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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and welcome to AvalonBay Communities First 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. [Operator Instructions] Your host for today's conference is Jason Reilley, Vice President of Investor Relations. Mr. Riley, you may begin your conference.
Thank you, Kathy, and welcome to AvalonBay Communities First Quarter 2020 Earnings Conference Call. Before we begin, please note that forward-looking statements may be made during the discussion. There are a variety of risks and uncertainties associated with forward-looking statements and actual results may differ materially. There's a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10-K and Form 10-Q filed with the SEC.
As usual, this press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during the review of our operating results and financial performance.
And with that, I'll turn the call over to Tim, Chairman and CEO of AvalonBay Communities for his remarks. Tim?
Yes, thanks, Jason. And welcome back to Q1 call. With me today are Kevin O'Shea, Sean Breslin, and Matt Birenbaum. I will provide a brief commentary on the slides that we posted last night. And all of us will be available to Q&A afterwards. Our comments today will focus on providing a summary of Q1 results. An update on operations so far this year, including through April, an overview of development activity and the status of construction sites. And lastly, highlighting our liquidity position.
Before getting started, I just like to acknowledge that the last seven or eight weeks have been far from normal for any of us on this call, or any of our more than 3,000 associates in AvalonBay. Given our market footprint in large coastal metro areas in the US, we've certainly been impacted by this pandemic, professional and personal level. Many of us have had to learn to adjust to a different work environment at home while managing new and shifting family dynamics at the same time. But even more of our associates have been asked to leave the comfort and safety of their homes, most every day to provide housing and service for the more than 100,000 residents that call one of our communities home. What we do is fundamentally essential, and we are grateful and inspired by our team's amazing dedication and thank them for the commitment they demonstrate every day and service to our customers.
I'll start the results of the quarter starting on Slide 4. It was a solid quarter. Highlights include core FFO growth of almost 4% driven by healthy internal growth with same-store revenue and NOI growth coming in at 3.1% and 3.0%, respectively. All of our major regions except Metro New York, New Jersey, of course, the same-store revenue growth of 3% or more in Q1. In Q1, we completed the three development communities totaling $215 million at an average initial yield of 6.4%. Continue to track record of creating significant value through this platform over the cycle. Given the current economic situation, we have not started any new development or acquired any new community so far this year.
And lastly, we raised over $900 million in capital this past quarter at an average initial cost of 2.9%, with most of that coming from a $700 million 10-year bond deal at 2.3% completed in February, a record low reoffer rate for a 10-year bond issuance in US REIT history.
And with that, I'll turn it over to Sean who will discuss portfolio operations including what we've seen so far and in April and now in May. Sean.
All right, thanks, Tim. Turning to Slide 5, the impact of COVID-19 and the various shelter in place orders had a material impact on leasing velocity in March as noted in Chart 1, with year-over-year volume down roughly 40% from March 2019.
In April, however, as a result of our teams becoming more proficient with virtual and no contact tours, prospective residents becoming more comfortable venturing out to tour apartment homes and the various incentives we offer to increase conversion rates, we've seen velocity rebounded, it was only modestly below 2019 levels. It's similar to the volume of notices to vacate for the month. Unfortunately, the reduction in leasing volume in March coincided with our normal seasonal increase in the volume of notices to move out from our communities. As noted in Chart 2, this resulted in fewer move-ins and move-outs during the month of April.
Taking collectively and as depicted on Slide 6, availability increased and occupancy suffered. As indicated in Charts 1 and 2 on Slide 6, availability was trending well below 2019 levels throughout most of the first quarter. That spiked in the second half of March, when leasing velocity fell materially. 30-day availability peaked at roughly 50 basis points greater than last year, during the third week of March, but has ticked back down a bit over the past six weeks or so. The impact of reduced leasing volume in March ultimately impacted physical occupancy as well as noted in Chart 3, with April down roughly 75 basis points from March and 50 basis points from last year to 95.3%.
In Chart 4, you could see the impact of the recent environment on April rent change, which ended the month at essentially zero. This diagram reflects our efforts to help mitigate the impact of COVID-19 on residents by offering a no rent increase lease renewal option to undecided folks, and our response to the weakening environment, which included offering incentives to increase prospective resident conversion rates, which did in fact increase from about 23% of March to 34% in April.
Turning to Slide 7, we collected about 96% of what we would have typically collected in an average month from our customers, which is noted in Chart 1. And if you look at the collection rates by segment, the rate for our market rate customers was the highest, with our corporate housing or short term rental customers, which only represent 3% of build residential revenue, the lowest.
In terms of May collections, over the past few days, we're trending at about 94.5% of normal levels or about 150 basis points behind April, but it's early in the month. There are differences in how the calendar lays out with deferrals being on a Friday in May versus a Wednesday in April, and other nuances that influence daily payment volume.
Moving to Slide 8, the collection rate for our highest income customers has been the best, which isn't too surprising given the impact of the pandemic on the various service-related businesses throughout our markets. In terms of regional collection rates, the tech lead Pacific Northwest and California regions have been the strongest and Southern California the weakest. Unfortunately, the impact of the pandemic on entertainment and tourism businesses in Southern California has been pretty severe. Most of the studios and other businesses producing content have been shut down for several weeks now. And all the major tourism-related sites, including Disneyland, Universal Studios, and many other venues are closed.
Without operational overview, I'll turn it over to Matt who will address construction and development. Matt?
All right. Great. Thanks, Sean. To provide an update on how the pandemic is impacting our construction operations, Slide 9 shows our 19 development communities across our eight regions. We started to experience slowdowns in the second half of March in Northern California and Seattle as regional shelter in place, orders were announced and availability of both labor and sections started to be impacted.
