating expenses, and net operating income in the first quarter of 2021 for our same store communities. In the first quarter, we project a year over year decrease in same store residential revenue of about eight and a half to 10%, reflecting the impact of lower residential lease rates, amortized and newly granted concessions, lower occupancy versus the year ago period, and a persistent level of uncollectible lease revenue. We expect an increase in same-store residential operating expenses in the low 4% range during the first quarter and for operating expenses to remain elevated during the first half of the year due primarily to several factors that influence a year-over-year comparison, including, first, the presence today of COVID-related expenses that were not incurred during most of Q1 2020. Second, substantially reduced maintenance and other spend during the beginning of the pandemic in 2020 that will make for a challenging comparison in the current year period. And third, elevated turnover and marketing costs in the current year period. As a result, for the first quarter, we project a decrease in same-store residential net operating income of between 13% and 16%. And finally, we project that core FFO per share for the first quarter will range between $1.85 per share and $1.95 per share. At the midpoint, our projection of $1.90 per share in core FFO for the first quarter of 21 represents a sequential decline of 12 cents from the fourth quarter of 2020. This 12-cent sequential decline is composed of an 8-cent sequential decline in residential same-store NOI, a four-cent sequential decline related to dispositions completed in the fourth quarter, and a four-cent sequential decline related to increased overhead and strategic initiatives. That is partially offset by a four-cent sequential increase from other community classifications, which in turn are primarily driven by increasing development lease-up NOI and commercial NOI, the latter of which was reduced in the fourth quarter by the write-off and straight-line rent receivables. As for the four-year guidance on other items, we project starting about $750 million in new development projects in 2021. We expect to complete $1.1 billion of development projects this year. And we expect NOI for new development communities undergoing lease-up to be between $40 million and $50 million in 2021. For four-year capital activity, we anticipate sourcing about $630 million in external capital from asset sales condominium sales from Park Loja, and capital markets activity. This compares with expected capital uses for development, redevelopment, and debt maturities and energization of $835 million in 2021. Turning to slide 10, as I just noted, we do expect to increase our development activity in 2021. The roughly $750 million in new starts that we plan for 2021 is comparable to our starts activity late in the last cycle and represents an increase from the $290 million in development started last year when we curtailed new investment activity in response to the pandemic. Over the past four years, about 85% of our development starts have been located in suburban markets, whereas Sean mentioned fundamentals have been much more favorable. For 2021, our development starts are also concentrated in our suburban markets. In addition, this year's two urban starts are located in residential city neighborhoods and not in the more hard-hit, high-density central business districts. These new development starts should contribute to earnings and NAV growth in the next few years and will be delivering into a market environment that we anticipate will be highly favorable for new lease-ups in 2023. Turning to slide 11, almost 95% of current development underway is already match-funded with long-term debt and equity capital. As a result, we have locked in the cost of investment capital on these developments, which in turn helps to ensure that these projects will provide earnings and NAV growth when they're completed and stabilized. As shown in the next two slides, we continue to enjoy tremendous financial strength and flexibility with excellent liquidity, modest near-term debt maturities, and a well-positioned balance sheet. Shown on slide 12, liquidity at quarter end was roughly $2 billion from our credit facility and cash on hand. This compares to just under $600 million in remaining expenditures on development underway over the next several years, resulting in approximately $1.4 billion in excess liquidity relative to our remaining development commitments. Turning to our debt maturities on slide 13, we show our debt maturities over the next 10 years and our key credit metrics. For debt maturities, we have only $600 million in debt maturities in amortization over the next two years, of which less than $40 million matures in 2021. As a result, our quarter-end liquidity of $2 billion exceeds both our remaining development spend and our debt maturities over the next two years by approximately $800 million. As for our key credit metrics, at quarter-end, net debt, the core EBITDA of 5.4 times was in line with our target range of 5 times to 6 times, while our unencumbered NOI was at or near an all-time high of 94%. reflecting our large, unencumbered pool of assets that we could tap if necessary for additional secure debt capital. And finally, and perhaps most importantly, as we look beyond the end of this pandemic, our strong balance sheet provides us with terrific financial flexibility to pursue investment opportunities as they emerge in the recovery ahead. With that, I'll turn it back to Tim. Thanks, Kevin. Turning to slide 15, I thought I might provide some longer-term perspective on this downturn in our business. This slide shows an index for same-store-based rental revenue since 1999 or over the 22 years, plus or minus, since the Avalon and Bay merger. A couple of things worth mentioning here. First, you can see the long-term trend is positive and reflects a healthy business. Over the last three cycles, annual compounded same-store revenue growth has been roughly 3%. Rents have grown a little faster than that during the expansionary phase of the cycle, generally contract for one to two years during a downturn, as they're doing now, and then re-accelerate during the recovery phase at the start of the next cycle. Housing has been a consistent performer over many cycles, as demand and supply generally grow in tandem over the cycle, with net completions roughly matching the pace of household formation most years, except during recessions when the number of households temporarily contracts. During the downturns, it can be difficult to project operating performances. No two downturns and recoveries look exactly alike. Just to demonstrate that, the downturn in the early 2000s was reasonably deep for the apartment sector. In fact, it took almost five years for rents to recover back to their prior peak across our footprint. And in San Jose, rents didn't fully recover for 15 years. The downturn in the late 2000s was comparatively steeper as the economy and labor market were significantly impacted by the financial crisis. And while it was steeper, it was also shallower for the apartment sector as rental demand benefited from the correction in the for sale housing sector. The current downturn brought on by the pandemic has been the steepest yet for the economy and for the apartment sector. And while we are perhaps seeing early signs of stabilization, it is difficult to predict the timing and strength of the recovery, given the myriad of uncertainties directly impacting our business, whether it be economic, regulatory, or health-related. Importantly, though, we are confident that the apartment housing markets will recover, that we will return to sustained growths in rents and revenues over the next cycle, just as we've seen over the last several cycles. And then multifamily will continue to be a good business for the long term. So turning now to the last slide and in summary, operating performance continued to decline in Q4, but during the quarter and the early part of Q1, we began to see early signs of stabilization and some important operating trends. We saw healthy gains in occupancy sequentially, with urban submarkets recovering about half the occupancy they lost earlier in the year. Rent growth began to level off after declining for most of the last three quarters, and some regions even began to see modest sequential improvement. The transaction market has recovered and strengthened significantly in recent months, with suburban assets generally now selling at or above pre-COVID values. As Kevin mentioned, our balance sheet and liquidity remain in great shape and well-positioned to support new growth opportunities. In fact, given recent operating trends and improved capital and transaction market conditions, we decided to activate the development pipeline, starting three new developments this past quarter after having been cautious for most of 2020. Our starts in 2021 will be focused on submarkets that have been less impacted by the downturn where the economics still offer a reasonable risk-adjusted return. And with that, Allie, we're happy to open up the call for some Q&A.

Of course. Thank you. And as a reminder, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. If you find your question has been answered already, you may remove yourself from the queue by pressing star two. As a reminder, it is star one if you would like to ask a question. And we'll go ahead and take our first question from Nick Joseph from Citi. Please go ahead.

Hey, it's Michael Billiman here with Nick. Tim, I wanted to ask you sort of on development, underwriting, and also maybe bring Ben into the conversation, because it's a little bit about mixed use, about when you're now underwriting these projects, how are you thinking about those ancillary services and locations that are going to be part of a community, whether they be retail or even office? Historically, Avalon has partnered with others to do those. I think about the deal you bought in Virginia. where Regency took the retail. I think about assembly where federal obviously brought you in to do the resi.

How do you think it's going to evolve?

