Avalonbay Communities Inc (AVB) — Q2 2020 Earnings Call Transcript

Thank you, Matt, and welcome to AvalonBay Communities Second Quarter 2020 Earnings Conference Call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There's a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10-K and Form 10-Q filed with the SEC. As usual, this press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available on our website at www.avalonbay.com/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?

Thanks, Jason, and welcome to the Q2 call. Joining me today are Kevin O'Shea, Sean Breslin, and Matt Birenbaum. Sean, Kevin, and I will discuss the slides we posted last night, followed by a Q&A session. Our remarks will summarize the Q2 results, provide an update on operations, and offer some insights on our balance sheet developments as we face an economic recession. Before we dive into the slides, I want to share some general observations about the current environment. The changes we've seen in the last four months have been significant. We are experiencing the largest global health care crisis in a century, and the economic downturn is the most severe since the Great Depression, occurring right after the longest economic expansion on record. Furthermore, social unrest has reached levels not seen since Vietnam and the civil rights movement over 50 years ago. These are truly unprecedented times. The impact of these events extends beyond economic activity; they are also influencing income and wealth distribution across various industries and demographics. Companies and workers connected to the virtual economy are faring quite well and some are thriving. In contrast, companies and workers operating in traditional sectors, like AVB, are experiencing the typical struggles and then some. Particularly hard-hit are the travel, leisure, and entertainment sectors, which are effectively in shutdown mode. These industries, along with others, will likely need restructuring in the coming years. Many companies may not survive, leading to their employees, currently on temporary furloughs, becoming permanently unemployed in the next several quarters. Unfortunately, those most affected tend to be individuals in lower-paying service jobs and minority groups. Consequently, this downturn not only carries the usual economic risks associated with past recessions but also significant health, social, and political risks that could influence the duration and trajectory of the economic recovery. While this downturn was rapid, anticipating the timing and shape of the recovery is challenging, creating a unique set of hurdles in managing our business and conveying our expectations to shareholders. Nonetheless, we will strive for transparency and clarity as we try to navigate how the current environment will affect our business in the coming months and quarters. Now, let's move on to the results for the quarter, starting on Slide 4. As anticipated, Q2 was tough. Core FFO growth declined nearly 2%, largely due to a same-store revenue drop of almost 3%, or 2.2% when excluding retail. Compared to Q1, same-store revenue fell 4.5%, or 3.9% without retail. We did not complete any developments or initiate new projects this quarter, and there have been no new starts year-to-date. On a positive note, we raised over $700 million in capital this quarter, averaging an initial cost of 2.8%, primarily from a $600 million long 10-year bond deal at around 2.5%. As Kevin will discuss further, our liquidity, balance sheet, and credit metrics are in a strong position as we face this downturn. Moving to Slide 5, I want to elaborate on the drop in same-store residential revenues this past quarter. The decline was mainly due to decreased occupancy and uncollectible lease revenue. Economic occupancy fell by 120 basis points, while bad debt was 200 basis points above the normal level. Given the depth of this downturn and eviction moratoriums in many operating markets, we expect higher-than-usual bad debt to continue. We also offered higher concessions this past quarter and saw a decrease in other income, as we waived several fees for residents, including late payment and convenience fees. The average lease rate for our same-store portfolio in Q2 increased by 1.8% compared to Q2 of 2019, reflecting rent growth from leases established in 2019 through Q1 of this year. On Slide 6, as I noted in my opening comments, this downturn presents unique risks compared to past recessions. Besides the typical household contractions and consolidations that result from job losses, the pandemic is driving other trends affecting rental demand. These include the increased flexibility of work-from-home arrangements, leading some renters to seek lower-cost markets or return temporarily to their parents’ homes. Additionally, record-low mortgage rates and the demand for more space are boosting interest in single-family homes. Many homebuilders saw strong orders and sales, especially towards the latter part of the quarter, with homeownership rates on the rise. Moreover, we're experiencing reduced demand from key renter demographics such as corporate clients and students, as most temporary corporate assignments have been canceled and educational institutions are adopting remote learning models and limiting on-campus activities for the fall. These factors are likely to impact performance until the public health crisis subsides. However, they may also contribute to a stronger recovery once employees return to the workplace. With that, I will pass it on to Sean to delve deeper into operations and portfolio performance. Sean?