By early April, the Northeast saw similar impacts, as such in April across all 19 projects. Our average daily manpower was reduced by an average of roughly 50% with wide variations as reflected on the slide. Projects indicated in green have seen relatively little impact, while those in yellow have been proceeding at a significantly reduced pace, and those in red are temporarily shut down except for basic life safety and asset preservation activity.
Residential Construction is considered an essential activity in many jurisdictions. And just in the last week or so, we started to see a listing of some of the more extreme restrictions. And the four projects in Seattle in the Bay Area just recently moved from red to yellow. We have been working diligently to adjust our on-site health and safety practices to ensure appropriate social distancing among our subcontractor trade partners, add daily health checks and onsite wash stations and move our supervisory staff to staggered shifts as part of our ongoing response.
These 19 development communities represent a projected total capital cost of $2.4 billion, which is our lowest volume of development underway since 2013. As shown on Slide 10, we shifted to a more cautious stance as far back as 2017. And our development stocks over the past few years have average shift $800 million, a little more than half of our mid-cycle run rate of $1.4 billion per year. This puts us in a strong position as we navigate the shift from expansion to recession.
Slide 11 shows a breakdown of our future development rights. We've been managing this pipeline of future growth opportunities to provide us with maximum flexibility at relatively modest cost and control over $4 billion of next cycle development projects with a total investment of just $120 million. The development rights pipeline includes 28 different projects, with more than 20% of the projected capital in flexible public-private partnership deals, and another 20% in an -- in asset densification opportunities, where we are pursuing entitlements to add additional apartment homes at existing stabilized communities. Both of these types of opportunities offer flexibility to align timing with favorable conditions in the construction and capital markets. Kevin will now provide some comments on our liquidity and balance sheet.
Thanks, Matt. Moving to Slide 12, as shown in the next two slides, we ended this recession very well prepared from a financial perspective with a healthier liquidity position, modest near term maturities and a well-positioned balance sheet.
Turning first to liquidity As you can see on Slide 12, liquidity at quarter-end, totaled $1.8 billion, for our credit facility and cash on hand. This compares to the $900 million in remaining expenditures and development underway over the next several years, of which about $400 million is expected to be spent over the remainder of 2020.
As a result, at quarter end, our $1.8 billion in liquidity exceeds remaining spend on development in 2020 by roughly $1.4 billion and our liquidity exceeds total remaining spend on development over the next several years, by nearly $1 billion.
Turning next 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 $70 million of debt maturing in late 2020 and only $330 million dollars in debt maturing in 2021, for a total of $400 million in debt maturities over the next seven quarters. Plus looking at over the balance of 2020, and incorporating both development spend and debt maturities, our quarter and liquidity of $1.8 billion exceeds remaining debt maturities and spend on development over the rest of 2020 by $1.3 billion.
In addition, our liquidity exceeds all of our main development spending over the next several years. And all of our debt maturities through 2021 are $500 million. So you can see from this, that we enjoy healthy liquidity relative to our open commitments through 2021. In addition, we also enjoy considerable incremental liquidity from cash flow from operations and excessive dividends, as well as from our ability to source attractively priced debt capital from the unsecured and secured debt markets, to the extent the asset and equity markets remain unattractively priced.
In this regard, at quarter end our net debt to core EBITDA of 4.6 times is below our target range of five times to six times leaving us meaningful capacity to absorb leverage increases as we proceed through these challenging times. And unencumbered NOI with at or near an all-time high of 93%, reflecting a large, unencumbered pool of assets that we could tap if necessary for additional secured debt capital.
With that, I'll turn it back to Tim.
Great. Thanks, Kevin. Just wrapping up and turning now to Slide 14. So, overall, Q1 was a very good quarter, with results a bit better than we had expected. Despite the slowdown, we began to experience in the second half of March and April, we felt much of the impact of the shutdown, certainly, although we were able to still coalesce most of what was built for the month with only 6% uncollected by month-end, which is about 400 basis points lower than normal.
Progress at many of our construction sites were impacted by the pandemic. We expect that orders by some of the state and local governments temporarily halt inspections and construction will result in the delay and delivery options scheduled in several communities, which in turn will push some of the lease-up NOI projected for 2020 into next year.
Most sites that have been impacted are currently in the process of either reopening or slowly returning to full manpower, as most states are now permitting new construction as an essential service as Matt had mentioned.
Our shadow pipeline of $4 billion in development rights, which is controlled mostly through options or represent densification opportunities at existing communities offers good flexibility in terms of timing future starts well supported by market conditions. And lastly, as Kevin just mentioned, we're in great shape financially. We have ample liquidity to fund existing investment commitments, modest level of debt maturing over the next several quarters, and strong access at attractive pricing to the debt markets.
So with that, Kathy, we're ready to open up the call for questions.
Thank you. [Operator Instructions] We will take our first question from Nicholas Joseph from Citi.
Thanks. Hope you guys are doing well. Just first, maybe on construction on the delays that you've seen and also being seen really across the space. So just wondering how that impacts expected supply in 2020? And on average, how long you think individual projects will be delayed in terms of deliveries?
Sure, Nick, this is Matt. In terms of what happens to total delivery in 2020, obviously, I think it's too early to tell. What we found the last couple of years, even before the pandemic was that deliveries wound up being 10% to 15%, below what we had thought at the beginning of the year just due to flavor constraints, inspection constraints, and so on and so certainly, I would expect more deliveries to be down by more than that relative to what maybe third party reports were at the beginning of the year. But it really depends obviously, on how things play out over the next couple of months.
