Avalonbay Communities Inc (AVB) — Q4 2018 Earnings Call Transcript

Thank you, and welcome to AvalonBay Communities' fourth quarter 2018 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 is 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 Naughton, Chairman and CEO of AvalonBay Communities, for his remarks. Tim?

Yes. Thanks, Jason. With me today on the call are Kevin O'Shea, Matt Birenbaum, and Sean Breslin. Sean is actually joining us remotely. The four of us will provide comments on the slides that we posted last night, and then all of us will be available for Q&A afterwards. Our comments will focus on providing a summary of Q4 and the full year results, and then a discussion surrounding our outlook for 2019. Before we get started, I thought I'd just note that we have chosen to eliminate quarterly guidance issue. You may have noticed that in our release. We've thought about this for some time and have concluded that, as long as we continue providing good disclosure that allows investors to assess our business in a detailed way, which we believe we do, moving away from quarterly guidance is better aligned with how we think about the business and will help discourage undue focus on short-term quarterly results. We will, however, continue to update our annual guidance at the second quarter, concurrent with our internal mid-year reforecasting process. Starting now on slide four. Highlights for the quarter and the year include, core FFO growth of 2.7% in Q4 and 4.4% for the full year which was 80 basis points above our initial outlook. Same-store revenue growth came in at 2.7% for the quarter or 2.8% once you include redevelopment. For the full year, same-store revenue growth ended at 2.5%, which was equal to what we saw in 2017. We completed $740 million of new development for the year at a 6.4% initial projected stabilized yield and started another $720 million. Lastly, we raised $1.7 billion in external capital this past year, principally through asset sales at an average initial cost of 4.7%, with more than half of that being raised in Q4, mostly from the closing of our New York JV where we contributed an 80% interest in five stabilized assets to the newly formed venture. The next two slides provide a little more detail on 2018 performance, and I think they provide some helpful context to our 2019 outlook. Turning to slide 5. As I mentioned before, same-store revenue growth for the year was consistent with 2017. However, some regions saw improvement while others actually decelerated from the prior year. Specifically, Boston and Northern California showed significant improvement from 2017, up 60 basis points and 130 basis points respectively, while Seattle decelerated by almost 300 bps as that market began to feel the impact of several years of continuous and elevated supply. Turning to slide 6. While same-store revenue growth was equal to that experienced in 2017, the cadence of rent growth through the year was not. We saw rent growth accelerate in the second half of the year, outpacing 2017 in Q3 and Q4 by 70 bps and 120 bps respectively benefiting from a strengthening economy towards the end of the year and a cooling for-sale housing market. This provides good momentum for our business going into 2019. Moving to slide 7, and turning to the development portfolio. We continue to see a meaningful contribution to core FFO growth from stabilizing new development, although at a lesser rate than in years past as we delivered only about a third of the homes as we did in 2017 and completed about half as much in capitalized costs as we had on average in the prior four years. With our starts down by about 40% over the last couple of years, we will generate less growth from external investment over the next two to three years than we did in the early and middle part of this cycle when development economics were particularly compelling. Moving to slide 8. Of the capital that we raised this year, $1.3 billion came from wholly-owned dispositions and the sale of 80% interest of the New York JV that I mentioned earlier. The initial cost of the capital activity was about 110 basis points greater than the $2.6 billion that we raised in 2017 when about 70% of that was raised in the form of debt. Since much of this higher cost capital was raised in Q4 at the end of the year and 2018 it will also contribute to lower external growth in 2019. Now on to slide 9. Our elevated disposition activity in 2018 did help drive down leverage. At year-end, debt-to-EBITDA stood at a cyclical low of 4.6 times. Our liquidity and credit metrics, as you can see, are in excellent shape as we move into what will be the 10th year of the current expansion. And finally, on slide 10, we excelled and made progress with several of our other stakeholders this last year, including our customers, where we ranked number one nationally among all apartment REITs for Online Reputation for the third consecutive year. With our associates, we were named to Glassdoor's list of top 100 Best Places to Work for the second consecutive year and by Indeed as a Top 5 Workplace in D.C. Lastly, our efforts on the ESG front have been widely recognized by several organizations helping to establish AVB as an industry leader in this area. And with that, I'm going to turn it over to Kevin who will provide an overview of our outlook for 2019.