Can those pieces stay capitalized separately, or will it require someone to come in and take a loss on retail or a loss on office to support the multifamily rent?

Effectively, you have to get higher returns on multifamily to make the math work.

Yeah, Michael, I think we've talked a bit about this in the past, and obviously he's probably more interested in it just given the events of the last few quarters. As we talked about mixed use, we pursued it in a number of ways, oftentimes partnering, as you suggest, whether it's with Federal or Regency or Edens on a number of projects where it's more of a condo structure where we may be building out the core and shell and ultimately turning back that retail to And that's been sort of the MO in cases where it's been a pretty significant piece of the retail. We felt like we were able to reasonably sort of separate the execution and ultimately the management of the two pieces. We're also doing a fair bit of mixed use that I sort of think of as sort of horizontal, more kind of PED, if you will, where we may be assembling a site, and Sudbury is a good example of this, where, you know, there may be a separate adjacent use. In fact, there we've got, you know, Whole Foods was part of the community, but it was owned fee-simple, not that kind of structure, but fee-simple by a different retail developer. That also had a for-sale housing component, also had a restricted, an age-restricted component as well. So, you know, particularly the suburban locations will look to do that. I'd say kind of the Some of the infill locations will probably continue to partner with some of the top retailers in the country. And then the third category, which I think is where your question was headed, is when the uses are so integrally linked, where it's probably in the interest of the asset that it be controlled by a single entity, whether that entity is a partnership or whether we control it. whether we control the entity 100%. I think probably our preferred solution in that case is where we're, again, partnering with somebody who's expert in the area of retail and can underwrite and help operate that, but our partners in the venture are with us. And so we'd be looking at the economics of the entire venture together and trying to optimize them in terms of the trade-offs that you inevitably make between the between the ground plane, which is usually the retail, and the residential above that. So I think you'll, you know, if you sort of fast forward over the next five, ten years, I think you'll see more of the third category emerging. And, you know, companies like us will be partnering with, you know, presumably the regencies, the federals, and Eden to the world to make that happen. And then just in terms of the rent recovery, and, you know, I know you pointed out that Extraordinarily, the timing and the strength of recovery, particularly in the urban submarkets, is difficult to project. You made a comment about the early 2000s and how San Jose didn't recover from a rent perspective to prior peak for 15 years. I guess when you think about New York and San Francisco, which you still have a fair amount of exposure to, I guess what are you trying to underwrite? So I would assume having a view would dictate your capital allocation decisions. about either rotating capital out of these markets or trying to go deeper overall. If you have a 15-year timeframe, that can make it a lot more difficult. So where is your mindset today about when you take the rent recovery and how the fundamentals in New York and San Francisco will turn? Yeah, yeah, thanks. I didn't use the San Jose example to suggest that's what we think is going to happen in New York City and downtown San Francisco. Obviously, the San Jose case was extreme because there had been a big spike during the tech run-up in the late 90s and 2000. So a lot of that period of gain was just before sort of the tech crash. But I think your point is, I think part of the point is that some of these things can be long cycles, right? You know, we still believe in New York and San Francisco. We believe in, you know, our coastal markets as an investment thesis going forward. I mean, they are, we think they're going to continue to be centers of innovation, homes of great research universities. They're going to continue to over-index in our view in terms of the knowledge economy where you have higher incomes and and productivity, and that density of knowledge that's contained in those markets is critically valuable, particularly to startups and companies that are getting off the ground. Now, as companies continue to grow and mature, they're going to distribute their workforces, as we've seen over the last year, to satellite, some satellite markets and other markets, and with the additional work-from-home or hybrid positions as maybe perhaps all over the map. I think it's too early to underwrite what the relationship between demand and supply is going to look like over the next five years, but we don't see those markets in long-term decline, to be clear. When you think about the power corridors in this country, it's still Washington to Boston on the East Coast and L.A. to San Francisco on the West Coast, and Those are long cycles, too. Those don't reverse themselves over five or ten years. So inevitably, we're going to continue to allocate capital to some of our other markets that I think are going to be somewhat beneficiaries by maybe some spillover effect from New York and San Francisco, whether it's D.C., Seattle, or Boston, as well as recent expansion markets, Denver and Southeast Florida. But there's probably other expansion markets in our future as well that that have some of the same characteristics, you know, research universities, attractive to knowledge workers, you know, particularly some of these larger, you know, mature, you know, companies disperse their workforces across a wider geography. But it's not that you won't sell in New York and San Francisco to fund that. That will be other sort of sales to do it or just raising up capital to expand? Yeah, I don't think we're at a point where we think it probably makes sense to pursue Pursue sales just just given given the performance of those markets right now. I Think we like all of us, you know, we're gonna feel a lot better which we see how much they bounce back I'm not saying they're gonna bounce 100% back from from where they were a year or even or even two years ago But you know until we until there's a little bit more visibility there. I just don't think you're I think the bid-ask is just going to be too wide and on assets in those markets. I mean, Sean mentioned in urban markets, we've seen rents down 18%, and they're down more than that in Northern California and New York, the city. So I think it's too early, but I think it's safe to say that's not where probably the net growth is going to be for the portfolio. Just like if you're Google or Facebook, probably a lot of your net growth isn't going to be in isn't going to be in Mountain View and Menlo Park. So it doesn't mean you're going to abandon those regions. So they're going to continue to be core to our portfolio, but it's probably not where the growth is going to come from as it relates from a capital allocation standpoint. Thanks, Tim.

And we'll go ahead and take our next question from Rich Hill from Morgan Stanley. Please go ahead.

Hey, good afternoon, guys. And Ben, it's nice to hear from you on an ABB earnings call. Look forward to working with you. Hey, guys, I want to spend a little bit more time thinking about the bridge from 1Q versus 4Q. I recognize that the sales in 4Q probably had a four to five cent hit. And I appreciate the additional disclosure on capitalized interest, which is another one cent to two cents. But it still seems like the guide is at midpoint, is a little bit lower than what maybe we were expecting. So as you think about that, given the green shoots, is it something to do with the mix of apartments coming online? Or how should we think about that difference, which given the green shoots, I would have expected maybe the guide to be, call it five to seven cents higher. So maybe I'm just trying to understand how you get there. And if you could break that down a little bit more for us.

Rich, this is Kevin, and maybe I'll sort of take a stab at that. I tried to walk people through that in my opening remarks, so I don't know that I have a whole lot of details. So let me begin by maybe repeating that, and then if you have further questions around that, we can try to dive a little bit deeper. So just as a reference point, we anticipate core FFO per share at the midpoint declining from $2.02 in Q4 to $1.90 in Q1. In terms of this $0.12 sequential decline, relative to our budget, what we have is an $0.08 sequential decline in residential same-store NOI, a $0.04 sequential decline related to dispositions that were completed in the fourth quarter. So need to bear in mind we did sell about $450 million of assets in the fourth quarter that were present for much of the fourth quarter and are no longer present in the first quarter. So that's a $0.04 sequential decline from that line item. four cents sequential decline as well from increased overhead and strategic initiatives. And those total, call it 16 cents or so, and they are partially offset by sequential increase in other community classifications, primarily which include increasing lease up NOI from development, and then commercial NOI, which is expected to recover sequentially because that was burdened in Q4 by the write-off and straight-line rent receivables. So that was kind of the backdrop for it. Again, it's hard for me to reconcile against your expectations, which seem to have been about $0.05 higher, but that's the backdrop. I'm happy to answer any follow-up questions you may have about those items.