As it relates to our pipelines, so far, what we've seen is, and what's reflected on our supplemental, five projects, we've delayed initial occupancy by a couple of months, call it, and these projects we -- as of right now, we think probably the final completion is going to be delayed by about a quarter. So that's maybe a third of our 19 that are actively underway right now. Some of the others are either in areas that have been less impacted or early enough in their process that they haven't been materially slowed down. Obviously, that could change, but kind of that's the way you see it as of right now.
Thanks. And then just -- states and different cities start to reopen, how are you thinking about kind of repositioning your amenities space to allow for social distancing? And then maybe medium and longer term for the developments on the progress or any kind of future developments, how do you think about changes to different amenity space, given maybe potential bigger picture trends, such as work from home or anything else?
Yes, Nick, this is Sean. I'll take that one, the third and others can jump in if they like. But in terms of the existing amenity space, yes, we do have a team that is taking a look at what the occupancy standards are for different types of spaces. Not only in our communities, but at our offices as well. And what kind of limitations that will place on the occupancy limits that were in place before the pandemic, so they're going to see that reduced pretty materially, but it depends on the type of space. Depending on what they're talking about, fitted center equipment with space two feet apart, we may have to go back and redistribute the equipment to have more spacing as an example. Chill spaces where there were, what's called soft seating that was side by side with tables around, that may have to be a space where we just reduce the number of items in there, in terms of chairs and same thing in terms of our swimming pool. So, there's a fair amount of work underway to sort of, redensify the various spaces that our communities to make sure they comply with the proper social distancing protocols, and it's just going to take some time to work through each one.
And then in terms of the longer term trend, it's probably a little too early to tell now but certainly there was a trend, see more people working from home, whether they were telecommuting, or whether they were just sort of independent contractors working from home, that are producing content or -- and sort of contracting business and things of that sort for different types of industries. Entertainment, in particular, comes to mind for a place like LA, so that trend likely continue. I think it's probably a reasonable conclusion from what we see. But to what degree, it's probably too early to tell at this point.
Thank you.
Yes.
And we'll take your next question from Rich Hightower with Evercore.
Good afternoon, guys. Hope all is well. So I wanted to get your reaction to one of your competitor's comments yesterday, regarding a little bit more underperformance in garden style communities versus high rises, due to the collections Are you seeing the same in your portfolio or do you have any comments along those lines?
Yes, Rich. It's Sean. I can share a few thoughts on that just -- we've looked at collection rates in maybe a few different ways. Certainly, we talked about it by segmenting in terms of what was presented on the slides in my prepared remarks. But in terms of some other metrics that we look at and have been following, first is sort of price point, As versus Bs. As are running about 100 basis points higher than Bs at this point in time. And that may look suburban, urban. What we're generally seeing across most of the markets is, suburbans are performing by about 25 basis points or so. So a little bit, but not terribly material. Probably the one exception is New York where the urban environment collection rate better than the suburbs, given the impact we've seen in Westchester. It's been pretty material in terms of the pandemic. And then in terms of high rise versus garden and mid-rise, high rise is slightly better, but there's not a lot of high rise products to benchmark against to be honest. And most of that for our portfolio is going to be in New York, a little bit in D.C. It's just not a big sample size, so I probably wouldn't draw too many conclusions about the product type differences.
Okay, so maybe a little bit of differentiation there in terms of what you're seeing versus maybe I guess elsewhere in re-planned. Okay, that's helpful color. And then I guess just as you think about foot traffic and demand patterns picking up now that we're into May and things have kind of come off the bottom, are you seeing any differentiation between suburban and urban within the portfolio along those lines?
Not material at this point. It's more market driven, I'd say, where you've got -- certainly the hot spots are a little more sensitive to the rebound and we're seeing people wanting to still continue with more of the virtual tours as opposed to self-guided, as opposed to maybe like the Mid-Atlantic, where people seem to be more comfortable given the state of the environment, either with self-guided tours, for the most part at this point, and not as many virtual tours. So I think it's really a market based on [ph] as opposed to maybe price point at this point or location, as you pointed out, urban versus suburban.
Okay, great. Thank you
We'll take our next question from Jeff Spector with Bank of America.
Hi, everyone. This is actually Alua Askarbek for Jeff Spector. Thank you for taking the questions today. So I was just wondering if you guys could give some more color on the condo sales going on right now. So I think you went one more under contract in Q4 '19 on the call. And so, I was just wondering -- I assume all of those were the ones that were closed so far. And are there any new projects underway? Is the market as expected or are you expecting to take a lot of price cuts or are you just holding out [ph]?
Sure. This is Matt. I think some people couldn't hear the question. It was about Columbus Circle condos sales and recent progress. So as of today, we have 41 units closed and have generated 1$29 million. That's an average price of $3.15 million per condo. We have 22 others under contract with binding deposits. That represents another $70 million of proceeds. It's actually slightly higher priced, $3.17 million, $3.18 million per unit. The sales activity -- the new contract track activity was pretty strong in January and February. In fact, if you go back to our first quarter call, we had 54 contracts at that time. So we've actually added nine since then, about $40 million in incremental sales since the first quarter call. And really all that came in February in the first half of March because once the stay-at-home orders came into place, we went to 100% virtual tours in mid-March with our sales agents there, and traffic did slow dramatically in the back half of March and the early half of April.