Okay. Thanks, Tim. Turning to slide 11, we provide an outlook for 2019. In particular, we expect core FFO growth of 3.3% same-store revenue NOI growth of 3%. In addition, we expect to start just under $1 billion of new development and complete $650 million of projects. NOI from development communities is expected to be roughly $27 million at the midpoint, which is down about one-half from last year. This is primarily a function of lower level of completions in 2018 and 2019 and unit occupancies being weighted to the back half of the year in 2019. Turning to slide 12, which summarizes the major components of core FFO growth. As you can see, all of our core FFO growth in 2019 is expected to come from the stabilized and redevelopment portfolio. Internal growth from the stabilized and redevelopment portfolio was contributing around 3.6% to core FFO growth, or 170 basis points more than in 2018, and external growth from stabilizing investment and lease-up activity net of capital cost is not projected to provide a net contribution to core FFO growth this year. The next three slides identify some of the major drivers impacting projected external growth. I'll quickly summarize. Slide 13 demonstrates the impact of a declining level of development completions later in the cycle, as we expect 2018 and 2019 completions to be down by about $0.5 billion for the average over the prior four years. Slide 14 highlights the impact of higher short-term interest rates on about $1 billion of floating rate debt. Slide 15 shows the impact of higher funding costs on long-term capital raised in 2018. Each of these factors is contributing to a decline in external growth in 2019. Some are cyclical in nature, like lower development volume and higher interest rates while others are more of a one-time impact such as the mix of capital raised in the prior year. Turning to slide 16. The next few slides provide further context to our outlook for the upcoming year. I won't go into them in detail, but in many ways 2019 is expected to be a bit of a mirror image of 2018. We're starting the year with a strong economy and labor market, but for a number of reasons while we expect the economy to remain healthy in 2019, we do expect economic growth to moderate as we move through the year, driven by a projected slowdown in global growth, the stimulative effects of corporate tax reform beginning to wear off and heightened uncertainty in volatility surrounding government dysfunction and monetary policy. As a result, we expect corporate profit growth to decelerate in 2019 but remain at healthy levels. Combined with elevated corporate debt and waning business confidence, we may see a slowdown in business investment as the year progresses. The consumer, on the other hand, should continue to propel the economy in 2019. The healthy labor market and accelerating wages are boosting confidence, spending, and household formation. Furthermore, demographics and housing affordability should continue to support the apartment market on the demand side of the equation. On the supply side, we expect deliveries to remain elevated in 2019 at a bit over 2% of stock. And while construction starts have remained elevated over the last year nationally, we've actually seen a decline in our markets, which should provide some relief next year. Construction cost inflation has been particularly acute in coastal markets and lenders have begun to take a more cautious stance in the sector. These factors should help constrain supply beyond 2019. Overall for 2019, we expect the macro environment to remain favorable and fundamentals to support healthy operating performance in the apartment sector. As noted in slide 17 through 23, drill down on these themes in more detail. We'll let you review these on your own. But for now we'll skip to slide 24 where Sean will touch on demand and supply fundamentals in our markets and the outlook for our portfolio in 2019. Sean?

Thanks Kevin. I'll share a few thoughts about the demand-and-supply outlook for 2019 and our same-store revenue expectations. Turning to Slide 24, while 2018 job growth of 1.7%, or 2.6 million jobs, exceeded most forecasts, the consensus outlook currently reflects a deceleration to roughly 1.2% job growth, or 1.8 million jobs during 2019. The slower pace of job creation is expected in all of our markets, but it is most notable in the tech markets of the Pacific Northwest and Northern California. While job growth is expected to slow, employees are certainly benefiting from the tight labor market. Wage growth has been accelerating over the past year and is expected to average about 3% during 2019. Turning to Slide 25 to address supply in our markets, new deliveries for 2018 came in below expectations at 2% of stock, as the tight labor market and constrained capacity at local municipalities resulted in extended construction schedules. Supply for 2019 is now expected to take up to roughly 2.3% of stock, driven by increases in Northern and Southern California and the Mid-Atlantic. In Northern California, the increase in deliveries will be concentrated in San Jose and East Bay, with San Francisco being relatively flat. In Southern California, the increase in deliveries is expected to occur in L.A. with modest reductions at both Orange County and San Diego. For the Mid-Atlantic, the increase is driven by new deliveries in the district. While we're tracking the deliveries that represent 2.3% of stock, our expectation is that the tight labor market will again result in some construction delays. Actual deliveries will likely be in a range of 2% by the end of the year. Turning to Slide 26. Our same-store rental revenue outlook reflects a midpoint of 3% with the expected improvement in all of our regions except Southern California which should perform relatively consistent with 2018. We're starting off the year in good shape with roughly 1.2% of embedded revenue growth in the portfolio, based upon rent increases we achieved last year. And for the month of January, same-store rental revenue growth was an even 3%. Additionally, the like-term rent change for January was 2.1%, a 150 basis points ahead of last year. With that, I'll turn the call over to Matt to talk about development.