That's very helpful, and I follow all of that. What I was trying to understand a little bit more was the $0.08 headwind, the same-store NOI. Because it seems like the quarter is going to be maybe a little bit more challenging than 4Q, despite some of the green shoots that have emerged. And maybe I'm just asking a naive question, but I wanted to maybe understand, you know, why same-store NOI is a headwind versus 4Q, despite what looks like to be improving occupancy and improving effective blended rents.

Yeah, Rich, this is Sean. Why don't I try to provide some high level commentary on that that I think may help. And then if you're looking for additional detail, we can certainly take it offline. But one thing to keep in mind here is that while we're talking about sort of green shoots in terms of leveling off of rents and such, we do have sort of the cumulative effect of both lease rent reductions as well as the amortization of concessions that will bleed through the P&L as we move through 2021. So, in other words, the expectation would be as you look forward to the next couple of months, the impact from the amortization of concessions and the cumulative effect of those lease rates will be higher than it has been in Q4. So, that's something that I'm not sure people always think about, but one sort of, you know, broad way to look at it as an example is we granted about $47 million in cash concessions in 2020. We only amortized about 16 million of those, so there's still another 31 million of concessions that we'll amortize through 2021. So that will continue, as Tim mentioned in his talking point, to impact the growth rates as we move forward over the next several months. So that may provide some additional coverage around the headwind.

Yeah, that's very helpful, guys. And I think the simple explanation, and sorry for complicating it, is there's just an earn and benefit that still has to burn off over time, which makes it a little bit more of a tougher comp. But that's very helpful. Hey, one more just clarification question, and I'll get back in the queue. But that fourth sense of strategic initiative that you mentioned, is that one time or is that reoccurring as we think about modeling?

It's It's part of our, you know, four-year guidance for overhead costs, which includes a significant component of which is investment in building out our digital capabilities and other strategic initiatives. And so it's a capability that we've been adding and continue to add to our business and is therefore occurring throughout the course of the year. So it's something that you can kind of think about as continuing on. Yeah, Rich, just to add on to that one as well. We may talk about it in more detail in the coming quarter or two, but it ties into some of the information that we provided back in sort of late 19 in terms of our investment in digital capabilities, AI, machine learning, things of that sort that, if anything, has only accelerated as we've moved through the pandemic. If you think about what's been happening with virtual tours and self-guided tours and smart access and things of that sort, I think if you talk to not only us, but our peers and others, there's even probably more conviction in making those investments in the ROI associated with them that we would expect to continue to invest in those capabilities over the next couple of years for sure and then see those payoffs come through. Hey, Rick, just to add to that, as we're making those investments in innovation, there is a bit of a geography issue, right? You've got maybe hitting the overhead line, but the benefit oftentimes is flowing through to the assets and So when we are able to save some payroll, things like that, it may not be obvious because the payroll expense is a big number. You know, the property offer X is a big number maybe compared to what the strategic initiative number is.

Got it. Guys, thank you very much. I know this was sort of wonky modeling questions, but I really appreciate you spending the time to detail that a little bit more. Thanks, guys.

And we'll now move to our next question from Rich Hightower with Evercore. Please go ahead.

Good afternoon, guys. And again, welcome to Ben on these calls.

So my first question, I kind of want to home in again on San Francisco and New York and the big sequential occupancy gains in the fourth quarter. Obviously, a lot of that must have been driven by pricing in the market as opposed to anything related to, you know, return to office or sort of the, you know, normal seasonal leasing pattern that we might consider.

But as we think about the pace and the drivers of demand going forward as we go through 2021, you know, what do you think the key drivers are that we should be expecting and how does that overlay with what is normally expected? peak leasing starting in the spring? And how do we fold in return to office in that? And how do you guys think about the moving parts, given that this is just going to be a strange year in all respects?

Yeah, Rich, why don't I take a first shot at that, and others can comment as needed. But I think the factors that you'd like to monitor are, first, what you mentioned in terms of employers basically reopening their offices and calling people back to work in these major environments. That's obviously a key driver here. As Tim mentioned earlier, we're probably not expecting 100% to return, but certainly a very high percentage are very likely to return. The second component is what I mentioned in my prepared remarks is sort of the reopening of these major urban universities that really do draw in not only domestic but international students that do occupy apartments in some of these major urban centers. And it's not just the student, but it's the ancillary staff, faculty, et cetera, et cetera. So when you think of New York and San Francisco and markets like that, that's a pretty significant phenomenon. And then ultimately what's going to follow that is more business activity where there was corporate demand and things of that sort for consulting assignments and such that you can make up 1% to 2% of a market. the combination of those factors is what will really sort of drive the demand. You know, what we'll likely see is people, you know, leave departments a little before they need to be either on campus or back at work or going to some consulting assignment, et cetera. And so the timing of which that is something that I think we probably all debate. I think, you know, our view at this point just based on what's happening with the pandemic and vaccinations, etc is that you know it's probably sometime maybe in the summer when you might see that happen depending on how the vaccination of the population occurs over the next few months here so we could see employers calling people back in the in the summer or maybe the fall uh when people are you know returning to school and stuff so i think those are the key questions the timing of which is uh is yet to be determined for it to have a material impact on 2021 results however given the lease expirations that we have from quarter to quarter, you really would need to see that happen probably in the late spring to early summer to have any kind of meaningful impact on 2021 as compared to what occurred in the fall where we only have maybe, you know, 20 to 30% of the lease expirations remaining, you would see the lift in 2022. Okay, that is helpful, Carlos and Sean. I guess my second question here, You're obviously ramping up development starts this year. What's the chance that you guys even go bigger than the 650 to 850 guidance if you think we're really on the cusp of the next multi-year recovery in multifamily? Well, it's a good question. As I mentioned in my prepared remarks, somewhat a function of what we've seen in the markets, both the real estate markets as well as the capital markets. At this point, we're basically funding that development with plan dispositions, just given where our leverage is right now and trying to sort of protect our credit metrics where they stand. And I think as we've said in the past, it's hard to, with gain ratios of around 50%, it's hard to sell sell too much, if we wanted to double down, we'd end up having to do distribution, and then it's just not capital. It's not as capital efficient. So I think what would have to happen is the equity markets, I mean, we had a good start today, I guess, but the equity markets would need to recover more to a level which we think is sort of more reflective of intrinsic value in NAV, where we might have access to those markets as well to really expand the balance sheet in order to accommodate more development. Now, I've said that not all deals we think are sort of ready to go. As I mentioned in my remarks, for the most part, we're focused on markets that haven't been as impacted from a run rate standpoint so that the yields are still, at least on a current basis, still offer, we think, sort of an appropriate risk-adjusted return. That's not true of the entire development pipeline. You know how these deals work. You just don't go out and pick up some land options and start the next quarter. These things take, even deals that are entitled can take a year or two years to sort of fully gestate before they're ready to start. So the numbers probably just can't flex up too much, even if market conditions were great. But I suspect it's going to be in this range unless market conditions move dramatically one way or the other.

Got it. Thank you.

We'll take our next question from John Polosky from Green Street. Please go ahead.

Thanks.