I will say in the last just two weeks or three weeks, traffic has picked back up. And although they're virtual tours, traffic is back up to over 30 per week, which is a pretty strong number and comparable to where it was kind of before things stopped in mid-March. But until people can actually get in and physically see the product, which we hope they'll be able to do within the next month or so, we won't really know how that traffic might convert to additional contracts. Pricing has been consistent. We haven't really seen a difference in terms of the pricing levels, either asking or what we're achieving, for the last 10, or 15, 20 contracts in the early contracts. It's a -- there's a lot of different price points in the building, depending on what line and what floor. And so, it's not exactly apples to apples. But so far, we haven't seen any impact there yet. But again, until we really get people back into the building and start seeing some additional new contract activity, which hopefully will happen soon, we'll have a better sense.
Okay, great. Thank you.
We'll take our next question from John Pawlowski with Green Street Advisors.
Hey, thanks. Sean, as you guys roll out concessions in different markets, which markets are responding better, in terms of traffic coming in and the rollout specials? And which few markets just aren't responding no matter how generous [indiscernible] become?
I mean, the general response has been pretty healthy across most of the markets. I mean, I guess I'd have to tell you that based on what you probably have heard from others and are -- just pointing out some of the weakness in L.A., probably taking slightly more concessions on average in the L.A. market as compared to others to get those conversion rates to sort of reasonable levels. But in terms of the rebound, for the most part, I would say that it's been pretty steady with some limited exceptions, and the exceptions really more relate to hotspots, and obviously, specifically in and around New York, where people are still pretty hesitant, given the environment, to be out shopping for apartments, people are doing virtual tours, and the concessions are reasonable, but not as much as what was required in L.A. to get people to spur to action to give us -- given what was happening in that market environment, which was already weak, as you may recall, at the beginning the year.
And the pandemic certainly only made it that much more difficult in terms of people who are qualified being able to come out and shop for an apartment and be able to afford to rent an apartment, given what was happening with all the studios being closed. And a lot of people that produce content in Southern California, with their shops being closed. So that's probably the one market where it's been a little more challenging.
Okay. And then last one for me, just a question about D.C. and the defensiveness of that market. Obviously, a winner on a relative basis during the GFC. In your mind, the price point of your portfolio in the D.C. metro and the employer base, now that it's shifted, is D.C. different this time, or would you still put it up there against any other market the next 12 months, 24 months, just in terms of rent growth and occupancy trends?
I think based on what we know as of now, and just thinking about the composition of the workforce, I think D.C. should hold up relatively well. If you think about the nature of the pandemic and how things have started, and the impact on joblessness to date for the most part, as opposed to kind of a trickle down, it's really a trickle up type thing where a lot of the job loss is heavily concentrated at those lower level service jobs. You're talking about food service or bars, restaurants, hotel workers, things of that sort. It may trickle up some. And in certain geographies, where people are paid well, again, like L.A., to produce content, maybe disproportionate impact. But D.C., highly educated population, a lot of professional services, defense, et cetera. But expected to hold up relatively well. And we've seen that thus far, even though it's only been sort of six weeks at this point in terms of what's happening. But others may have different thoughts to add.
No, I agree. I mean, between the knowledge base, knowledge nature of the economy, the federal government, state local governments are going to be pinched and are beginning to see cutbacks there. But not as much in areas of the federal government. I think it's just saying that -- I think D.C. was hurt a little bit initially just because our of exposure to hospitality. You have obviously both Hilton and Marriott here, which had massive furloughs kind of early on in the pandemic. But I think I think over time, Sean is right. I would expect it to stand up pretty well relative to the rest of the world, John.
Okay, great. Thanks for the time.
We'll take our next question from Austin Wurschmidt with KeyBanc.
Hi. Good afternoon, everyone. I was curious if you were to negotiate a new contract today on a construction project, what do you think hard cost would be versus pre-COVID-19?
Good question, Austin. It's Matt. We certainly think the direction is headed down. I think as you see here in this very moment, I'm not sure that you would see that yet. And several of our projects, we have decided to defer. One of the reasons we deferred some of our potential 2020 starts is because we think that there will be a better buying opportunity in, I don't know, three quarters, four quarters maybe. So I think it takes a while to work its way through the system, and probably we'll see it first in some of the early trades were -- like concrete or site -- or paving where deals aren't starting. Those folks will start to see they have excess capacity and probably start to cut the pricing first. They'll probably take longer before it gets to some of the finished trades where there's funding stuff underway and that's need to be finished, and if anything, may take longer than finished over the next four quarters to six quarters.
So one of the advantages we have is because 90% plus of our construction, we are our own general contractor. We can kind of time that and play that strategically a little more than if we were using a third-party general contractor, which is the way a lot of the private side of the business works. So still too early to tell. We'll see what happens. In the last downturn, it was down maybe 15%. And that was an extreme correction. But time will tell. I think Tim wanted to add something.
Yes, Austin. I just would say, I think going into this, obviously, we've seen a lot of pressure on construction costs. We've probably been seeing 6% to 8% increases for the last three years. So it was probably already well roughed terrain, and that provides us with a bit more conviction that we're likely to see a correction. And certainly in terms of wages, commodities, materials, profits of subcontractors, those should all come down, putting downward pressure on pricing. Offsetting that somewhat, we would expect a little bit general conditions just given changing protocol, social distancing, things like that. And perhaps, productivity being a little bit strained, offset again by -- as subcontractors start to reduce their workforce, they're left often with their most productive crews, and you oftentimes get cost benefits from that, as you come out of a downturn in the early part of an expansion. So overall, we do expect cost to come down. They're going to need to just to make sense of the economics, given NOIs are flat, on their way down and account for costs, if anything, are up since the beginning of the pandemic. Looking for sort of a bargain in the equity markets, obviously.