All right. Great. Thanks Sean. I'll start on Slide 27. Our development activity has been moderating as the cycle matures as you can see on this slide. We've averaged about $1.4 billion per year in new starts in the middle part of the decade, but are expecting about $825 million per year for 2017 to 2019, as good deals are harder to find and capital becomes a bit more costly. This is a good late cycle run rate for development volume for us, with starts in the $800 million to $1 billion per year range, keeping our local teams engaged while preserving our balance sheet strength. As shown on Slide 28, we also continue to maintain a land-light posture at this point in the cycle. Since 2016, we have managed our land position to be at or below $100 million and we will continue to be disciplined about structuring land contracts, so that we minimize the risk of carrying too much land on the balance sheet when the cycle turns. At year-end, the only significant land position included in our $85 million in land held for development is a site in Orange County, California, where we expect to start construction in the second quarter. In addition to minimizing the drag from land carry, this puts us in a good position to take advantage of any interesting opportunities that might arise if there is a future disruption in the land market. Turning to slide 29. We have structured our $4.1 billion development rights pipeline to provide a great deal of flexibility. These development rights represent future growth opportunities for the company over the next several years. Only about half are conventional land purchase contracts with private third-party land sellers, where we would be expected to close on the land once entitlements are obtained. The other half are roughly split between asset densification opportunities, where we are pursuing added density at existing stabilized assets and public-private partnerships, which are generally long-term development efforts that span multiple cycles. These types of projects allow more flexibility to align the start of construction with favorable market conditions. Of the $800 million in new development rights added in the fourth quarter, $500 million came through three new asset densification opportunities located in three different markets. It is also important to note that we are controlling the entire $4.1 billion future pipeline through a very modest current investment of just $125 million, including the land owned and other invested pursuit costs today. And with that, I'll turn it back to Kevin.

Thanks Matt. Turning to Slide 30. As we've discussed before, another way in which we mitigate risk from development is by substantially match-funding development underway with long-term capital. This allows us to lock in development profit and reduce development exposure to future changes in capital costs. As you can see on the slide, we were approximately 75% match-funded against development underway at the end of the fourth quarter of 2018. On Slide 31, we show several of our key credit metrics and compare these to the sector average for unsecured multi-family REIT borrowers. As you can see, our credit metrics remain strong in both absolute and relative terms, reflecting our superior financial flexibility. Specifically, at year-end, net debt-to-core EBITDA was low at 4.6 times, unencumbered NOI was high at 91%, and the weighted average years to maturity on our total debt outstanding remained high at 9.7 years. Additionally, as a result of our relative balance sheet strength, we enjoy relatively lower cost of debt funding, which is all the more notable because we issue longer-term debt. Finally, on slide 32, over time we have fashioned a debt maturity schedule that enhances our financial flexibility by reducing the capital needed to refinance existing debt over the next decade. In particular, with over 20% of our debt maturing after 2028, average debt maturities over the next decade represent about $550 million per year on average, which is only about 1.5% of our total enterprise value. And with that, I'll turn it back to Tim for concluding remarks.

Well, thanks Kevin. So, in summary 2018 was better than expected for AvalonBay. We delivered core FFO of $9 per share, which was $0.07 above our initial outlook. We saw rent growth accelerate meaningfully in the second half of the year. We reduced our portfolio allocation to the Northeast and began to make strides in our expansion markets of Denver and Southeast Florida. In 2019, we expect the economy and apartment markets to remain healthy. For us, same-store revenue growth is expected to be 3%, up 50 basis points from the prior year. Growth from external investment and capital formation will be lower than past years, due to a variety of factors mentioned earlier. We'll continue to manage liquidity, the balance sheet, and our development pipeline to pursue growth, but in a risk-measured way as we move further into the current economic expansion. And with that, April, we'd be happy to open up the line for questions.

Thanks. Has a final decision to do a condo execution on Columbus Circle been made? And where are you in terms of premarketing and how has it gone so far?

Sure Nick, this is Matt. I can answer that one. It is our plan, and the numbers that were provided are based on the presumption that we do move forward with condos there. Really the next step is going to be opening a sales office. We expect that will happen probably in April, and then we'll see how it goes as sales go as we hope and we will proceed along that path, but probably, it won't be — yes probably won't be until the third or fourth quarter before we actually see any settlement proceeds. But that is the plan right now. We have a thin website up where we're just collecting names of interested parties but we haven't really started active marketing yet. Again, we expect by April we will have a full floor and a tower complete with white-glove ready models to show and a full sales office. So, that's really when we’ll launch.

Then how's the lease in retail space going? I think with the last re-lease you are 45% of total retail revenue leased or in advanced negotiations?

Yes. So there's really no further update since the last quarter. Those two spaces are spoken for and we're pleased with that. The retailers in general get pretty focused on sales over the holidays. So not anything more to report since then.

When does the retail NOI begin to come online?

It will start, I believe, in the second quarter, late in the second quarter when we turn the first spaces over to those first couple of tenants for their build-out.