Matt, could you give us a sense for the two Northern California dispositions? How do you think values ultimately fell out to where what you could have gotten on the sales pre-COVID and Capra colors, those two deals? Sure, John. We sold the two deals in Northern Town, the fourth quarter. Yves Saint Raphael was our only asset in Marin County. That's a pretty unique asset, you know, in a very supply-constrained part of the world with, you know, very little existing stock, almost no new construction. So I would say that one, I don't think that the value there was really impacted much at all. We think the cap rate was a high three, maybe around a 3.9%. So I'm not sure, maybe it's down slightly from where it would have been a year ago, but that's just such a special asset that it's a bit of a one-off story. The other asset that we sold at the end of the year was Eve's Diamond Heights. That's an older rent-controlled asset in the city of San Francisco. And we were a little bit motivated there to close by year-end because the city, through a ballot initiative, increased their transfer tax to the highest in the country at 6%. So there was definitely some Dollar savings by closing before year-end that deal was about a three seven cap as four hundred seventy thousand unit I would say a year ago that asset probably would have sold for Eight to ten percent more although it's hard to know Maybe not as impacted in terms of the NOI as some of the other assets just because it was a rent controlled asset and so some of the rents were below market and but also maybe less lift for the buyer way out because there'll be more constraints on ability to raise rent. So probably a little lower beta maybe than some other assets in San Francisco.

Okay, great.

Thanks. And then second question for Sean, sticking with Northern California, just curious your thoughts, particularly in San Francisco, San Jose, when A lot of your private competitors' occupancy is well below your own level, and it feels like the entire market's one to three months free. And so the short question is, are you going to be able to sustain the occupancy and sustain stable rents as your private competitors play catch-up? Do you feel like the floor is underneath, or is it going to be a choppy few quarters here? Yeah, John, that's a good question. I think if you look at basically how the quarter unfolded, and not just in Northern California, but across some of the more impacted markets, whether it's ones you referenced or New York City or, you know, Redmond and Washington State as an example is, you know, we've certainly seen rents decline as we've built occupancy. And now they've sort of leveled off. And the question kind of rolling forward is, or do they just sort of bounce along the bottom here as we basically try to kind of hold occupancy where it is? You know, we feel like the, for the most part, across the portfolio, we're pretty close to where we think market occupancies are. And so rents should get better. The question is how much as the rest of the market sort of does what it does, as you pointed out. I think there's, you know, some of the other peers are going to be higher in occupancy, some are lower, trying to catch up. But I think just given what we've seen, the belief is that we probably just for the next couple quarters are going to kind of be bouncing around a little bit. I wouldn't say that we're expecting a sharp uptick. I wouldn't say that. But should we expect some marginal improvement? I think that's reasonable to assume, given where the rents were to get the occupancy that we needed. Now we're trying to just sort of stabilize a little bit. So we should be able to compete without as much inventory available, and therefore, you know, the rents won't need to be as soft, I guess is the way I'd describe that. Every pocket's a little bit different, though, is the way I think you need to look at it in terms of what's happening. Is there new supply? Is there not new supply? Things like that do impact these submarkets in potentially a meaningful way, depending on what's going on there.

Okay, great. Thanks for that, Todd.

We'll take our next question from John Kim with BMO Capital Markets. Please go ahead.

Thank you. Comparing this downturn versus the prior recession on page 14 is very helpful. I guess one of the big similarities between now and early 2000s is the home ownership rate and the strength of the housing market. And I'm wondering if you think this is the factor that's most important in terms of the pace recovery this time around or have landlords including yourself aggressively cut rent so that the recovery time could be quicker?

Yeah, John, it's Tim. It's a good question. I mean, we are definitely seeing the for sale market strike. I think, you know, part of that, like the early 2000s, is demography. As you start to see the kind of the 30 to 34 year olds or the leading edge of the millennials come forward and, you know, start to purchase. I do think, though, what's happening is you are seeing just an acceleration of folks that may have bought a year from now or two years from now, three years from now, accelerating that purchase decision just because of what quality of life in the urban markets has been like over the last year. So, you know, we'll have to see. When you look at, you know, it's been our view, you know, I think we've talked about this over the last two or three years, that housing demand between rental and for sale is going to be more balanced. over the next decade than we've seen over the last two decades. The last decade was kind of the renter decade. The decade before that was kind of the homeowner decade. There was some artificial factors driving it, particularly in 2000s, as you know, what was going on in terms of just the whole mortgage crisis. But I just think just given kind of the mortgage finance system we have in place now, I think it's going to be driven more by fundamental factors than speculative factors. And for a long time, from ownership rates were just sat at like, you know, just 64, 65%. And they were kind of that, uh, you know, kind of, kind of that level on a mark on a marginal level. And if you look at what's happening in terms of, in terms of the growth, and we've talked about this too, in terms of this growth and single, single person or single parent households, that, that population is still growing. That population is still growing. And that, you know, multifamily is a, is a better, is a better use for, uh, a better housing choice for that group. So I think there's a lot of factors when you sort of put them all together, it really does suggest sort of balanced housing demand going forward. So today, you know, we're producing whatever close to a million, around a million single-family units and three or four, maybe 400,000 multifamily units. That feels about right, you know, relative to marginal demand. I think it's being accelerated as we're speaking right now just because of the because of the pandemic. But as you look at over a two, three, four year period, it sort of strikes us as about sort of the right mix of supply to address marginal demand.

That's very helpful. Thank you. Maybe the second question for Kevin. The impact your earnings from concessions doubled this quarter versus last quarter. But can you remind us how the concessions have trended throughout the year last year? So the average concession be granted by each quarter?

Well, maybe Sean, if you want to speak to the average concession value.

Yeah, I mean, I think what I can probably describe to you is if you look at the leases that we signed, kind of what the pace has been in terms of concessions. So in Q3, the average concession for a lease signed was $1,100. When you look at Q4, the average was $1,350. But it did tick down as we moved through the quarter. So as an example, October was $1,450 at least. November was $1,400. December was $1,190. And then we're down to just under $1,000 at least in January. So the trend has been our friend in terms of the impact of concessions. In terms of the accounting of it, just one comment to reiterate what I mentioned earlier, and Kevin can address it more thoroughly as well, is We granted about 47 million in cash concessions in 2020, but we did only amortize 16 million of them in 2020. So there's still 31 million in deferred concessions on the books that will be amortized through 2021. And then in addition to that, whatever concessions, cash concessions we grant in 2021 will also commence amortization. So hopefully that gives you some sense of sort of the headwind as we move into 2021 from the concessions that were granted but deferred in 2020. I don't know if that answers your specific question or if you have a follow-up. I can add a couple things, John, Kevin, again. So just to give you a sense to frame it, if you kind of look at our earnings release to start the discussion here for, and as Sean has mentioned on page 31 of our earnings release, for the full year of 2020, we granted $46.6 million worth of concessions. That's just the granted number. If you kind of go back, in Q4 we granted about $19.5 million. Q3 granted about $15.3 million. So the difference pretty much is really what we did in Q2. So, you know, that's going to be, call it, you know, another $12 million or so granted in Q2.

And again, what we amortized, of course, is different. Is it fair to say in the third quarter that year-over-year comps are easier? You'll be withholding the concessions on renewals?

Well, it is a function of what concessions we grant in 2021. Although it's being equal, if you just sort of stop today, if you thought the concessions were going to go to zero, effective February 1st is an example. What's on the books today, the peak concession burn-off, re-amortization, would be sort of in the April-May timeframe. You know, we're still granting concessions, maybe at a lower rate, but we're still granting concessions now, so it's very likely that the peak burn-off of the amortization will drift into the summer sometime, depending on the volume of concessions that we grant and the amount of each concession over the next few months.

A couple. Thank you.

We'll now take our next question from Austin Warschmitz from KeyBank. Please go ahead.

Great. Thanks, guys. Just wanted to touch on sort of the occupancy rebound again and, you know, economic occupancy is now approaching kind of that mid-95% range.