That's really helpful. I mean, you guys had previously expected to start $900 million. That I think you alluded to. Some of those projects you delayed purposefully would be potential for cost to come in. What percent of that $900 million of cost is fully baked at this point?
I would say none of it. I mean are you talking about the cost or the start commitment? We haven't committed to starting anything with year.
The cost on some of our projects.
The only cost that would be baked would be where we bought the land already. I think two of those nine -- and we did buy two parcels of land in the first quarter deals that could have been or could be 2020 starts. So we spent $38 million on those two deals so far. A little bit of the soft cost is baked, but we haven't bought any of the construction on any of those jobs.
Okay. Understood. Thank you. And then last one for me, Kevin, maybe to pull you in here a bit. The balance sheet's certainly in great shape. But if you don't start any or only a small subset of that $900 million, where do you expect leverage to finish the year?
Yes. I mean, Austin, we're probably going to have to throw out a more fulsome update on what we expect our capital plan to be for 2020 when we have our mid-year call and provide -- have clear visibility on a whole range of things, including not only NOI, but also investment activity and capital markets activity. We're standing right now at remarkably low leverage level of net debt to EBITDA at 4.6 times versus the target range of five to six times and that's intentional. We very much drove that leverage number down over the last few years to give us more scope and more capacity as we might have to put it through a downturn and so we find ourselves in the spot we had hoped we would be, which provides us an awful lot of flexibility to respond the opportunities that may present themselves here in the coming months, as well as capacity to take on Dennis levy the full true incremental development spent.
But as I pointed out in my opening remarks regarding abundant liquidity here relative to our open commitments here in the near term and from a capital plant standpoint, although we went through valiance. When we provide our guidance, our initial expectation was to raise external capital of $1.4 billion. We've already raised $900 million of that so through the year and raise two-thirds of what we initially hoped to raise. We may not need to raise as much as all that but I think the bottom line answer to your question is why we haven't upgraded our guidance. I think our capital needs going forward are pretty modest and so you can probably looking at the balance sheet in terms of absolute debt levels where it is. It's probably not going to change a whole lot from here based on what we know today.
That's helpful. I guess I was getting it. It seems like it could be lower to the extent you get some leaps up and you don't have the incremental spend but we'll wait and see what you have to say in 2Q. Thank you.
Next question from Nick Yulico with Scotiabank.
Hi, this is Sumit [ph] in for Nick. Thank you for taking the question. Just following up on the development discussion. You mentioned as a footnote that you've lowered the yields on your development. I'm just wondering if you could give a little more color as to what kind of introduction you're looking at for near term or development or developments in research versus a stock that's going out in 2021, 2022?
Sorry, can you repeat the question? This is Matt. The question was about the yield shown on the development?
Yes. You footnoted yield as slightly reduced saying that you brought down the yield or you brought down assumptions for development nearing completion [indiscernible]. So just trying to get a sense of what's the split in the yield reduction particularly for developments that are more near term in 2020?
As a general rule, our practice has been that when a deal gets more than 20% leased then we kind of remark the rents to market to reflect the experience that we're actually having. Until that time, we tend to carry the rents at what we initially underwrote. So we've talked for years about the fact that we don't trend rents and that's what we mean by that. In this particular release, we only have the three deals that are completed and in that case, those rents reflect the actual rent roll in place. Those are all more than 90% leased but is on the schedule. Then there's three other communities where we have enough leasing done that we've reflected the most current rents there on the chart there on Attachment 8. The other 16 assets, we haven't done enough leasing yet so those are still the original pro forma rents. That's consistent with what our practice has always been. I guess we did add a note just to make clear that we have not endeavored to update those because of any changes in the environment related to the pandemic.
We're still carrying in some grants that were in the initial pro forma. When we get leasing activity, we will adjust them accordingly. So it's really not any change from our current practice. I think it was just an additional disclosure to make sure I understood that. It's a more volatile environment than it's been. Sean, do you want to talk to how they're currently leased?
Yes, just to add one thing on that as Matt indicated. Just for the first quarter, there were six assets in lease. If you look across the rents for those six assets, four of them were producing rents at that time average for the quarter that were above the original proforma. One was equivalent to our original proforma and one deal in northern Seattle was modestly below our original proforma. But you blend all that together rents at that point in time were roughly 3% above proforma were at $80 or so but there were some cost changes on those deals. So the net reduction in yield really was only about 10 basis points to a weighted average of 5.9 so really immaterial in the context of the whole basket.
Thank you so much.
We'll take our next question from John Guinee with Stifel.
Great, John Guinee here. Two quick questions. One is, has this situation given you any thoughts on speeding up or slowing down into other markets such as South Florida and Denver? Then second, if there is a slowdown in development stats in 2020, how would that affect G&A and interest costs in 2021 as you need to -- you can no longer capitalized people and development interest expense?
John, this Tim Naughton. Maybe take the first and Kevin if you want to take the second piece of it or not. With respect to our market footprint, as we talked about in the past, we had to potentially diversify a bit of our exposure to the larger cost markets into other knowledge economy type markets part of what drove entry into Denver and to Southeast Florida for sure. There have been other markets that have been on screen as well. We've been pretty active in terms of our investment in both those markets, both in terms of acquisitions and in the development and also funding third party developers. We've tried to really activate all the levers, if you will, with respect to those markets. So we really haven't been held back by desire to get in those markets. It's a function as much of opportunity as anything. We'd expect that to continue. That will make you tend to trim from some markets and recycle some capital or they tend to make sense to the balance sheet, invest capital in those markets so we can do that as well. But right now, it's more to debt and asset recycling. So I don't think anything's changed there.