Thanks.

Hey good morning guys.

Hello.

Yes, can you hear me?

Yes, we hear you fine. Thank you.

Thanks for the response. I have a couple of questions. Firstly, could you provide a breakdown of the $1 billion in new capital mentioned, which comes from various activities included in the guidance? I noticed that $70 million to $80 million of that comes from condo proceeds, indicating some level of certainty regarding that item. However, could you clarify the details regarding other asset sales and capital market activities related to that $1 billion?

Sure, Rich, this is Kevin. There's — on slide 15, you maybe see a little bit of breakdown on external growth. So, as you pointed out on our earnings release page 23, we have on the top right some summary information with respect to our sources and uses for the year. Essentially, there's about $1 billion of external capital, we expect to source a portion of that. Broadly speaking, there's two pieces of it right now, disposition equity if you will which includes a modest amount from condo sales and the balance from wholly-owned dispositions primarily; and then unsecured debt. So, that's the capital plan. It's just really capital from those two sources, selling assets if you will and selling debt. What we'll ultimately do of course will depend on how the capital markets and the real estate markets and our business needs evolve over the year. But the current capital plan is to blend a mix of debt and equity with the equity coming from asset sales and a little bit of condo sale activity.

Okay. Thanks for that. And then I guess maybe on a related note, you tapped the ATM the last quarter roughly around where we are today in terms of the stock price. Can you tell us how that source of equity factors into how you view different sources of capital?

Sure. Well as you know we resourced $1.7 billion of external capital last year. A little less than $50 million or 3% was from the common equity market. So, it's been a pretty modest source of capital for us lately. In fact, over the last three years, we've only sourced $150 million of equity out of $6 billion of external capital. So, 97% of the activity has been from asset sales and unsecured debt. We're at the part of the cycle where that's a reasonable expectation is that we would be primarily looking at the unsecured debt market and the transaction market for equity. In terms of the ATM usage last year, it was a modest amount. And essentially what we look at is among other factors kind of the liquidation cost of selling assets and what that involves from a liquidation NAV if you will relative to the alternative selling common equity. And we of course try to be thoughtful and judicious in raising common equity, given the sensitivity that some investors have for that topic. But ultimately, we're making choice on what we think is mathematically the superior choice from capital allocation point of view, taking into account the alternative selling assets not merely from a growing concern NAV point of view, but take into account the liquidation cost which from time to time can include property routine costs and tax abatement costs.

Okay, got it. That is helpful and then one quick last one here. I appreciate the development starts on a trailing three-year average basis are down versus the prior sort of era. But starts are ticking up year-over-year in 2019. So is there anything specifically driving that with respect to specific projects in the pipeline? Or is there anything that may be characterized as the more macro view on development that's driving that? Just any color around that.

Yes. Rich, it's Matt. It's basically driven by one project, large project the one I mentioned that the one land position we own in Orange County in Brea. We thought that was actually going to start last year. If you look back to our guidance for last year, start volume was higher. That project is now likely to start in the second quarter. So it's just basically move that one project and it changes the volume from one year to the next.

Yes, to add to that, this is Tim. We have previously mentioned that we are comfortable within the $800 million to $1 billion range. This is a level we believe we can achieve on a leverage-neutral basis, considering our balance sheet capacity, which includes free cash flow, additional debt capacity, and anticipated asset sales each year before triggering any tax-related distribution requirements. Overall, when we look at it over a few years, it's consistent with the $800 million to $900 million range.

Got it. Thank you.

Good morning. Maybe just a big-picture question on strategy possibly for Tim, just trying to think about developments and the comments on fundamentals are healthy, yields remain strong on development. Maybe specifically we can talk about I guess rates. Rates are flattening. Maybe your cost of capital will remain flat and all the forecasts had been wrong. I guess how do you balance between the healthy fundamentals again all the forecasts for higher rates or real weakening economy been wrong. How do you balance that from what you're actually seeing in your markets and how tempting is it to potentially even pickup development or take on more land, just trying to get a feel for that balance when it comes to your strategy?

