Avalonbay Communities Inc (AVB) — Q1 2019 Earnings Call Transcript

Thank you, Jessica, and welcome to AvalonBay Communities First Quarter 2019 Earnings Conference Call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results 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 Naughton, Chairman and CEO of AvalonBay Communities, for his remarks. Tim?

Yes. Thanks, Jason, and welcome to our Q1 call. With me today are Kevin O'Shea, Sean Breslin, and Matt Birenbaum. Sean, Matt, and I will provide some brief comments on the slides that we posted last night, and then we'll all be available afterward for Q&A. Our comments will focus on providing a summary of Q1 results, an overview of development activity, and lastly, progress in our expansion markets of Denver and Southeast Florida. So now starting on Slide 4. It was a solid quarter. Highlights include core FFO growth of 5.5%, driven by healthy internal growth, with same-store revenue and same-store NOI growth coming in at 3.4% and 4.9%, respectively. Interestingly, every region posted 3%-plus same-store revenue growth for the first time in over 6 years. As you recall from last quarter's earnings call, we expect little contribution to earnings in 2019 from external investment activity, primarily due to significantly lower apartment deliveries from our development portfolio this year; and secondly, the relatively higher cost of capital raised in late 2018, most of that being through dispositions. In Q1, we completed 2 communities in the very attractive suburban towns of Sudbury and Hingham in the Boston market, totaling $150 million, at an average initial yield of 6.3%. And then lastly, we raised $220 million of external capital in the quarter, 2/3 of that being raised as equity from CEP and the balance from a D.C. area disposition. The initial cost in this capital was 4.5%, and our leverage remains at a cyclical low of 4.6x debt-to-EBITDA. So with that, I'm going to turn it over now to Sean, who will discuss portfolio operations, including performance on our lease-ups. Sean?

All right. Thanks, Tim. Turning to Slide 5. Apartment fundamentals continue to support healthy rent change in the portfolio. This slide represents same-store rent change on a trailing 4-quarter average, which reached a high-2% level during Q1. As we've highlighted in the recent past, we believe the current pace of job and wage growth, combined with new supply of roughly 2% of stock, supports rent growth in the 2.5% to 3% range for our portfolio. Turning to Slide 6 to address Q1 specifically. Same-store rent change was 2.4% or 80 basis points above what we achieved during Q1 of 2018. This improved performance was primarily driven by our East Coast portfolio, which represents 52% of the overall same-store pool and produced roughly 150 basis points of improvement compared to last year. On the West Coast, we also achieved better rent change in the tech-driven Seattle and Northern California regions. Job growth has been quite healthy in both markets. In fact, it's actually running ahead of last year's pace through March. Southern California is the only region where rent change fell short of Q1 2018. While job growth in the region was roughly 1.25% for the full year 2018, it fell to about half that rate in the last 6 months and is off to a weak start in 2019. Turning now to Slide 7 and the development portfolio. Our performance has been solid. For the 5 communities in lease-up during Q1, rents are trending about 3% ahead of pro forma. The total capital cost is projected to be within 1% of budget, and the weighted average stabilized yield is expected to be roughly 10 basis points ahead of plan at a very healthy 6.8%. And with that, I'll turn it over to Matt to talk further about the development underway and our expansion markets. Matt?