I think you were, you know, 96% plus pre-pandemic. But anyhow, how does it change your view towards, you know, continuing to build occupancy

given, I guess, your view that it could be, you know, until the summertime, until you start to see, you know, a surge in demand as people firm up the back office dates and then into the fall for the student population. How does that kind of balance that, you know, continuing to grind down, I guess, on the concessions versus, you know, trying to build occupancy to give yourself maybe some cushion as you get into the spring leasing season and the expirations start to increase? Yeah, Austin, this is Sean. Good question, kind of from a strategy standpoint over the next two or three months. As I mentioned in response to a couple questions ago, we think as we look across the suburban markets and the urban markets that we're in the range of what we consider market occupancy based on, you know, multiple data points that are available out there, people use Axiometrics or CoStar or, you know, various other sources like that. And so we've got, you know, the ability to sort of triangulate into where we think market occupancy is. And we're comfortable sort of operating around market occupancy to slightly above maybe 100 to 200 basis points. Anything beyond that and you're probably just giving up too much rate to hold that higher occupancy. So while occupancy may drift up a little bit over the next couple of months here, I wouldn't expect it to spike materially, you know, similar to what we've seen in the last four months. So for us, it would be more about maintaining marginal improvements in physical occupancy and really trying to make sure we find where we can hold those rents and see sequential improvement in effective rents at that occupancy. That would be the fourth game going forward for us. To the extent that there's a pivot one way or another in terms of the macro environment, that would certainly influence that strategy, but that is the strategy as we see it today. Thank you. And then you referenced the 18% decline in rents. I think it was in reference to urban markets. But as we think about that recovery, you know, last quarter you did mention you've kind of gone further down in the renter pool from a credit perspective.

Can you give us any type of metric to give us a sense of how that change in renter profile, how significant it's been, or maybe an affordability, you know, ratio comparison versus, you know, you know, the years leading up to the pandemic?

Yeah, no, also a good question. And one thing to be clear about is, if anything, our credit standards have become more stringent during the pandemic, given the various regulatory orders that are out there, particularly the eviction moratoria. Where we have deep reach down further in the rental pool is more from an income perspective. And obviously rents are down, so people can qualify for apartments that maybe they couldn't qualify for last year when you go to New York City or San Francisco and the rents are down 25%. But in terms of maybe where you might be going with this is their ability to pay in the future as we see a rebound and are trying to push through rent increases. And while income levels are down, rents are down more than that. So actual rent-to-income ratios have come in a little bit for the last few quarters, which just tells us that there is more ability to absorb rent increases on the other side of the pandemic. We see a rebound. And one thing to remember, excuse me, as it relates to concessions is what we have to amortize concession for gap purposes, we don't amortize the concessions for the individual residents. So they may receive a month free as an example up front, but the next month they are still going to check for the full amount of the lease rent. So any renewal that we provide to them at some point in time when the lease expires will typically be based off the lease rent as opposed to the success rent. So people are, you know, in a position where they can afford what they're writing a check for as opposed to the effective rent. Right. And what's the decrease in the gross or face rent, if you will, versus that 18%? Yeah, so if you look at it on a rent change basis, as opposed to the blended values that we were talking about, basically we had effective rents that were down 11.2. But if you look at lease rents, they were down about 7%. Yeah, no, I saw that for the quarter. I'm more curious, I guess, you know, over the course of, you know, how that 18% number would compare.

And is our income still down less than, you know, that face rent number, you know, when you remove the concession as you referenced?

That's correct, yes. Yes, incomes are down less than the reduction of rental rates. Okay. Thank you.

We'll now take our next question from Aloua Askarabek from Bank of America. Please go ahead. Hi, everyone. Thank you for taking the question. I know we're going a little too long, so I'll be quick. But I wanted to ask a little bit more on the demand side that you've been seeing, just to get a clear idea. Are you still seeing a lot of those bargain hunters coming in within markets looking for the deals in your urban markets? Or are you starting to see a little bit more demand coming in outside of those markets?

Yeah, no, it's a good question in terms of the bargain hunters. I guess in the current environment, yeah, sort of everybody's looking for a deal. But as I mentioned in response to the last question, if people are well qualified with good incomes that are coming in. So it's, I would say that we're not looking for people that really can't afford what we're doing. And so they're really trying to drive for a deep discount to make a council for them. In terms of the question about net new demand coming in from sort of other geographies, that's a good question. I don't have that right off the top of my head, but I would say for the most part what we're seeing is that given the entire market in many cases has improved in occupancy, that there is net new demand coming into these markets as opposed to just a recirculating of the existing demand that's already in place that would allow that to happen. So I don't have specific detail for you in terms of how much demand in New York City is an example, but market occupancy to come up, there has to be net new demand.

Okay, got it. Thank you. And then just a quick question on Boston or New England overall. It looks like the effective rents really dropped off in 4Q. Is there anything behind that other than maybe the supply that you guys have been talking about?

No, I mean, it's the same phenomenon. I mean, the urban markets in Boston are still very challenged. It's quite choppy, not quite as bad as New York City or San Francisco, but the urban markets are driving most of it, and there are some sort of infill pockets. I mentioned your Assembly Row asset, Dutton, Chestnut Hill, pockets like that that are sort of the inner ring suburbs are also a little bit weaker. Some of the more distant suburban towns but good school districts and things like that are performing better.

Got it. Thank you. We'll now take our next question from Nick Ulico from Scotiabank. Please go ahead.

Thanks. I just wanted to go back to the slide in the presentation where you gave the occupancy and blended rent for the suburbs and urban environments. And I guess I'm just wondering, you know, for those two different buckets, suburbs versus urban, you know, if you had – if you could give us a feel for kind of the composition of the blended rent, meaning, you know, what percentage of that was renewals versus new leases for the different regions? Yeah, Nick, that – It's a good question. It's a lot of data points because it is a blend of renewals and new move-ins, which changes by month. That's probably something, you know, Jason could, you know, talk to you about offline as opposed to trying to walk through that because, again, it changes month by month. If you think about it, if you want to do it, you can just go look at our turnover rates that we provided in the earnings release to get a feel for it, though. It shows that year-to-date and for the last couple quarters. That'll give you a good sense. Right, okay. Yeah, that's what I was wondering if it was kind of similar to the turnover rate because I guess my question here is, you know, if your turnover is at your lowest point of the year in the fourth quarter and first quarter and we're looking at a blended rent number that is, you know, in some cases stabilizing or slightly ticking up versus, you know, higher turnover periods, I guess I'm just wondering what we should really be reading into this, because doesn't it just mean that you're signing less new leases, which is where the worst pricing is? And so the fact that it's starting to stabilize, but you're doing more renewals versus new leases, and you're going into a period in the spring where you're going to have a lot of new leases, I guess I'm just trying to wrestle with what we should really be reading into this line of improvement for January and the fourth quarter versus other parts last year. Yeah, no, that's a good question. I think to the comments that I made to John earlier, probably a little too early to tell in terms of calling it a bottom, but we are pleased with the fact that during what is typically a seasonally lower period where we had turnover up 15% year over year, that we have been able to slowly pull back on concessions and see slightly better London rents. Sort of that effective basis, you know for now four months basically through four months that that gives us a sense that We're kind of pricing in the right neighborhood and that was building occupancy so we don't need to build as much occupancy as We were attempting to do in the last three or four months therefore We believe we should be able to do better in terms of absolute effective rents moving forward To your point, though, it does, you know, what happens at each market as we get to the spring leasing season is yet to be seen. So I think we're kind of bouncing around the bottom now. And the question is, will we continue to see those sequential improvements now that we're at that occupancy platform that we want to be at? That is a function of just pure supply and demand in these markets and what happens. So I think it's probably a little too early to call in terms of the specific question that you have, whether I should read a note that this is at the bottom and it's going to bounce back. I'm not sure we're prepared to say that just yet.