Well Jeff, yes, thanks for the question. I mean some of it's strategy and some of its opportunity, right? In terms of adding land to our balance sheet or significantly increasing the level of development rights beyond what, beyond maybe some of the densification opportunities that Matt mentioned. The opportunity set just isn't that compelling to really ratchet that up relative to maybe early in the cycle. I'd say, the way we're managing, it really is really kind of how we’re thinking about risks. We still think it's profitable as long as you match-fund it which we're trying to do. Even the deals that we're starting this year, we think they're sort of comfortably clear cap rates by 150 basis points plus. And as long as we're match-funding, we're basically bringing that capital onto the balance sheet and then it just becomes a matter of execution. As long as it's match-funded, it shouldn't look that much different than your stabilized portfolio other than the execution risk behind it which is something obviously is a competency of the company. Lastly, it's just making sure that we maintain as much optionality as we can, not much land, trying to really manage pursuit cost carefully. If we get caught in the downdraft, we'll have some options. And in the last cycle where you had pretty severe correction, we — we’re in many cases, we’re able to salvage those development opportunities in part because we didn't own the land and we're able to go back and at some cases renegotiate the basis. But it's really just about maintaining flexibility around the development pipeline. But I think just given where we are from a capital markets standpoint, we're not — over the next two or three years, it's not our intent to rely on the equity markets to develop. There may be opportunities from time to time to tap the equity markets and ATM, but late cycle typically the — I don't think it's a good strategy to rely in the equity markets to be open and available, priced at a level where it's going to be — where you're going to be able to accrete a lot of value to the development platform.

Okay, thanks Tim. That's helpful. And I guess just if we can turn to supply, I don't believe you discussed supply by market. Could you talk about that a little bit? And again one of your peers commented that they expect New York City supply to be down 50%. Can you give a little bit more details on supply in your various markets?

Sure. I'm going to ask Sean to jump in on that. Sean, you want to take that?

Yes Jeff. I'm happy to take that one. In terms of the various regions and given kind of the high-level overview and then talk about the distribution in specific markets if you're interested. But in New England which is pretty much Boston, we are expecting supply to tick down about 40 basis points. It was 2.9% of stock in 2018. We're expecting it to be closer to about 2.5%, which is roughly a reduction of about 1,100 units. In New York, New Jersey specifically you mentioned that region overall is expected to be relatively flat at about 1.9% of stock. New York City itself, we also expect to be relatively flat on a year-over-year basis in terms of deliveries being around those. As it relates to the comment you made about reductions in specific parts of New York City, just so you know how we look at it. We look at it in terms of the aggregate amount of supply, delivered across New York City as opposed to potentially others may look at it relative to what they think may impact them. We try to look at it more on an aggregate fashion. So sometimes that leads to differences in the way people talk about supply. So that's specific to New York just so you know as well. In mid-Atlantic, I mentioned in my prepared remarks that we're expecting an increase in the mid-Atlantic that's all pretty much concentrated in the district, where all that supply's coming online. We're pretty flat in suburban Maryland and Northern Virginia. Seattle Pacific, Northwest so 4% year-over-year both 2018 and 2019 pretty much concentrated in the urban infill markets in and around downtown Seattle, whether it's Forest Hill, downtown Seattle or even South Lake Union as an example. That's where the heavy amounts of supply are located in Seattle. There's not as much in places like downtown Bellevue, Redmond in the north end of Seattle, which has been helpful to us. And then in Northern California, we are expecting it to tick-up the most in Northern California from 1.6% of stock to 2.7% of stock in 2019. That's all coming as I mentioned, in both San Jose and East Bay. It's relatively flat in San Francisco in terms of deliveries. So it should be pretty much at par there. And then Southern California, ticking up about 30 basis points from 1.4% of stock to 1.7%, which is about 4,200 units. All of that is in the L.A. market, primarily downtown L.A. kind of Mid-Wilshire, Hollywood those submarkets, primarily a little bit in Warner Center, Woodland Hills as compared to Orange County and San Diego we're expecting supply to come down in actually both of those markets. So that's sort of a high-level overview and if you want to talk about specific submarkets happy to chat with you about that offline as well.

Hey, Jeff just one thing to add as you probably hear from Sean's comments, a lot of it continues to be concentrated in the urban submarkets as it was probably the last year we're expecting urban to basically outpace suburban supply by about two times.

Great. Thank you. Very helpful.

Thanks. Good morning, everyone. A couple questions on the condo project. On Attachment 14 you give some details there, which is helpful. I guess, question is when you talk about the projected gross proceeds from sales expected to be $70 million to $80 million is that the total after-tax profit for the project?

No. Nick, I think – this is Matt. I think that's just the number that we have in our budget for settlement proceeds this year. It's cash in the door basically.

And kind of vary a lot based on when the settlements actually happen on how sales actually go. We just had to put something in kind of unexpectedly for starters for budgeting purposes. If it winds up being more or less then, we may raise more or less capital from other sources as Kevin mentioned.

Okay, yes. I think you said in the past that you expected about $150 million of incremental value above your cost on the project, which is on a pre-tax basis. Is that still a good number to think about?

Yeah. That was last quarter. That was really think about what we think the building is worth as a condo building versus a rental building, not necessarily relative to our basis, although, we do think it's worth more than our basis. But we're saying that based on where we thought the condo values would settle out, if you looked at what the total sell-out would be of that relative to what it would be worth as an apartment building if you leased it up and if you put a cap rate on it, I think that that difference is about $150 million. That is a before-tax number.