All right. Great. Thanks, Sean. Turning to Slide 8. We expect the $2.4 billion in development currently underway to generate $145 million in annual NOI once those communities are completed and stabilized. As we talked about last quarter, this year is a bit unusual for us in that very little of that NOI has begun to flow through to earnings yet, given the timing of the individual lease-ups and deliveries, but it should be a good source of growth over the next few years as those projects move to completion. While there is still some capital to fund to complete construction, the tick-up in NOI should easily exceed the cost of the capital remaining to be sourced. Slide 9 shows the projected value creation from this development underway. If we apply a 4.5% cap rate to the $145 million in stabilized NOI, the value of these assets on completion would be $3.2 billion, which exceeds their projected cost by $800 million or roughly $5.75 per share. I also thought I would give a brief update on our progress in our new expansion markets of Denver and Southeast Florida. About 1.5 years ago, we announced the strategic expansion of our market footprint and indicated our intention to begin to rotate capital out of some of our legacy markets in the Northeast to these higher-growth regions of the country. As shown on Slide 10, we had begun this effort in Southeast Florida, acquiring 2 brand-new stabilized communities and breaking ground on a development community in partnership with a local sponsor. These 3 properties represent a $350 million investment in over 1,000 apartments and are a good start on assembling a diversified portfolio, spanning 3 different submarkets and 3 different product types, from garden to mid-rise to high-rise. Turning to Slide 11. We have been even more active in Denver, where we currently own 4 completed communities and one development site, with 2 additional development rights in the pipeline. This activity puts us on track to a portfolio of over $600 million and 2,000 units, again, diversified across a variety of different submarkets, with a generally more suburban footprint so far. We have indicated a long-term goal of a 5% allocation to each expansion market, so we expect to continue to grow our presence meaningfully via acquisitions, development, and joint venture hybrid structures with local developers over the next few years. And with that, I'll turn it back to Tim for some concluding remarks.

Well, yes. Thanks, Matt. So overall, Q1 was a very good quarter, with results a bit better than expected. Same-store performance continues to improve, with revenue growth generally in the 3% to 4% range across our footprint. The development portfolio is performing well and in line with our expectations, delivering or projected to deliver meaningful NAV growth over the next couple of years, as Matt just mentioned. And lastly, we're making solid progress in our expansion markets of Denver and Southeast Florida, having redeployed or committed almost $1 billion of capital through acquisitions and development to these markets over the last several quarters.

You discussed the strength of acceleration in the East Coast market, but within your portfolio, what are you seeing in terms of trends of urban versus suburban or A versus B?

Yes, Nick, it's Sean. Happy to chat about that a little bit, if you like. I mean, when you look at our portfolio specifically, one thing to keep in mind is the mix of As and Bs is not necessarily representative of the market. But in our portfolio, for the first time in about 15 quarters, in Q1, A did outperform B assets by about 50 basis points, but the majority of that is really supported by some acceleration in some of the higher price point assets on the East Coast, which had been a little bit softer over the past few years. So we certainly have seen that change in the outcome in terms of the A/B mix. If you look at it in terms of broader sort of market coverage, and you look at Yardi or Axiometrics, they're showing it pretty much in balance at this point between A and B across our footprint, also supported by improvement in the A side of the product on the East Coast. In terms of urban/suburban, those spreads are still relatively wide, suburbans outperforming urban by about 50 to 60 basis points in our portfolio. And if you look across sort of the market footprint, again, looking at Yardi or Axiometrics, that spread is closer to about 100 basis points. So still seeing outperformance, but varies by portfolio and market.

And then just curious if you can give an update on Columbus Circle, both in terms of where you are in the marketing process on the residential units and also the retail leasing.

Sure, Nick. This is Matt. I'll take that one. On the retail side, just to remind folks, we have 67,000 square feet of retail there in total across 4 floors. About 43,000 square feet of that is leased, including all of the 2 subfloors, a little bit of the ground floor and a portion of the second floor. Since the last call, activity actually has picked up, and we are in what I'd say is advanced discussions for 17,000 of the remaining 24,000 square feet of space, including the remainder of the second floor and a good portion of the ground floor as well. So hopefully, those deals will proceed to lease, and we'll have more to report on that in the quarters to come, but we are seeing strong activity there. On the residential side, we did open our sales office there earlier this month, starting out really just with presales to broker contacts that were on the list. So we're not kind of open to the general public yet for walk-ins off the street. We're probably still a couple of weeks away from that. So we're really just now starting to get a read on the early sales activity side. I'm not going to comment on that yet. It's too early, but we do expect and we will provide a more detailed update on the residential sales activity on our second quarter call.

Hopefully, you can hear me?

Yes.

Great. Sorry about that interruption. Tim, could we discuss the overall economic picture? I think you have kept your estimates in line, and based on your opening comments, it was a solid quarter with strong internal growth. Every region saw a 3% revenue increase for the first time in six years. While none of us are economists and can't precisely predict the future, there is ongoing speculation about any potential weaknesses in the economy or when a recession may occur. From your perspective, things appear to be quite robust.