All right. Thanks, Tim. Turning to Slide 7. The factors Tim highlighted on the previous slide impacted leasing volume throughout the quarter, which is down roughly 10% year-over-year. Turnover for the quarter fell about 5%. So the volume of resident notices to leave our communities exceeded leasing velocity, most materially in May when we experienced about a 25% increase in lease breaks for a variety of reasons, including corporate apartment operators shutting down operations in certain markets. As a result, move-outs exceeded move-ins for the quarter. As of yesterday, net lease volume for July is roughly on pace with the volume of notices to vacate our communities, which should help stabilize occupancy as we move into August. Moving to Slide 8. We experienced a 120 basis point decline in physical occupancy from April to June, with most of it occurring in May as a result of the lease break volume I mentioned a few moments ago. Chart 2 on Slide 8 depicts both lease and effective rent change for the quarter. As detailed in our earnings release, blended lease rent change was down 40 basis points in Q2, while effective rent change was down 3.1%. Rent change for July has improved slightly from June, but the nature of the health crisis and economic environment will dictate the ongoing demand for rental housing and our pricing power as we move through the balance of the year. Turning to Slide 9. You can see the regional distribution of both lease and effective rent change for Q2. Northern and Southern California were the most challenging regions for a variety of reasons, while the Pacific Northwest performed the best. Moving to Slide 10 to look at performance metrics by submarket type. Urban submarkets deteriorated more materially during Q2 as compared to suburban submarkets. From an occupancy standpoint, urban submarkets declined by 270 basis points from April to June, while suburban submarkets fell by only 50 basis points. And from a rent change perspective, urban submarkets trailed suburban by roughly 200 basis points. While the weakness in urban environments is pretty broad-based across our portfolio, it's most pronounced in San Francisco, Boston and parts of L.A. Unfortunately, demand in urban submarkets is suffering from a variety of factors, several of which Tim mentioned in his prepared remarks, including a desire for more affordable price points, extended work-from-home policies across corporate America, a lack of short-term and corporate demand, uncertainty regarding on-campus learning at urban universities and a general concern about population density. Shifting to Slide 11 to discuss our development portfolio. Construction delays at the beginning of the pandemic weighed on both deliveries and occupancies during the second quarter. As noted in Chart 1 on Slide 12, deliveries and occupancies for the first half of the year fell short of our expectations by roughly 450 and 650 units, respectively, which translated into an NOI shortfall of approximately $2 million. Fortunately, following some initial shutdowns at about 1/3 of our construction sites for a short period of time, all of our jobs are currently underway, albeit with a slower pace of deliveries expected across certain assets. I will now turn it over to Kevin to further address development starts, funding and the balance sheet.

Thanks, Sean. Turning to Slide 12. In response to the current environment, we have chosen not to start any new construction projects so far this year despite having initially guided in the beginning of the year to about $900 million in new construction starts for 2020. Looking ahead, we expect lower construction costs will benefit many of our future planned starts. And we are prepared to wait for this expected correction on hard costs before breaking ground so that we can lock in a lower basis on these investments. Although real-time construction cost data are difficult to come by, initial indications suggest we are beginning to see a softer labor market and a reduction in overall construction activity that makes its way into subcontractor pricing. As for development that is currently under construction, as you can see on Slide 13, we are in a remarkably strong position from a financial point of view. Development under construction is already 95% match funded with long-term capital, which not only mitigates the financial risk of development but also means that we have locked in the investment spread profit on these developments by having matched the long-term expected returns on the projects with equity and debt pricing when we were starting these projects. Finally, as shown on Slide 14, we continue to enjoy an exceptionally strong financial position today. This is particularly evident when comparing our key credit metrics today to those from the fourth quarter of 2008 when we entered the last recession. Specifically, since late 2008, our net debt-to-EBITDA ratio has improved to 4.9x from 6.5x. Our interest coverage ratio has increased to 6.9x from 4.5x. Our unencumbered NOI percentage has increased to 94% from 77%. And our credit rating has improved to A3, A- from Baa1 to BBB+. This strong balance sheet position provides us with great flexibility to pursue attractive investment opportunities that may emerge as this downturn unfolds. And with that, I will turn it back to Tim.

All right. Thanks, Kevin. Just turning to the last slide and offering a few summary comments. Q2 was a challenging quarter driven by the suddenness of the pandemic and the depth of the downturn. So far, the impact on same-store performance has been driven by lower occupancy and elevated bad debt. Contributions from NOI and new development lease-ups were less than expected due to construction delays and weaker absorption. We have curtailed new developments dramatically and have not started any new communities so far this year. Despite the strength in the for-sale market, we do expect construction costs to fall over the next few quarters. And we'll incorporate that into our capital allocation plans. And then lastly, the balance sheet is very well positioned in both an absolute sense and relative to prior downturns, which as Kevin said, just gives us plenty of financial flexibility to address challenges or opportunities as they arise. And so with that, Matt, we'll open the call for questions.

Appreciate the color and the rationale behind pausing new starts. Just curious how long do you think the delay will be until you actually start to do projects again. And then what signals are you looking at before actually making that decision to proceed?

Hey, Nick. This is Matt. Yes, we have deals that could begin, and we feel confident that hard costs should start to improve soon. The main focus is on the trend of our hard costs and the coverage of subcontractor bids. There might be one deal we could initiate that has some exceptional circumstances, which is located in an opportunity zone. We're considering starting with third-party joint venture capital, which is quite unusual for us. For projects funded solely by our balance sheet, we are closely monitoring the balance between potential decreases in hard costs and reductions in net operating incomes, as well as assessing the overall investment basis and how costs and rents compare to their long-term trends.