Okay, thanks. That's helpful. Thanks, guys.

We'll take our next question from Rich Anderson from SMBC. Please go ahead.

Hey, thanks. Good afternoon, everyone. So when I think about percentages and talk about percentages, it can get sort of misleading. If I don't have any jobs, we're lost in your markets in 2020, but you need kind of 2x growth to get back to where you were in absolute numbers just because you're growing off a smaller base. And then the same logic applies to the 18% decline in your urban effective rates. You got to do 30 plus off the lower base to get back to where you were in absolute per unit rent. And my point is, You know, when you look at your slide on page 14, it's taken three to six years for you to just get back to where you were in whether it was the tech bubble or the housing crash. Does this environment, which is somewhat more black and white, it's sort of virus vaccine, it's as bad as it was, it's not very complicated. Do you think that the recovery back to where you once were in whether you use jobs or rents, whatever the metric is, will be tighter than that 3% bottom end of the range that you've experienced in history?

Rich, Tim here. You know, that's obviously one of the big debate here as to whether this is going to be, you know, V-shaped or, you know, swoosh-shaped in terms of recovery. And that's ultimately, you know, it's jobs. It's what's going to, you know, help propel a total household formation. and the deconsolidation of households that may have consolidated over the last year. And while the unemployment rates are looking pretty good, obviously the labor participation rates are pretty low. So it's going to take some really decent economic growth, I think, to really... I think suburban rates could be back a lot quicker than the three to five years we've seen in the past. I think the question here is really about urban and some of the really tech-intensive suburban submarkets like a Mountain View or a Menlo Park, as we were talking about before. And that's going to take some economic growth, I think. So I think we may see sort of a quick V-shape maybe for the suburban markets and the urban markets. We may not be back to those rents for another three or four years.

Yeah. So it leads me to my, my kind of second question, which is, you know, you're not given full year guidance because, you know, you don't have a lot of visibility, you know, beyond 90 days, but then you're ramping development up. So I just wondered if, you know, your, your, your confidence in a period two years from now, when you might be delivering these assets is, is higher than it is, you know, six months from now. And I imagine it is, but I, I, That's what I'm trying to pinpoint. Or is the development you're turning on sort of specific to those markets and those areas that maybe weren't as impacted by the COVID pandemic?

It's the latter point that you're making. As I said before, I think suburban rents could be back to where they were in a year. They're only down 4%. It doesn't take a lot of growth to get that 4% back in those markets. And so, yeah, we're we're focused, you know, we're kind of activating that lever in, you know, markets where we think there's, like, as I said in my prepared comments, where we think the risk-adjusted return is, you know, makes sense to us right now, so.

All right. I guess that's it. Yeah, thank you.

We'll go ahead and take our next question from Anthony Pallone from J.P. Morgan. Please go ahead.

Yeah, thanks. On the expense side, is there anything for 2021 as we look out that could bring just expense growth back down to sort of an inflation number? Does the turnover and some of these other dynamics just step function this up for higher growth this year?

Yeah, that's a good question. I think it's more the latter. I mean, a lot of the stuff that we're seeing is sort of related to pandemic and it's prompted, you know, whether it's a higher turnover cost, PPE and extra cleaning costs, associates that are on leave and therefore driving temporary labor, contract labor, overtime, things like that, need to kind of play their way through. And obviously we have a tough comp just given first half of last year, particularly the second quarter, you know, spend came to a screeching halt in a number of different areas. That turnover came down, maintenance projects were delayed, et cetera, et cetera. So I think that it's just going to put pressure on what the numbers look like, particularly as Kevin mentioned, the first half of this year, given that tough comp. It'll be a little bit easier when it gets to the second half because some of those expenses and the elevated turnover and all that will be more comparable, but particularly the first half will be pressured.

Okay. And then just a second question for Kevin. The 160 to 170 million of total overhead for 2021, do you have the comparable number for 2020? Just to understand the increase, I think it's a couple line items and a variety of adjustments to get there.

So, Tony, you're referring to kind of the core expense overhead number?

Yeah, I think you gave brackets around, I guess it combines like G&A and property management, a few things like that.

Core expense overhead for core FFO of $160 to $170 million. The reference point for the prior year was about $150 million, $151 million, so it's about a $14 million year-over-year increase. You know, where most of that is, as we alluded to before, related to investment, it's very strategic and related initiatives. I mean, strategic initiatives alone are about $7 million of that number, probably about $5 on the growth basis, and there's ancillary investments as well. and there's some additional compensation costs, including some executive transition costs.

Okay, got it. Thanks for that.

We'll go ahead and take our next question from Alexander Goldfarb from Piper Sandler. Please go ahead.

Sure. Good afternoon, and Ben, welcome aboard. I'm assuming that you declined the free rent incentives, so you can do your part to help of earnings. Two questions here. The first, just going to guidance, Tim and Kevin, you know, you've laid out, you know, definitely that you think things are bottoming. You're not sure how things will go. But in general, you've laid out sort of a base case. So with that in mind, why couldn't you provide a full year number, even if it's a wide range? Because it seems like you're sort of tracking in the sort of 750, 760, something like their midpoint. And just sort of curious, what prevents you from providing, even if it's just a wide range, something, because as I say, from your first quarter observations, it sounds like you feel comfortable with where things are shaking out and you have a general sense that if that continues, then you sort of would know where you were for the full year.

Yeah, Alex, you know, it's a fair question. We, you know, I mentioned in my kind of earlier remarks, it's more than just you know, one or two things that are, you know, kind of a play here. You know, we didn't even get into the issue of eviction moratorium where we've got, you know, call it 3% of our units sort of tied up and people that aren't paying. We have potentially a federal stimulus that they might benefit from and actually help us to actually potentially even reverse some bad debt that we've taken on before. You know, Sean, in terms of the work-from-home mandates, when they expire, you can make a big difference in terms of when we might get initially a good occupancy boost, but with that comes other income and other things as well. So when you put them all together and you start playing with these variables, you get the ranges and you feel why that we just think it's not that reliable. And frankly, I think in the past we've actually haven't given quarterly guidance, we've given annual guidance because that's how we manage our business in a typical year. manage it quarter to quarter. Reality is we're managing it week to week, month to month, quarter to quarter right now. And we feel like we've got enough visibility out about 90 days to provide reliable guides. Beyond that, we just don't think it's that reliable. To be putting it out there and to always be trying to reconcile and sync up, it's us who didn't think it was really adding anything to the conversation. So others may choose to provide Outlook with a wide range. I get it. And I think if you're a If you have a Sunbelt portfolio, I think it makes total sense that you'd be providing guidance right now, but that's not the situation we're in. Kevin, I don't know if you have anything else. Just to add to that, I think that covers what's in, but Alex, for us it came down to can we satisfy the test of providing a reasonably reliable midpoint and a reasonably narrow and useful range? As we know, anything's possible in Excel, but when we kind of played with these variables and looked at the back half of the year, there were things that could be very positive or very negative, and they're beyond our ability to reasonably predict with accuracy. And so, you know, given that, we just didn't feel like we could meet the test of providing a reasonably reliable midpoint forecast, which ultimately would be what people would focus on, even if we gave a wide range, and yet we couldn't provide a reasonably narrow range around that. So we just felt like, you know, why try to get something that at odds would have a range in the business, and the Q1 guide seemed more appropriate. Yeah, Alex, maybe the last thing to add. You know, that's one of the reasons we showed the slide 14 as well and kind of put a circle around the downturns and the recoveries. That's when it's hard to protect the business. I mean, when you're in an expansion, it's fairly linear, and we feel like we can give some pretty reliable guidance in terms of how the portfolio ought to perform over the next 12 months.