Yes, Jeff. I would say everything has unfolded mostly as we expected when we provided our guidance last quarter. Our job growth outlook is down from last year at 1.2% for our markets, but we anticipate stronger wage growth, projecting it at 3.5% along with supply growth in the low-2% range. Not much has changed from that perspective. We did mention that we expect economic growth to moderate throughout the year, possibly reflecting a trend similar to what we experienced in 2018. Our views remain unchanged, though there is a slight slowdown in global growth due to the diminishing effects of tax reform. As Sean mentioned regarding job growth, the data over the past 6 and 3 months aligns with our expectations, although there are regional variances. Northern California and the New York area are stronger than expected, while Southern California is weaker. Another observation that differs from our expectations three months ago is the slowdown in homes for sale, both in volume and pricing. Additionally, homeownership rates have declined for the first time in the last couple of years, which is a single data point. When combined with a slight drop in consumer confidence, these factors are what we are currently monitoring as leading indicators, which have been reflected in our portfolio performance to date.

Okay. And then my one follow-up, just on the Northeast region, I guess, in particular, maybe New York City or Manhattan, I believe you somewhat commented that the luxury end was maybe better than expected in 1Q. I guess what are you seeing in the Northeast, the East Coast that was better than expected year-to-date?

Yes, I'm happy to provide some insights on that. Overall, across the East Coast, performance is generally in line with our expectations, with a few areas performing slightly better. In specific markets, there are notable differences. For instance, in the Metro New York and New Jersey region, Long Island is showing strong growth, nearly 5% year-over-year, while other nearby markets like New York City's suburbs and Northern New Jersey are seeing increases between 1% to 2%. New York City is doing somewhat better than previously observed. Additionally, we are noticing a positive trend in the higher-end price points in certain submarkets, which has been beneficial. The differences in pricing power largely hinge on the availability of supply, especially impacting higher-end properties. For example, Washington D.C. is not performing as well compared to Northern Virginia and suburban Maryland, which are currently much stronger, mainly due to the volume of supply being introduced in the district.

I know we discussed this earlier today, but for everyone's benefit on the call, let's go over the bad debt accounting change and its effect on same-store performance during the quarter. Can you clarify the factors that contributed to the better-than-expected results, including the accounting change, occupancy levels, market rents, and other revenues? This will help ensure we all have a shared understanding of the key elements.

Yes, this is Sean. Why don't I go through it at a fairly high level. To the extent there's a lot of detailed questions about drivers of other rental revenue and things like that, that may be more appropriate to take offline. But in terms of the broad view of the TRR growth or rental revenue growth in Q1, the impact from the change in bad debt is 30 basis points. Regionally, the range is sort of between 0 and call it, 60, 70 basis points, depending on the specific region. And that is a reflection of underlying changes year-over-year in bad debt, which are really driven by a couple of factors. One is some investments we've made in data analytics to improve our bad debt profile in the residential side, both in terms of people coming to our communities as well as our collection processes. And the second piece of that is in certain regions, in particular, we had some write-offs as it relates to retail tenants in Q1 of 2018 that we don't have in 2019, and that really accounts for some of those regional differences that occur. But the overall broad impact, again, is the 30 basis points. We had mentioned that, when we were at the Citi conference, that we were trending about 20 basis points ahead of what we had expected in terms of revenue growth through January and February. So if you look at the full Q1 number in terms of our outperformance, basically, about half of it is in just raw performance mainly driven by occupancy, and the other half essentially is the bad debt component is the way I look at it in terms of from a revenue perspective. On the OpEx side of things, we reported Q1 OpEx growth of 20 basis points. That actually would have been down 90 basis points year-over-year in Q1 if bad debt had remained expensed. So that's the full impact on Q1. Hopefully, that's clear.

Okay. Yes, I appreciate the detail there, and we'll probably have a few follow-ups. But I'm going to take a stab at the next question here, and feel free not to answer because I know Avalon's policy on guidance and everything. But is it fair to say that on an all-else-equal basis, given everything that you just described in terms of the building blocks, that a same-store range should go up because of what you described? Or is it not fair to say that, and we can interpret that as we wish?