We'll continue to evaluate other markets that we think could make sense for us in the long term that we think are over indexed to the innovation economy and therefore we think we'll outperform over a long period of time from a demand standpoint. I think your second question had to do with G&A around development. I can maybe start that and Kevin if you want to come in. We're always going to try to right-size the development organization to what we need and the opportunities for the next two, three years. To the extent we delay deals this year, it means we're probably going to have more stacking up in 2021 or 2022. So part of it is to make sure that you're properly positioned not just for what you have to do for the next six months but really for the platform over the next three or four years. To the extent, this becomes a very protracted recession but that changes the calculus obviously. That's not how we're viewing the environment today. We are viewing this as kind of a slow build up from a sharp downturn. If we do see a meaningful contraction and construction costs to the balance of 2020 then you start to see some recovery in 2021. You start to see 2022, 2023 could be a really good time to be delivering the product which would argue for heightened starts in 2020.
We want to make sure we've got the right type development and construction organization really over the next three or four years, not just over the next six months and not much has changed in terms of our view that it needs to change material. In part because we'd already brought it down from as Matt had mentioned around $1.4 billion to roughly $800 million sort of late cycle. It's already sized for late-cycle downturn type dynamics.
Kevin?
You'll need to cover things and as a result of some of those that decline and start bawling. We did have some recent staff reductions in our cap odds groups last year and so when we put our budget together for this year, we did expect capitalized overhead for 2020 to be a bit below what it was in 2019. If you look at what happened the first quarter catalog overhead did sequentially increase a little bit in the first quarter due to a few one-time items such as increased benefits and payroll costs but for full year 2020 we would expect that that catalog overhead runway would decline in the back half of the year somewhat based on what we know today.
Great, thank you.
We'll take our next question from Alex Goldfarb with Piper Sandler.
Good afternoon. Just two questions from me. One, in the beliefs about the impact of locked fees $1.4 million per month, can you just talk about your expectations? I'm assuming the eviction moratorium market, obviously, they're no late fees. Then you based on wherever you don't have amenities open, you aren't charging amenities so how should we think about this $1.4 million a month? Is that something you should be thinking about for the next few months or is your view that within whatever maybe by mid-summer, a bunch of communities will fully be open where this number won't be as big as it is right now?
Alex, this is Sean. Just to use some perspective of about 80% of that $1.4 million was in way of commentary amenity fees because our amenities are closed. So our expectation is you're going to see a slow build of that line item over the next few months. As the states begin to reopen, we resize our occupancy limits as I was describing earlier in response to a question and then it will slowly rebuild. We don't expect it to snap back I guess I would say, just because the pace of opening is going to be different by jurisdiction based on the local market environment, but that's the majority of it that should fully rebuild. The rest of it was small stuff related to some late fees and credit card convenience fees and things of that sort.
Okay. Then on your line of credit, you guys had drawn the $750 million and then you quickly paid -- you just paid back the $535 million. It sounds like you have about $150 million or so rough numbers on condo sales. It's pretty quick that you guys pulled down and then paid it back so what shifted in your thinking? Was it more that hey, we weren't sure if banks were going to fund or we weren't sure if the Fed was going to be there or was it just once you guys delayed a bunch of projects, suddenly you realize that you didn't need all that money at once?
Hey, Alex, this is Kevin. We drew a portion of our line of credit, basically so that $750 million out of $1.75 billion in mid-March. We really did it on a precautionary basis not because of anything in our business, not because of our development activities, not because we had any particular use. We didn't have commercial paper. There was really nothing related to AvalonBay that caused us to draw that $750 million. Instead, it was really just a reaction to the initial stage of the pandemic and its impact on the capital markets and before the Fed had fully stepped in to stabilize the markets. So it was really done on a precautionary basis to ensure that we had greater control over the capital. That would give us incremental abundant time and room to maneuver through what we thought would be a choppy set of months ahead of us.
Maybe just to straighten that out. Once the Fed came in, obviously, the bond markets became very constructive and we had thought as split [indiscernible] the bond market if we needed to, so that was the reason that ultimately we just paid back.
Okay. Thank you.
We'll take our next question from Rich Anderson with SMBC.
Thanks. Good afternoon, everyone. First question, this whole thing started to take effect at the beginning of what would be considered the heavy leasing season for multifamily. My first guess was perhaps that was a good thing but then I thought about it, maybe it was a bad thing because there was more activity and tenants maybe had an arrow in their quiver to negotiate. So what do you think? Not that we could have changed it but do you think the industry or yourself was negatively impacted by the timing or how do you think that played out from a cadence standpoint?
Rich, you know, it's hard to now, I mean, you know what that would say when you're in the complacencies [ph], it only gets most of our rent growth for the year -- you have both the benefit of a better market pricing and more leasing velocity so your rent roll is increasing. You kind of earn it all kind of in that March to July timeframe and obviously that's a challenge right now. We have a lot of things in our control, we haven't gotten any of them.
Yes, I mean, come on, can you guys do anything right? The second question is perhaps a more realistic and longer term. So you guys are, are thought of as sort of visionaries and I don't know if you're different, you know, product types and price points came out of the Great Recession, but let's pretend for the sake of this question that it did. Do you feel like that there's an evolution to multifamily as a consequence of all this, maybe more comparable with the work from home environment, maybe more of a build out of internal office space or technology enhancements or laser printers or whatever might people be needing right now that they don't have because they're working from home? Is that something that you think or maybe there's another alternative about how a multifamily will evolve out of this? Do you do you have any idea it's or have you thought about it at all about what the change -- the basic fundamentals of the industry might look like five years from now?