Okay, and then the second question is, you know, as you guys think about ramping up the development program and using more capital, How does that balance with, you know, the expansion markets and, you know, to the extent that you're looking at other markets like, you know, Nashville or Austin or some of the other sort of popular markets these days? How do you reconcile your balance of capital between investing in development in your current markets versus using that capital to either in your expansion markets or enter other new markets?

Well, Alex, that's a good question. I think the reality is that we didn't give guidance around acquisitions and dispositions to the extent that we acquire, we would just sell more and existing assets. So it's really been done more through portfolio management, basically recycling capital out of certain markets. And you know where we've been recycling, largely the Northeast. into markets like Denver and Southeast Florida and potentially some other expansion markets to come. But at this point in the cycle where capital is priced, that's probably how we would fund it. If equity values recover in any meaningful way where you think it makes sense to expand the balance sheet in a creative and prudent way, that'd be sort of the second alternative.

Okay, and then just finally, the New York development site, which one was that that was written off?

Hey, Alex, it's Matt.

That was the investment that we had in the East 96th Street RFT.

Okay, that was the Cuomo de Blasio one. Got it. Okay. No problem. Thanks.

Hey, Alex, just to be clear, when we write it off, it means it's more probable than not. It's less probable than not. Did I say that right? The double negative. Thank you. It doesn't mean we're not still working in pursuing it, but it's more probable.

Yeah, we have to do this from an accounting point of view. It's tipped the other way, and it's being less probable. We got it. Thanks, Tim. Yeah, it's a long time.

And we'll go ahead and take our next question from Brent Diltz from UBS. Please go ahead.

Hey, thanks, guys. Just one for me at this point. But could you talk about how the financial struggles of some of the largest U.S. transit agencies who are talking about permanent cuts to service might impact your transit-oriented properties? Yeah, Brad, it's Sean. I can take a stab at that one and Matt or others can jump in, but you know, it's probably a little too early to start right now, I would say. I mean, certainly, you know, ridership has fallen dramatically through the pandemic and all the major transit systems. And as a result, I, in my prepared remarks, mentioned that one of the locations within our suburban footprint that has been most impacted is for transit-oriented developments. Just because people don't need it as much. Whether that results in permanent cuts versus just the temporary reductions in capacity that we've seen has yet to play out. And I suspect that there probably wouldn't be decisions made around permanent cuts until we get beyond the pandemic and people see what ridership sort of normalizes that. So I think it's probably too early to call on that at this point. But certainly if there are transit-oriented developments that are out there that are the residents are heavily reliant upon transit system and capacity is cut dramatically, there would be a negative impact on those assets. It's probably just too early to tell what that might be. I'll just add one thing to that. This is Matt. On the other side, perhaps marginally, it makes the transit agencies a little more aggressive with trying to dispose of some of their land and or go into some joint development. Actually, one of the deals we just started this past quarter was Avalon Somerville, which is at a NJT stop in central New Jersey, and we are, you know, looking at other sites where, you know, transit agencies are probably going to feel more pressure to monetize their land positions.

Okay, great. Thanks, guys.

We'll take our next question from Rob Stevenson from Jannie. Please go ahead.

Good afternoon, guys. What percentage of your 2021 development starts are locked in cost-wise at this point? And what are you seeing with respect to construction costs, especially lumber, given what's going on there? And how decent is the labor supply these days?

Sure. Hey, Rob, it's Matt. I can speak to that one as well. If we haven't started a job yet, we have not locked in the costs on anything really except for probably the land and a little bit of the entitlement costs. So, you know, the starts that we're looking at potentially for next year, I think we own the land on maybe two or three of them, and then there's a couple others where we have, you know, they're under hard contracts. So, you know, everything else is subject to the market. The land and the soft costs usually is around a third, 30, 25, 30, 35% of the total. Capital costs, the hard costs, usually around 65%, depending on the product type. If you had asked at the beginning of the pandemic, I'd say we had a pretty high degree of conviction that hard costs should come down, particularly in some of these markets that had seen a big run-up over the last couple of years. I'd say we have less conviction around that today, just seeing how the for-sale market has recovered. And lumber right now is very, very expensive. Fortunately, we're not in a position of really having to buy much lumber as we sit here today because we didn't start anything for three quarters last year. But if lumber pricing doesn't adjust back to where we would expect it to, some of those starts may be in question. And my guess is, like a lot of commodities, there's a little bit of a self-correcting element to that, that we're not the only ones that will probably find ourselves in that position. There are a number of mills that are shut down right now because of COVID concerns. So we do think supply should start to increase again here by springtime. But at this point, I'd say our sense is more the costs have leveled off, and except for maybe in a few markets where they were really overheated, I'd say the expectation at this point has probably moved towards more of a flattening than a real nominal decline in hard costs.

Okay. And given that, I mean, where are the yields on the new start, the 2021 starts, relative to the 5.8 on the current pipeline?

Right there. Just about the same. And when you look at our current development pipeline, and you look at the mix of the current development pipeline, it is mostly suburban, and even the deals that are in lease-up, there's a couple of them that are behind pro forma, but there's a couple that are actually ahead of pro forma as well. So that kind of makes sense when you compare that to kind of near-term stocks.

Okay, and then last one for me. Where are you in terms of the mix of condo sales at Parklogia? Is what's left skewed towards higher or lower price points, or is what's left fairly consistent with what you've already sold?

Congratulations, Rob. I was wondering if we were going to get through the call without a question about Parklogia. We've closed 73 units. We have another 15 where we've accepted offers or are under contract, so that would bring us to 88 total. The mix, we have sold maybe a few more. I think we sold three of the four penthouses. So the mix is going to start to skew a little bit more towards low-priced units just because of that. But we still have a reasonable mix up and down the building. And that's where we're seeing, frankly, some pretty good traction now is in the more modest price points in the podium of the building. Traffic's actually picked up quite a bit. We've seen 15 to 20 increase a week in January. We've been averaging about four new deals a month the last three months, whereas on the last call it was more like three per month. But the inventory that remains is a little bit more affordable on average.

And is stuff being sold, I mean, thus far been primary residents or are these largely secondary residents? And are you expecting any impact if New York City and state passes additional soak the rich type of tax measures?

You know, I don't know. Again, this is not billionaire's row. I mean, this is by, you know, Manhattan standards, this is a pretty compelling value proposition, which is, I think, why we're continuing to see our sales base maintained pretty strongly. It is not – there's a lot of – people buying condos for their kids. You know, in many cases, maybe their kids who are going to university in New York and, you know, that market, obviously, it's been a lot of distance learning since the pandemic hit, but, you know, may well pick up. So I don't have the exact breakdown of primary versus secondary residences, but I would say that there is a lot of pied-à-terres and a lot of a lot of family-type transactions.

Okay. Thanks, guys. Appreciate it.

We'll take our next question from Hendel St. Just from Mizzou. Please go ahead.

Hey, thank you. Good afternoon. First question is on the bad debt. Remained elevated in 4Q, very similar to the third quarter. I guess, first of all, are you expecting a similar level? Is that what's embedded there? within your 1Q guidance here? And second, I guess, when do you think you can see some improvement there? And since you brought it up earlier, how's the extension of the eviction moratoriums until March 31st playing a role into your thinking? Thanks.