Hey, Rich, this is Kevin. I guess at the outset, just to say what we said before, we're not intending to update guidance until the second quarter. So we don't really have any additional comment on that. I think one question that's embedded in what you're asking is if we had known back in the beginning of the year, when we gave our initial guidance, that bad debt would need to be moved geographically up into revenue, would we have changed our guidance, the answer is no because we did not forecast at that point in time a material improvement in bad debt recoveries. So those are probably the 2 points that I'd emphasize for you to consider.

You guys have sustained a positive spread on like-term lease rates now for the past 3 quarters, I believe. So does the same-store revenue guidance assume that those lease rate spreads converge by year-end or that you continue to sustain some level of a positive spread each quarter throughout the year?

Yes. Hey, Austin, this is Sean. I think what I said in my prepared remarks in last quarter is that, on average, throughout the year, we expected rent change, like-term rent change, to be 20 basis points greater in 2019 as compared to 2018. We didn't specifically go under the quarterly numbers, but that's what we expected for the full year.

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

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

Great. Appreciate that. And then just last one for me. As far as leverage, you kind of have held steady within that 4.6x range now for the last couple of quarters. And just curious if we should expect that to continue to tick up. Or has the opportunity to issue a little bit of equity under the ATM given your ability to kind of sustain lower leverage, and that's really your intention now moving forward?

Hey, Austin, this is Kevin. I think as I indicated in the last quarter, our net debt-to-EBITDA fell at around 4.6 turns, which is where it is today and where it was last quarter. And that was primarily driven by the closing of our New York City joint venture transaction, among the other dispositions that we completed last year, as Tim alluded to in his opening remarks. So that was sort of an outcome of a portfolio set of activities that we undertook. As we've mentioned in the past, over a full cycle, we'd like to have our leverage run somewhere between 5 and 6 turns, and we're comfortable being a little bit above or a little bit below that. At this point in the cycle, our preference is to be more around 5 turns. We happen to be a little bit below that today. And I guess what I'd say is we're relatively comfortable with where we are now. It may be that it probably ticks up a little bit, but I don't think there's any great haste in doing so. And while we are where we are, we feel like we have incremental financial flexibility to take advantage of opportunities that might be out there.

Kevin, maybe just remind Austin sort of what the capital plan was for this year just in terms of sort of mix.

Sure. Yes. Just as a reference, when we began the year, our capital plan for 2019 contemplated sourcing $1 billion of external capital, with roughly half of that to come in the form of newly issued debt, and the other half in the form of equity, which we planned would be net disposition activity. And in terms of where we are today, as you know from reading the release, we sourced $150 million in equity issuance. And then in terms of net disposition activity, we sourced an additional $80 million. We've got probably a couple hundred million or so of assets through the market today. So I'd say the capital plan, while it can certainly change based on market conditions and changes in capital uses in terms of where we stand today, I think we're kind of roughly intact in terms of where we are on the capital plan.

I have a question about the same-store expense growth, which appeared to be unusually low this quarter. I noticed there was a 3% year-over-year decrease in payroll and office costs, along with discussions about lower bonuses and reduced overheads. I'm curious to hear more about what contributed to this and how we should interpret this in relation to the same-store expense guidance for the year, which was set at 3%, especially since you only achieved just over flat growth in the first quarter.

Yes, Nick. This is Sean. I'm happy to address that. Regarding Q1, as you mentioned, we had some favorable factors as well as a strong comparison to last year. This positively impacted marketing and utility expenses. Additionally, property taxes were relatively low at around 1% in the first quarter. As the year progresses, we expect to see growth in various categories. For instance, in the upcoming quarters, payroll merit increases will take effect, and property tax growth will normalize. In Q1, we benefited from an appeal and a rate reset in Seattle, which are one-time events that won’t happen again in Q2. We will also face a more challenging comparison on utilities in Q2. Overall, we had advantages in several areas in Q1, but we anticipate a slight increase in Q2, which will help establish a trend. Regarding payroll and other factors over the next couple of years, it's worth noting that property tax assessments have significantly increased this cycle, and since we have limited exposure under 421-a, I expect property tax growth to be less in the next few years compared to the past 2 or 3 years. In terms of managing operational expense growth, payroll, which represents approximately 24% of our total expenses, is an area where we are investing in initiatives to keep growth in check. For example, we reduced on-site office staff by about 3.5% year-over-year in Q1 through potting and other consolidation efforts. Additionally, we launched an AI platform in Q1 to streamline interactions between an automated agent and potential clients. While it's still in the early stages, we're seeing improved conversion rates from this platform, which operates 24/7 without requiring staff involvement. We are also focusing on other technology investments aimed at enhancing self-service for our customers and making our staff more efficient. This strategy involves leveraging automation and centralization, which allows us to reconsider our sales and service model at our communities. This approach is beneficial not only for payroll management this year but also for the coming years.