Okay. So do you have any number you could share on what the ultimate NAV benefit is assuming you hit your sale plans on an after-tax basis?

Nick, this is Kevin. I mean, I think it's all premature. At this point, we've yet to even commence marketing. So we'll see over time what happens in terms of the sales we closed not only this year but in succeeding years when most of the sale activity would occur. If you take Matt's comment about $150 million pre-tax value associated with the residential or condo portion, you just have to apply kind of a tax rate to that which for rough numbers assume a third is taxes. And then the balance call it $100 million is what we would hope to achieve on a pro forma basis in terms of net profit after taxes to our shareholders when all is said and done when we finally sell everything out. But we're early days in this and we'll see what happens when we go down the path and market this and see if this is a path we ultimately want to pursue and then so what comes from that effort.

Okay. And then in terms of the FFO impact this year, the guidance is assuming that this project is a $0.04 drag on FFO. Is that right?

So just to walk through the pieces for the sake of clarity, if you look at Page 23 Attachment 14, we lay out sort of the bottom right of the core FFO adjustments related to Columbus Circle or 15 West 61st Street. So as Matt noted, we only have modest amount of sale activity in our forecast for this year $70 million to $80 million that would generate an anticipated amount of gains of $8 million that would be included within NAREIT FFO, but then excluded when going to core FFO. So you see that negative $8 million shown on Attachment 14. There are also two other line items that are worth talking about here. The first is the expense costs related to condominium homes, which consist mainly of marketing and operating costs tied to selling condominium inventory. We will incur these costs, and they will impact EPS and NAREIT FFO, but we will add them back and exclude them from core FFO, which amounts to $6 million. Additionally, there is the estimated carrying cost of unsold inventory. Once we complete this project, we will have approximately $400 million of condominium inventory on our balance sheet at a cost. We will continue to absorb these costs, so they will be excluded from core FFO and added back. So essentially what we're trying to do with these adjustments is recognize that this is a different business line. It's not a traditional REIT activity and trying to present our core FFO in a manner that shows our operating performance year-over-year on kind of traditional REIT multifamily rental activities and looking at this Columbus Circle activity as a discrete business and carving those costs and gains out and treating them differently from a core FFO point of view.

Right. Okay. That's helpful. But still all the net result here is, it looks like a $0.04 negative impact to your reported FFO in 2019. Is that right?

No, it's just the opposite, adding it back. So look at those items as being sort of a NAREIT FFO to core FFO reconciliation with NAREIT FFO at the top. So adding back to NAREIT FFO $6 million of expense marketing costs, reducing $8 million of gains and then adding $8 million in imputed carrying cost for unsold inventory for net addition to core FFO of $6 million or $0.04. So the net positive impact going from NAREIT FFO to core FFO when taking into account those three line items is $0.04.

And Nick, our guidance difference was $0.05 between core FFO and NAREIT FFO. So basically this is $0.04 of that $0.05.

Okay. All right, we get a lag of 0.5. Thank you.

Hey good morning guys. Wanted to maybe spend just a little bit more time on your development pipeline, recognize why development might be coming down late cycle and clearly see it as prudent. But there's still likely some markets that need new supply of apartments. So I'm curious when you're thinking about your development pipeline, what land you have under option, where you're already developing? How do you sort of think about that relative to your existing portfolio?

It's Matt responding to your question. The approach is somewhat bottom-up, as Tim mentioned. It begins with identifying the best risk-adjusted opportunities and assessing where the economics of development remain favorable. Right now, that typically means focusing on wood frame products. All of our planned starts for this year are high-density wood frame projects, and nearly all of last year's starts, except for one, align with that. Generally, these projects are located in suburban areas where demand is strong and supply constraints exist compared to urban submarkets. So it takes a little longer to get through the process and that tends to meet or out supply in a more measured way which is one reason those submarkets aren't necessarily seeing the same pressure on rents, although urban markets actually have seen rents rebound here recently a little bit. But generally speaking, rents have held up a little better over the last couple of years. So, we are seeing some of the suburban Northeast deals still pencil out. This past quarter we added a development right in Long Island. It's probably a 2 year to 3 year entitlement process. Those types of deals tend to be pretty resistant to the cycles. So still be favorable. And then we're seeing opportunities in our own portfolio, locations where we already are and again as I mentioned, we have six densification development rights now which is $1 billion in locations that we love, where we have the opportunity to do more over time. It's going to take a while to get at those. They're complicated from an entitlement point of view, but we have one in Redmond. We have one in Mountain View. We have one in Suburban Boston. So those are great things, where the economics are likely to work through most market cycles. And then we are also trying to find opportunities in the expansion markets and we started a deal in Florida last year in Doral. We have our first ground-up development right in the Denver market, which is in RiNo, which is kind of a very hot neighborhood outside of downtown there, but it's a wood-frame product that we hope to start this year. So those are kind of the places where it's still making it through the screen.