In terms of the math there, I think that's going to continue to be driven by the nature of the households. And there's been such great growth in single person households. That's literally what drives demand for our business. It's -- most of our households are singles and professional couples, very, very few children. You know it -- but the terms of kind of the product and the service, you know, I do think you probably see some of this either work from home type. There's already a trend that's already -- I think that Sean alluded to in some of his remarks. I think there's a good basis for expecting that. That might accelerate a bit. We had already started putting co-working, you know, lounges and spaces with meeting rooms in all of our -- all of our communities, and they are making it feel perfect now. Just a little bit -- bit more space, but they're pretty good size to begin with. And if you think about it, from a resident standpoint, they might prefer that environment to Starbucks, which is a much more controlled environment.
They're going to sort of work from, they're going to work from some place other than other than -- other than the office. I think -- I think there's been a movement towards a much bigger, grander fitness centers, I think you're going to continue to see that. People are going to have more faith and comfort in working out in a community with their peers and, you know, maybe a large, you know, large club with a bunch of high schoolers who are cleaning up equipment, and things like that. And then, within the unit, you know, another trend that had already started, I think it might accelerate, it's just more flexible, open unit spaces, lifting where the nature of the space can change during the course of the day based on kind of where you are in your day, where kitchen, dining spaces convert to office spaces.
My office space is an apartment community right across the street. And I noticed a number of people that sort of set up their desks right up against the window. I don't think that's where it was, to be honest, to spend good part of their -- good part of their day there now. So I think people start to think about that in terms of -- in terms of unit design, that, you know, folks may be using the space more during the day than they have -- than they have historically. And then, certainly just the need for, you know, broadband and, high speed and reliability, there, anything that we can do to kind of support that.
And I guess lastly, I just mentioned kind of, kind of the Smart Home initiative, which you know, a lot of folks are pursuing now, but I think one of the most intriguing aspects of that is the remote entry, being able to allow goods and services to sort of flow freely throughout, throughout community rather than having to be handled by somebody in the front desk or in a central office that people can get -- can get access right up to the unit and potentially right end of the unit to the extent that the, you know, resident has to step away.
So, I think you'll see, you know, all those things that were trends anyway, you know, perhaps just accelerated result of this.
Really good color. Thanks, Tim. Appreciate it.
Sure.
[Operator Instructions] We will take our next question from Hardik Goel with Zelman.
Hey, sorry, guys. Can you hear me?
Yes, go ahead.
Thank you. I was just wondering if I look into it development pipeline, I know Matt talked about how [indiscernible] update them when there's 100% -- but if you look at the development pipeline that's going to deliver 2021, late 2021 or mid-2021 and beyond. How do you feel about the underwritten yield on those? I know there's a lot of uncertainty but what kind of buffer is there? Where you would still underwrite it today?
Hey, Hardik, it's Matt. You know, the deals that are delivering in 2021 -- first deliveries in 2021 are deals that generally were started in the last year if call it, you know, because otherwise they'd be delivering sooner than that. So on those deals, you know, I guess we'll just we'll see what happens right. I think it's fundamentally it's going to depend on what happens in market rents. We'll have them analyzed, you know, they -- some of those deals were higher yielding deals in first place just because of the geography of where they were. So, you know that, in theory, I guess gives you a little more room. But I don't think, and there's a few that are early enough that we might actually realize a little bit of construction costs -- and as I mentioned, we are, in some cases shifting from trying to get as quickly as possible to slow it down a little bit to take advantage of, hopefully, what could be a better market to buy construction services in a few quarters. But, yes, I mean, you know, the risk there is the same as the risk in the stabilized portfolio. You know, it's just the risk of what happens to you know, market rents between now and then.
I guess I'll just add to that. I think we're going to first recognize those deals are capitalized and in a different capital environment. So you got to figure, you know, with both cost of capital as well as -- as well as the underlying fundamentals, but as you saw Sean's remarks, rents in April were pretty flat on a year-over-year basis, I think there's a basis for believing that they should continue to come down. We've lost 20% of our workforce, and even if three quarters of that comes back as states start to open up, we're still looking at 8% unemployment, and you know, likely see, you know, flat there may be slightly negative household growth, while we're still delivering some new supplies. So that's going to take its toll in the near term on. And as I mentioned before, I think, you know, it's ultimately it's, you know, we could see a pretty -- pretty strong, you know, late 2021 and 2022 delivery.
People who start doing what we're doing, which is blank start, and you start to have, you know, a dearth of deliveries at a time and maybe economies starting to really regain its footing.
No, just kind of one other thing Hardik. As you think about sort of development, how it flows through our earnings from a business model standpoint and compare it perhaps to the last downturn. As you know, we've emphasized [indiscernible] funded we are with respect to long term capital being sourced to fund the development underway. And really at Q1, we were about over 80% match funded with long term capital against the development that's underway. So that's an important point. Tim touched on in his antics but I really do think that's -- as you think about AvalonBay and how we might perform here in the coming years, it's an important distinction to draw in terms of how we are positioned from a balance sheet and funding point of view and a built in accretion point of view with respect to development, relative to say the last downturn we had a lot more -- much more in the way of open and unfunded development commitments.
At time when 12 years ago developments were coming in at 5%or 6% yield and funding with that cost around 6%. Today is very different. We'll see whether the yields really shape out to be. But we know you know, debt cost for us on a 10-year basis today are probably somewhere in the 2% range. So, and we don't really need much of that at all. And we're already over 80% match-funded and the development underway. So we really are in terrific shape from that standpoint, that sort of benefit from, you know, painting profit growth on the 80% or so that we've already paid for this underway. And to this extent, we have to source incremental capital and use debt to do so; that's likely to be an additional source of accretion.