Okay. That's very helpful. In terms of rent control taking more of a focus in New York, there could be some changes that could happen in June. Can you just break out for when we look at your Metro New York portfolio, how much is subject to, let's say, rent stabilization in New York City, if any of the suburban assets, any of the units there are also subject? And I guess just separately, within New York City, how much of the 80-20 buildings you still own where you're getting the 421-a tax abatement?

Sure, I'm happy to discuss that. As you know, rent regulation in New York is complex due to various building classifications and their specific regulations. There are buildings with very low rents that are considered rent-stabilized at different levels. Regarding our market rate portfolio subject to the 421-a program that includes stabilized units, our same-store portfolio consists of approximately 3,800 apartment homes. About two-thirds of these are classified as market-stabilized, and only around 20% of that segment is capped at the legal rent. The remaining tenants pay what is referred to as preferential rent, which puts them in a loss-to-lease situation. This describes our same-store assets. There is considerable discussion happening in New York regarding the potential impacts. According to insights from a strong organization like REBNY, the focus seems to be primarily on the lower-priced regulated assets, where much effort is being devoted to determining policy changes, rather than on market rate properties. While there is some conversation about market rate properties, the emphasis appears to be on lower price points, especially concerning issues like displacement. We will have more clarity as we approach June, but discussions and debates are already underway as we get into May.

A quick question on L.A., drilling in a little bit. Obviously, supply in downtown L.A. has been elevated and concessions are pretty aggressive. Given that you don't have many properties or any properties really in downtown L.A., I thought I'd ask kind of where within L.A. you're maybe seeing some of the softness that occurred in the first quarter. And if you could also give an update on how things are kind of progressing in April, that would be very helpful.

Sure. Drew, this is Sean. Happy to chat about that. You are correct in that we have one same-store asset in downtown L.A. in Little Tokyo. Fortunately, it is at a price point where it's actually performing quite well right now. But in terms of the rest of the assets, I'd say the slowness that we're seeing in L.A. is relatively widespread. It's a little bit more in the San Fernando Valley specifically. But when you look at the individual assets across the San Fernando Valley and L.A. and say there are certain pockets where it's weaker, maybe at the margin a little bit. But I'd say we expected some slowdown in Southern California as reflected in the chart that we presented during the Q1 call, where we show sort of the distribution of anticipated revenue growth. Southern California was the only region where we expected it to be down. Job growth had already started to slow. And so we forecasted that for the most part. I would say that certain pockets in San Fernando Valley, as an example, might be a little bit weaker than what we anticipated. I think the issue that will play out in Southern California this year, a little bit that people may not be as clear about, is there are some anti-rent gouging caps in place throughout parts of Los Angeles right now as a result of the fires from last year. Those caps are in place through November of 2019. And while it's a 10% cap and you don't think of it as being material, what it does impact is your ability to generate and execute short-term leases at premiums through the summer season. And so some acceleration that you might typically see in L.A. through the summer as you generate short-term leases for a variety of different types of customers, that incremental revenue is not anticipated to come through this year at the same extent that it did last year because of the nature of these caps where you can't increase the rent by more than 10% of the amount the prior customer was paying for that specific unit. So some of those nuances are at play as well, but in terms of the environment, I would say across L.A., it's been a little bit weaker than we would have anticipated, but not too far off.