Yes, Rich. I think there are three areas where we haven't been very active due to the current market dynamics: the Bay Area, where land and construction costs generally make new development unfeasible for us; Seattle, where we have not participated in the land markets over the past three years; and most urban submarkets, where the costs typically do not work out later in the cycles. We aim to balance where we want to be in terms of portfolio allocation and use development to help us achieve that, but we also recognize that there are times in the cycle when certain opportunities do not make sense financially, which means that capital would be better allocated elsewhere.

Got it. And what I'm ultimately getting at, sort of, sounds like your development pipeline is nice to have and not need to have. I was struck by your growth being driven by stabilized portfolio with new contribution coming from new investment activity. So it sounds like, the development pipeline is a nice to have. It's in areas that you think really still need supply. But even if the development went away as we start to think about 2019 and beyond, your stabilized portfolio can grow consistent with peers. Is that sort of fair in the way you're thinking about it?

Our outlook for this year is likely in the middle range of our peers. We're in 20% to 25% of the U.S. markets where many of our peers operate, so it seems reasonable to expect similar performance on a same-store basis. Regarding development, we believe it's important, though we will be cautious about how we allocate capital at this point in the cycle, focusing on a smaller amount. We view this year as somewhat unusual due to factors affecting delivery and the capital raised in 2018.

Great. Thanks, guys. I appreciate it.

Yes. Thank you. Good morning. You guys pointed out that your cost of capital in the past year is up about 110 basis points versus 2017 and I was just curious what are you factoring into guidance for the $1 billion you've assumed in your capital plan in 2019?

Austin, this is Kevin. We've never commented on that before. We actually typically don't comment on capital markets. So by even showing the 50-50 blend of asset sales and unsecured debt, we're doing something we've never done in our 25-year history. Essentially to bite into our budget process, but we’re essentially assuming that we're going to achieve kind of market rate execution on transaction activity and unsecured debt issuance over the course of 2019.

Kevin on the debt, we typically would just look at the forward curve and…

Make some adjustments.

Thanks. Appreciate that. And then just curious what the attractiveness today is for redevelopment as you have seen rental rate growth improve albeit gradually, and given the decrease in development starts moving forward.

Yes. Thanks, Austin. Sean you want to take that?

Sure. Happy to do so. Yes, Austin. I mean redevelopment has been pretty active for us. We invested almost $200 million in the past year across about 7,300 homes. A chunk of that related to the rebuild at Avalon headquarters about $70 million, but still around 7,000 units that have been redeveloped last year. And in terms of planning forward going forward, I'd probably think about we're going to spend somewhere in the range of $150 million to $200 million a year over the next couple of years on redevelopment activity. And then beyond that it will breaks out a little bit, but the returns have been compelling and the opportunity set has been something that we're comfortable with. So that's kind of where we are.

And how do you think about the returns on those and is the majority moving forward more kitchen and bath-type opportunities versus I guess the redevelopment Edgewater a little bit of a different animal?

Yes. Edgewater is certainly that was sort of a one-time thing. The rest of it is a combination of either full-scale redevelopments where we're doing not only the apartment homes, we're doing the common areas. It includes some projects that are just purely large CapEx projects, that really just not generating any kind of incremental return. It's just CapEx. And then there are other projects which we call apartment only, which are just touching the apartment homes. And so when you look at the redevelopment activity and the apartment-only activity, typically we're seeing returns that are sort of in the 10% on capital type range based on the enhancements that are being invested in the building. And again, as I said, the CapEx side of it is probably something you just underwrite basically zero, but in terms of apartment-only activities, they generate nice returns.

Great. Thanks for the time.

Yes.

Hey, good morning. Presumably looking out to 2020 as more of the condos in Columbus Circle are sold the gains on sale number will increase. And I think that the positive add-back between NAREIT FFO and core FFO should go negative, I'm assuming. Will that the apartment NOI that you would have been getting from the project is replaced with these gains, which would be backed out of core FFO. I guess, the difference is now you have more cash coming in that can be reinvested. Do you think the reinvestment of that cash will occur rapidly enough to kind of offset the dilution to core FFO that would be happening in 2020 to see if you sold the condos and kind of how that is cash if that makes sense?