Well, Handel, this is Kevin. Maybe I'll answer the first couple here. In terms of the first quarter, you know, we are expecting a persistent level of bad debt expense to roll into the first quarter, so not meaningfully different from what you saw in the fourth quarter. And you know, you know, I don't know if anyone, I mean, I'm sorry Sean, if you want to add any more about kind of. Yeah, just on the on the eviction moratoria. There is a sort of myriad of various morators out there related to both evictions, whether we can charge late fees, whether we can allow rent increases, things like that. So it's not just at the federal level that we have to. apply with at the state and even local level in some cases. So one example, you may have noticed that California extended what used to be called into a new bill called 5091 that extends through June. And there's other things in Washington State and various other places. So while the CDC order is a little bit of a federal override, there is quite a bit of a jigsaw puzzle out there, I guess I would say, in terms of what you can do at the state and local level. Our expectations at this point is that we'll probably see most of it hold through mid-year, very likely, depending on how things unfold with the vaccination of the population and the economy continuing to recover. That's sort of the House view at this point, but, you know, there's No question that it could be extended beyond that, or in some cases, if things are going well, people let it expire sooner. So that will influence our ability to evict people. We are continuing other efforts as it relates to collections that will continue. But at this point, what we basically feel like is going to happen is the bad debt that we saw the last three quarters of 2020 will likely continue at that pace. We had a little bit of a nice surprise in January where it wasn't quite as bad, but the expectation is to look more like the last three quarters of 2020. Yeah, I mean, just to add to that, and I mean, you know, to begin to revert from that 250 to 300 basis points of revenue trend that you've seen the last few quarters to something more typical, which is more like 50 to 60 basis points of revenue, obviously we're going to need a resolution of the pandemic and a restoration of kind of landlord remedies with respect to you know, those who are non-payers. And that could be a little wild here. It's certainly not something we expect to change materially in the first half of the year.

Got it, got it. Very helpful. Second, more of a follow-up to some earlier questions on development. You noted, it's been noted that all three of your new development starts are northeast, suburban. So I'm curious, you know, when you're thinking about new starts, when can we see a few more starts in the west coast or non-northeast markets and in more urban locations? I recognize you have a couple west coast projects underway in the pipeline, but you haven't started a new West Coast project since I think it's the second half of 2019. Thanks.

Sure. This is Matt. We do have a start likely in southeast Florida this year. We have a start in Denver that we're planning, and we have a pretty large start in suburban Seattle that we're planning later this year. California is tough. California is where we're probably finding the most challenged economics right now for new starts. But we do have starts in the expansion markets and Seattle.

And would those spreads on your expected development yield versus cap rates be fairly similar, that call it 50, 75 basis points spread you were referring to earlier?

Yeah, no, I think the spread's more than that. I mean, if you look at, we said the current book is about a 5.8. I mean, those assets today would sell for sub 4.5, you know, probably low 4s. So I think the spread is, you know, well over 100 basis points, and it's probably just as wide given, you know, how low cap rates are in Seattle, Denver, and Florida.

Got it, got it. Thank you.

We'll go ahead and take our last question from Dennis McGill from Zellman and Associates. Please go ahead.

Thank you. Just wanted to touch on supply and your views on how that might play out in 2021, especially in urban environments. It seems from our work there's still quite a bit to deliver and maybe some of that slides out, but would seemingly limit some of the pricing power once you rebuild occupancy. But just wanted to see how you guys are thinking about those competing balances.

Yeah, Dennis is Sean. Good question. Happy to comment on that and you know others can as well, but as it relates to our footprint, we are expecting deliveries in 2021 to come down about 6 or 7% compared to 2020 and represent about 1.8% of stock. All the regions are expected to be down except for the. New York, New Jersey region first, where the decline in deliveries in. sort of the New York area are going to be offset by what we're seeing in northern New Jersey, particularly Jersey City. It increases by about 3,500, 4,000 units, even though the balance in New York City is down maybe 2,200. So in terms of the trade area, there's an increase there. And then we expect it to be relatively flat in northern California. In terms of the urban-specific, yeah, we do see a little bit of benefits certainly coming in. As I mentioned, New York City, urban Boston, a very modest increase in the district, so not terribly different. And San Francisco is basically flat, so no material change there. And then the other urban market I guess you could be interested in would be L.A., where deliveries are going to be down about 1,500 units. So in general... the supply picture in the urban environments with the exception of San Francisco and D.C. will be better in 2021 than it was in 2020, which all things being equal should certainly help support the recovery at some point in time. Hey, Dennis. Tim here. I agree with everything Sean just said. I think one of the interesting things to think about with the urban supply is not just what's happening over 21 and 22 on stuff that's already been started. 19 and 20, but the likelihood that we're going to see starts in 21 and 22 and how that may translate into 23 and 24 performance. I think it's going to be tough for people to get deals financed, you know, just against the narrative of this whole kind of, you know, work from home, work from anywhere, you know, dispersing, you know, your workforce, the satellite offices, as well as, you know, as well as kind of downtown and I think by the middle of the decade, we could be in a position where we're seeing very little supply delivered, where demand may be down a bit, but where the fundamentals actually look better, quite a bit better in urban submarkets and even the suburban markets. It's almost the reverse of what we saw this last decade, where at the beginning of the decade, 2010, everyone thought urban was going to outperform. And it did from a demand standpoint, but supply more than made up for it. such that performance, actually asset performance, at least in our portfolio, in our markets, is stronger in the suburbs. That story could completely reverse, I think, in the next three to four years.

That's helpful perspective. Thank you. And then on the share repurchase in the quarter, can you maybe just talk about how you triangulated to getting comfortable on the buyback and then how you might be thinking about that now with where the stock is if If it hangs out here or higher, is it a likely use of capital in 21?

Yeah, this is Kevin. So, you know, there are a number of variables to take into account, clearly. First of all, what is our alternative use? And development is our alternative use. And as you can see, kind of based on our outlook for the year, we do anticipate starting development, and that reflects in an implicit view that, at least relative to where our shares have been trading lately, development represents a more attractive use for our capital than buying back our shares, although our shares do look quite compelling, and it is a tougher call than in most normal circumstances, given how we're trading below NAV. As you can tell from when we were buying back shares, we were buying back shares at around $150 a share, which we felt was pretty darn compelling when we ran that math. and we're at a different point today. So that price matters to us as well when we're looking at the alternatives. The other factors we need to take into account is not only our source of proceeds, but also what the impact on our leverage is. We did then and we do now still have the financial capacity and the proceeds from dispositions to engage in a measured buyback if it were to make sense to do so. But every time we do so, we have to think about the impact on our leverage metrics And what we knew then and what is still true today is, you know, EBITDA has been sequentially declining over the quarters. And, you know, our net debt to EBITDA was at 5.4 times, you know, in the last quarter. Our target is 5 to 6 times. When we began the pandemic, our ratio was about 4.6 times. And so the movement up in that ratio has really been driven not by taking on more debt, but rather by a decline in EBITDA. And as we pace through the balance this year, and see the lower lease rates and concessions work into our rent roll and our EBITDA, we need to be mindful of managing that ratio so that it stays, if possible, within our targeted range. Engaging in a heavy buyback could potentially work against that a little bit. But all that said, we stand still ready to engage in a buyback if it made sense on a measure basis, mindful of our credit metrics, But at the moment, when we triangulate around what's the best use of our capital development still figures today to be our best use of capital.

Got it. That makes sense. I know it's been a long call, so thanks for the time and the transparency.

And with that, that does conclude our question and answer session for today. I would now like to turn the call back over to Tim Naughton for his brief closing remarks. Tim?

Thank you, Ali, and thanks, everybody, for being on. I know we've been off for a while. Thanks for all of you that hung in there for an hour and 45 minutes. But I look forward to seeing all of you or many of you virtually around here over the next two or three months. Enjoy the rest of your day. Thank you.

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.