Okay. That's helpful. And then just one quick follow-up on East Bay. Obviously, it was one of the slower revenue growth markets during the first quarter. I guess it would be helpful if you could talk about kind of within the context of Northern California doing better than expectations, would you say that Oakland-East Bay is sort of performing in line with what you expected going into the year given the supply, or has it been a little bit weaker than you expected?

Yes. No, good question. We certainly expected San Jose and San Francisco to perform better than the East Bay, a combination of several different factors, including just the nature of the job growth that we expected across the footprint there as well as certain pockets of supply. I'd say that our assets in Walnut Creek are performing quite well, but assets in Pleasanton, Dublin, not quite as much. So it's one of those places where, as you probably know, the East Bay has sort of lagged performance in San Jose and San Francisco. We've seen a rebound come through in both of those market areas, and the East Bay tends to lag and it is, this year, lagging as well. So not a surprise.

On the uncollectible lease revenue or bad debt, has this figure been trending down over the last few years? And how does this really compare to historic levels? And is it something that you're going to be breaking out in future years? Or was it just this year because of the accounting change?

Yes, John. I'm glad to discuss that. Regarding the year-over-year change, what we're observing now, specifically in Q1, is a slightly larger than usual decline in bad debt, contributing to the 30 basis point increase in our revenue numbers. This improvement has been mainly driven by two factors. First, we've made significant investments in data analytics over the past couple of years, which have yielded positive results in how we screen residents entering our communities and in our collection efforts at the customer care center. Our approach to managing these collections has seen substantial improvements, especially in the cohorts of move-ins over the last year. We expect to see this trend continue over the next few quarters, particularly in the upcoming period, which I anticipate will be the most impactful. Additionally, in Q1, we had a few retail write-offs in Q1 of 2018 that we didn't experience in Q1 of 2019, which also contributed positively. The bad debt trend definitely correlates with the economy. It's significantly decreased since the Great Recession, and the recent improvements are largely due to our enhanced data analytics and better customer screening and collection efforts.

And then are you going to provide this figure going forward? Or is it just for...

Yes. Sorry, I didn't address that. It's really just for this year. We don't anticipate doing that going forward. It's just sort of a transition year for us.

Okay. It looks like you didn't have any development starts this quarter. I was wondering if you're still on track for the $950 million of starts in your guidance for the year?

I think there were specific projects identified, and they're all progressing. We certainly plan to start at least a couple of deals this quarter. The exact timing on some of these can vary a bit. So we may achieve it. However, some deals might be delayed by a quarter or two, which could lead to missing our target, but it's too early to determine.

And John, we'll certainly update, as part of our midyear guidance update, as well, what we expect for that. As Matt said, it's kind of premature to update you on that at this point.

A couple of quick questions. One is Oakwood Arlington, I was sort of surprised to see you sell that given all the hype in Arlington. Can you pinpoint exactly where that's located and then your thought process and pricing?

Sure. This is Matt. That was a very unusual asset in our portfolio. It's a 30-year-old property located in Rosslyn, Arlington, Northern Virginia. We acquired it through the Archstone acquisition, and it was master leased to Oakwood, who operated it as furnished housing. That master lease was nearing the end of its term. When we considered taking it back to market operations, the required capital and our expectations for the NOI suggested it would be about a 4 cap, which is lower than what it might have been if run as a conventionally operated community. Oakwood was actually the buyer, fitting their strategy of purchasing and operating assets. This was just a unique combination of events. We weren't specifically looking to sell, but during the lease extension negotiations, it became clear they were interested in owning real estate, and at that price, we were open to selling.

Great. And then the second question, regarding the hard costs of Washington, D.C. in particular, but elsewhere. What are you seeing? What did you see in the last year? And what's your projection for the next 12, 24 months in terms of hard cost increases?

Yes, it's Matt again. I can attempt to answer that, and others can add their thoughts. The D.C. market has experienced hard cost inflation that has surpassed rent growth, which has been quite modest. Compared to most of our other markets, the increase has been somewhat subdued, around 3% to 5%. We are about to start a wood frame project in suburban Baltimore this quarter, so we have some current data on that. In other markets, we are still observing mid-single digit increases, while the West Coast is likely experiencing high single digit inflation in hard costs. The price of commodities like lumber has decreased, which should help, but labor remains the primary concern. Recently, we have noticed a slight improvement in labor availability on the West Coast and better coverage from subcontractors in our bids. However, this hasn't yet led to a reduction in aggressive inflation. I would say it's a necessary condition but not enough on its own. So, there might be a slight decrease over the next 12 to 18 months, but that is very uncertain.