That's just from my standpoint, guys. I have no problem with the balance sheet, I'd never have. I find it confusing when people are, you know, kind of begging you for that. And it's resulted in you guys holding $750 million on your balance sheet. It's kind of crazy to me. There's no issues with the balance sheet at all. You guys have been doing this for two decades and people still get nervous about this, but I was thinking more about the IRRs. And Matt and Tim, all you guys have talked about you know the 9% to 12% range through the cycle. To get 9% on assets started during the last downturn, maybe 12% in your best assets. What I'm trying to understand is on an IRR basis, obviously these things will lease up more slowly if they're coming on in a stressed environment. What is the IRR on the developments that are, you know, kind of 2021 and beyond? Is that a 9% number, 10% number, what does that number look like?
Yes, we have shared with you in the past, at least what, you know, last couple cycles where we had, yes, when we started deals kind of late in the cycle and delivered into a downturn. Those were -- at one point you can't run out 10-15 yards, they are what was in fields that you start at the beginning cycle or in the downturn at least up at the early stages like -- I think we saw ranges from -- it narrows over time, as you turn out the time horizon from 10 years. But over 10 years, right, but I think we were so clear on our cost of capital [indiscernible]; I think on the low end, it was around 8.5%. On the high end it was 13.5% range.
So, you know, I would say, you know, it's going to be, you know, something feels better, that weren't -- that were sort of time -- the worst that started with construction costs peaky and delivering in the depressed environment. I think there could still be high single digit kind of hang around; and have deals that we start in 2021 and 2022, it could be much better than that.
Got it. Thank you. Some great color.
Thank you.
We'll take our next question from Haendel St. Juste with Mizuho
Hi guys. Thanks for taking my questions. Just a quick couple of for me here. Just going back to April [indiscernible]. I guess, collections show the market rate collections, I've seen some of this is income and claims related but I get more surprised it's even more meaningful lag in the corporate apartments business or can you just to help us to identify or help us understand what are the key reasons [indiscernible] rent collection? And what's supposed to lead that?
Okay, you were a little muffled on some of it, but I heard the collection rate in the quadrant. And yes, it is more. I mean, the way I think about it is these are the kind of corporate profit home providers. It's not a corporation per se that are the end users here, but sort of intermediary that are, you know, essentially, that has a sales team that have reached agreements with various corporations or have a booking site essentially, that's the marketplace. And then, they are leasing units from us and many other -- of our peers and others. And those there, you know, think of it I guess I'll call it sort of like an extended stay hotel almost where the bookings basically dried up pretty quickly. And somehow some longer term states from people who were there on consulting assignments for three or four months, they'll bleed out a little bit longer. And there are others who really were running more short term, 30 days.
And their demand evaporated more quickly. So, yes, we're working through the process with them just as we work with other residents in terms of referrals and plans and things like that. But you know, that's why the collection rate was quite a bit lower than what we'd see from our market rate apartments, which is generally higher quality residents, good household incomes, as indicated in my prepared remarks about the slide to be addressed.
That's helpful. Thank you. So just wanted to be clear, but ultimately, who is on the hook to the right, is it the individual or the corporate sponsor?
The intermediary is technically our credit. That's who we're dealing with. But their ability to pay certainly is based on what occupancy rates they have across their portfolio and to the extent they're 75% occupied with good corporate clients. That's what they can pretty much pay. Not many of these companies have, but none of them really have a really strong balance sheet to be able to handle, you know, three or four months without payments or 25% to 50% occupancy. So the nature of the pandemic and how long it lasts and the impact on travel [indiscernible] the next few months.
So, can you also -- what percentage of the tours you've been conducting this year in April or early May have been virtual? And how the conversion rate on those virtual tours compares to more traditional tours historically, and are you finding that -- you did talk a bit more incentives to get the virtual tours to sign officially?
Yes, good question. You know, I don't have that right in front of me in terms of the composition of it, but I mean, I would say that virtual tours, you know, for our business, you know, are not nearly as effective as self-guided tours or escorted tours. But given the nature of the pandemic, it was actually nice to see a rebound activity in April, people are getting more comfortable with commercial to work. As you know, online through our website, or in some cases, we had community consultants that would basically do FaceTime through individual units. And then some of that was really at the discretion of the customer where they didn't want to come through with someone. They were fine doing it virtually. So, I think it's evolving but certainly reflects the nature of the business and where it's going in the future in our view, and the technology investments that we're making, and we're already making that we may accelerate as it relates to technology and support.
A lot of the sort of no contact type activity between our staff and our customers and our prospective customers. And that includes various things on the tour side and move in. We see the packages and even on the maintenance side, where we're doing diagnostic call via FaceTime and other via -- other tools to try and diagnose issues for customers being able to sort of self-serve and self-help, in many cases, before actually someone to go to a unit. So I think this will just accelerate some of the things that we've already counter-putting as far as overall platform that will lead to more efficiencies in the future.
Got it. Thank you for that.
There is showing no further questions at this time. I'd like to turn the conference back to Mr. Tim Naughton for any additional or closing remarks.
Thank you, Kathy. In fact, all of you being with us today. I know that you've got a lot -- a lot of calls to cover. And normally I'd say I look forward to seeing -- it may read, but I don't think that's going to happen. But hopefully we'll talk to somebody during that -- during that week and maybe even see on a Zoom call. So take care and stay safe. Thank you.
That concludes today's presentation. Thank you for your participation. You may now disconnect.