Yes. Drew, this is Kevin. I'll make a couple of comments and I'll let Tim maybe want to add on top of that. So essentially to the extent we generate gains on selling condominiums that will boost NAREIT FFO and of course as it would we would be true for other real estate gains. We will exclude those gains when computing core FFO. From an underlying cash point of view, certainly all else equal, we would prefer to sell through the condos quickly and receive the capital back so that we can reinvest it, and generate a return on that. And then that return, of course, will flow through naturally as any source of capital would in our earnings. In the meantime, while we have our inventory outstanding in terms of capital, we created these condominiums. We're marketing them. We're bearing cost for having created those condominiums, but we've not yet sold them. Potentially that creates an inventory cost if you will and we are adjusting for that as you can see on Attachment 14, where we have $8 million imputed carrying costs on the capital associated with the unsold inventory condominiums that were calculated at corporate unsecured borrowing rate, which is about 3.7% today.

Yeah. I mean, obviously, as we sell the amount of unsold inventory goes down so carrying cost adjustment would go down with it. Secondly, Drew, I would just think of this as just more disposition capital. And so just means we're going to sell less assets than we otherwise would. So in terms of how quickly you get to deploy and yeah we get deployed presumably as quickly as any other asset that we sell. So I don't know that you need to really think differently in terms of how you model it's just a source of capital and cash as Kevin mentioned.

That's very helpful detail. The other question I have here is, if you look on at least my numbers, total NOI for 2018 not same-store was up just over 6%. Corporate overhead, property management, investment management expenses all increased and this is on adjusted for severance and things like that but in the double digits. And then based on guidance for 2019 it looks like that rate moderates quite a bit.

Well, in terms of 2018 there are a number of factors that drove overhead costs up. You did have as you may recall rent occupancy costs that were included in PMOH, which is part of the overhead that's referenced in our Attachment 14 for our outlook. G&A increased for a number of reasons. Compensation was part of it but there were some settlements in estate sales used tax accruals and then there were some severance costs. So — and at the same time there's also been historically some investment in some strategic initiatives, which will certainly and are bearing fruit on the operating side and Sean could speak to. So there's a number of drivers of growth that we've had over the past couple of years that are starting to abate, which is why you're seeing that relative decline in year-over-year growth in overhead, which I think is about 2% to 7% based on the math in Attachment 14.

Okay. That’s all very helpful. That’s all for me. Thank you.

Thank you. So you have development starts picking up this year, but there's still a noticeable gap between the construction costs growth rate and rental growth. So I'm wondering if you believe that gap will narrow as you go through the development pipeline. And if not, how will that impact yield?

Sure, John, this is Matt. It's a good question, and it's definitely something we've been monitoring. It seems that the growth of construction costs in certain markets has slowed down a bit. This is related to our business mix. As Tim previously mentioned, we have only secured a few new development rights in Northern California and Seattle over the past three to four years, and we have significant projects starting in those two areas. In fact, we haven't had any new projects in Northern California last year or this year. This situation is primarily due to the market reality in those areas, which have experienced the highest growth in hard costs compared to their rent growth. As a result, this impacts the regional mix. I also noted that many northeastern markets are much more stable, and the difference between construction cost growth and rent growth is not as substantial there, but it does exert downward pressure on margins, which is one reason our volume has decreased.

On your dispositions that you've executed last year, it was the highest amount that you’ve sold, the lowest cap rates, but also you have the lower IRR compared to what you achieved historically. Is there anything unusual in what you sold last year that brought down that figure?

Yes, this is Matt again. It really is kind of a mix from one year to another. So I wouldn't kind of infer anything from kind of the basket that happens to be one year versus another. The one thing that we do tend to see as it gets later in the cycle, there's probably more pressure on us to sell assets with a little bit lower tax gains because we just had kind of a long cycle of realizing gains and that essentially puts pressure on our dividend coverage. So again, there's plenty of other assets we could sell that would have higher returns, but they might generate enough tax gains that it would require a special dividend. So that's definitely more of a consideration later in the cycle. And then also to some extent we start looking for assets which may be are little bit more difficult in terms of the execution and calling some of the ones that maybe weren't our greatest successes, where it's easier to do that in a very strong sales market like what we've seen recently.

Okay. And then a final question. I guess Tim you mentioned in your prepared remarks at the beginning that you're moving away from quarterly guidance. And I'm wondering if it ended up being too distracting to manage that quarterly number? And generally speaking, what do you think about quarterly reporting and whether or not that's completely necessary?

Well, I don't have a view necessarily on quarterly report. We continue to issue quarterly reports. It's just — it really comes down to how we kind of manage the business. When we talk amongst ourselves and to our board, we're not talking about managing the business to what's happening in the quarter and try to minimize variances relative to our budget or explain variances relative to our budget on a quarter-over-quarter basis. When it comes to revenue, we're looking at that, daily and weekly. I mean — but when it comes to sort of the overall earnings, there's just a lot of noise from quarter-to-quarter. And just — we don't think it really serves a great purpose ultimately for our investors to be trying to — always trying to sync up and explain and reconcile, what we think is often times is noise. So that's — as much anything that’s driving it.

Thank you very much.