Hey, John, this is Tim. As you know, D.C., it's always been sort of a deeper subcontractor market here, and so even when we've had periods of development and supply, we tend not to have the same kind of swings in construction pricing. So we never really saw what we saw on the West Coast even when production levels got up to sort of cyclical highs here, and so I don't think we anticipate dramatic disruption of inflation in the mid-Atlantic over the next year.

I wanted to just come back to New York for a second. You've been vocal in the past about maybe allocating away from New York City to higher growth markets, but you obviously had a pretty nice rebound in this market. And there were some commentary that led me to believe that it was widespread. So I am curious, is it as widespread as maybe I perceived? Or do you think it's reflective of the fruits of your labor pruning your portfolio and really focusing on properties that make the most sense in the Greater New York City area?

Yes, Rich, this is Sean. Happy to provide a couple of comments on that. I mean, as I mentioned, I think earlier, the suburban markets are probably performing a little bit better, but New York City is starting to show some life, let's just say. I mean, it's not going gangbusters for a change in the city in Q1 with only 1.5% as compared to, say, Long Island was 5%, as an example. So I would say that the assets that we have in the same-store pool today are pretty well-positioned. So for example, the 2 high-rises on the waterfront in Long Island City are sort of leading the charge in terms of revenue growth, but our Brooklyn assets are doing fine as well, particularly Fort Greene, which is at a different price point from a lot of the newer product that's being delivered in and around that submarket. So I'd say, overall, we're seeing improvement, and depending on where you are and the amount of supply being delivered in that particular neighborhood, has a material impact on the performance of assets in the city specifically.

Hey, Rich, Tim here. I just want to add that occupancy is strong across our markets and has been throughout the entire cycle. Ultimately, it will mainly depend on supply and demand within each specific market. Interestingly, when you look at the overall housing market, including homes for sale and single-family properties, housing vacancy is at a 30-year low, which should provide additional support for pricing.

Circling back to your comments on the political scene in Albany, so if the Real Estate Board of New York's most likely scenario plays out, I guess, what percent of your New York units would feel some sort of impact?

John, this is Sean. It depends on how it plays out, but if the focus is really on the very low-rent regulated units, there's 0 risk for us in terms of impact on what we can charge for assets that we own. I think the date on that is 1974, is my recollection in terms of the date of construction, but it's also a rent threshold as well, those kind of 2 variables that go together. So the impact would be negligible, 0 in that specific case.

Sure. So your political contacts aren't concerned at all about the vacancy control threshold being strengthened?

I wouldn’t say that they’re not concerned. In the case of both California and New York, there are strong organizations with deep connections to the political landscape. They are working within those relationships to ensure that people understand the unintended consequences of certain policy issues that could be implemented. We believe that the efforts in those two states, with the organizations we have, have been successful in the past, and we hope they will be successful in the future. There are no guarantees, but that is based on what we know today.

Understood. And then, Sean, your comments about the Orange County being off to a slow start, has the sluggishness persisted in early 2Q? And can you share some leasing stats for Orange County in April?

Yes. I'd say, generally, across Southern California, as I mentioned earlier, we anticipated it to be weaker than the other markets just if you look at year-over-year revenue growth that we had laid out. That certainly has been the case across all 3 markets in Q1 and continuing into April, L.A., Orange County, and San Diego. If you look at it from the perspective of rent change, for example, in Q1, in the L.A. and San Fernando Valley, it's kind of the 2% to 3% range. It was weaker actually in Orange County and San Diego, more in the mid-1% range. We're seeing some acceleration into April, but that's more seasonal than anything else. So to give you some reference points, we're averaging more like 3% in L.A. right now on a blended basis for April, almost 3% in Orange County and about 2.5% in San Diego. So there's some seasonal component to that obviously in terms of the lift. But when you compare that to healthier environments where we would have had better job growth, we certainly would be putting up better numbers in terms of rent change across that geography.

So my first question is, Tim, just going again back to New York with the recent energy efficiency legislation they passed, I don't know if you guys have had a chance to assess the legislation versus your buildings. But if you have, can you just give us a sense for how you guys would trend towards the initial 2024 mandates?

Sure, Alex. This is Matt. I can speak to that a little bit. It is obviously hot off the press, so we're still digesting it. But a couple of things. Number one, I believe buildings with rent-regulated units may be exempt, which would be most of our buildings. But there are a few that are not, and it's perhaps still unclear exactly how wide that net might get cast. But as we looked at it, our buildings scored pretty well. Most of our buildings are actually probably performing today in a place that they would meet the 24 to 29 targets. There's a few that are a little bit over, but we continue to make investments in cogen and solar and other things. So we've actually been leaders in this area, and I think we're pretty well positioned.

Alex, just to add on to that a little bit. There's really one building that matters for us that doesn't have regulated units, which is the Riverview buildings in Long Island City, and we have cogen there. So we're pretty comfortable that one's going to clear.

Okay. That's helpful. And then for my second question, as you increase your activities in Denver and South Florida, has there been any change in your initial investment strategies, whether that involves acquisitions or developments? Additionally, have any submarkets shifted in your plans? With $1 billion invested, are you still on track, or have you found that some aspects are easier to develop, or perhaps there are more developers interested in selling their lease-up assets?

Yes, it's Matt. I would say things have gone as we expected and hoped. We aimed to enter those markets with a goal of achieving 5% in each, but we did not set a specific timeline because our approach would depend on market conditions. There's been significant merchant build activity in both markets, providing many new assets to acquire, which we've been focused on. We anticipated being more active in vertical developments earlier in Denver due to our personnel and understanding of those markets, and that's materialized. We own one development site there that will begin later this year, and we have two others progressing through due diligence. Overall, we continue to seek acquisitions, discuss joint ventures with developers, and look for development sites. It's largely been what we expected, and we will proceed as market opportunities arise.

I had 2 quick ones. So first one on the transaction markets in New York and D.C. Have you guys noticed some slowdown there? We heard some reports that investors were holding back before the rental guideline board meets in June in New York, and something similar in D.C. with regards to people, the transaction markets as being sluggish.

Yes. Hi, Hardik, it's Matt. We're not active in the New York transaction market right now at this moment. Obviously, we were last year. So I can't comment on that specifically other than the transaction market, in general, in our markets was down a little bit in the first quarter. And there has been some concern in D.C. There has been a little bit of concern about some changes to the rent control ordinance as it relates to older assets. Again, I think that's pre-'78 constructions. So there were some changes there that may have slowed that transaction market a little bit, but it's hard to tell in D.C. because you have the TOPA law, which gives the tenants the right to organize to buy the building and match third-party offers. So any transactions you see closing in D.C. are the transactions that were struck anywhere from 6 to 12 months earlier. So to the extent there's an impact on the market with assets in the market today, you wouldn't necessarily see that in the closing statistics for another couple of quarters.

I understand. Regarding your same-store revenue number, when I calculate your sequential figures, I arrive at a growth rate of about 2.7% or 2.8%. The difference between that and the 3.4% is roughly 75 basis points, with 30 of those basis points attributable to changes in bad debt and reporting, as you noted. The rest appears to stem from changes in the same-store pool. Can you provide the growth rate for the incoming units in the pool or for the units that aren't comparable in the pool? Do you have a rough range for that?

Yes, Hardik, this is Sean. For the 2019 same-store pool, the new entries from development and redevelopment activities that stabilized beforehand are slightly above normal, at almost 10% of the pool. The growth rates for those assets still in the pool are around the low 6% range, indicating they are growing faster than the base. Additionally, some changes in other rental revenue related to those communities contribute to this increase, and changes in bad debt are significant components, as you mentioned.

Well, thank you, Jessica, and thanks all for being on the call today. I know you're busy given it's the beginning of earnings season, and we look forward to seeing many of you at NAREIT in June. Have a good day.