Yes, Nick. It's difficult to predict accurately. In the last cycle, we experienced about 4 or 5 quarters of decline. My initial comments on the current economic downturn suggest that it may be different from previous ones, which tended to drift into recession. This downturn has been quite abrupt, and previous recoveries may have been quicker. We believe the recovery could be more prolonged, resembling a K-shaped recovery, where the rebound will be uneven based on demographics and population. Considering the public health and economic factors at play, it’s challenging to predict with certainty. However, as we indicated in one of our slides, we are beginning to see construction costs start to correct. In the last cycle, these costs corrected by approximately 15% or a bit more. We will likely need to witness similar double-digit corrections before gaining more confidence that we are acquiring deals that will perform well in the next cycle.

I think you announced the $500 million share repurchase program. How do you think about actually executing on that? And where does it currently stack up in terms of the use of proceeds, maybe relative to development or any other kind of acquisitions or redevelopment, kind of other options that you have for that capital?

Yes, hey, Nick. This is Kevin. I'll respond here, and Tim may want to add a few comments. You're correct that we announced a $500 million share repurchase program in the earnings release. The reason behind this is that we believe our stock is currently trading at an attractive value, both on its own and compared to our other investments, including development. Given our strong balance sheet and liquidity, we plan to move forward with this program. As mentioned in our earnings release, we are likely to finance it over the long term through asset sales and possibly some additional debt, but we do plan to proceed. Initially, we will likely start on a measured basis until we have better clarity on those funding sources. At this point, this seems to be our most appealing investment available.

Yes, I agree with you, Kevin. There are two key factors at play here. It's the most appealing investment opportunity, and there is a notable difference between the cost of equity and the currently inflated cost of debt due to the Federal Reserve's intervention. Although we lack clear visibility on asset pricing, we believe that asset prices have not declined as much as equity prices. We've observed a correction of around 30% in equity prices, while we estimate asset sales have seen a reduction of less than 10%. This also supports our confidence regarding capital sourcing alternatives.

I'm looking at the second chart on Page 8, specifically the blended like-term rent change chart. Can you help clarify some details regarding new and renewal leases, as well as what you're currently observing in urban and suburban areas? Additionally, what about the weaker markets you mentioned, like Boston, San Francisco, and L.A.? Please explain the factors that contribute to these trends.

Yes, Rich. It's Sean. Happy to walk you through it a little bit. I mean as we noted on an effective basis, blended rent change was down about 3% for the quarter. If you look at it on a lease basis, it was down only about 40 basis points. And certainly, based on what I mentioned in my prepared remarks, we're seeing the greatest weakness in Northern and Southern California. And if you double-click through those regions, probably the softest spots are San Francisco and throughout L.A., particularly in some of the entertainment-oriented economies around L.A., so think about Hollywood, West Hollywood, Burbank, San Fernando Valley, et cetera. And then in the other markets, we're basically anywhere from sort of 0 to minus 2%. And across the other markets, the softest spots are probably in New York City and throughout the urban submarkets within Boston. And as I mentioned in my prepared remarks, generally, across the portfolio, what we're seeing in the urban submarkets is rent change is trailing suburban by about a couple of hundred basis points. And as you probably noted in the chart, our economic occupancy and physical occupancy are both trailing what we're seeing in the suburban submarkets as well. So certainly, a tougher place to be as it relates to both rent change and occupancy in those environments. And as it relates to kind of where things are today, if you look at it in the context of July, effective rent change is down about 3.5%, a little bit better than June. And lease rent change is down about 2%. And in both cases, renewals do remain positive right now, sort of in the 50 to 70 basis point range, slightly lower than what we experienced in Q2 but still positive in July at this point.

Okay. Sean, that's helpful. And then just thinking maybe a little more broadly, in some of the bullets highlighted in the prepared comments about the work-from-home shift and the fact that suburban is outperforming urban. And I would also assume, with respect to home purchases, I mean, given the price points in Avalon's markets, maybe you're a little more insulated from that effect than the average apartment landlord out there. So at what point does that sort of mix start to help Avalon in the sense of having a highly concentrated suburban portfolio? When do you think we'll really see that show up in the numbers there as a net positive, you think?

Yes, Rich. It's Sean. I can provide a couple of comments, and then Tim can chime in. I mean it's really a function of how some of those factors evolve over the next few months here. I mean urban submarkets, we've mentioned several of the factors that are sort of driving it. So I think what I mentioned in my prepared remarks is sort of the nature of the health crisis and the economic environment will dictate when people start to come back to the urban submarkets and at least some in a more material way. And on the suburban side, it's really a function of sort of portfolio mix. And in some places, it certainly is very helpful. There are some submarkets where, even though it's suburban, it's a little bit painful right now. I'll pick one specifically, like Mountain View in Northern California, where Alphabet is headquartered. Given their extended work-from-home policies, it tends to be a weaker submarket even though it's technically considered suburban. So I'm not sure there's a one-size-fits-all answer here as it relates to that. At least, that's my general thoughts at this point in time. But Tim, do you have anything you want to add?

Yes. I mentioned that suburban areas had been performing better than urban ones prior to the pandemic. We observed a trend where, in the last cycle, supply outpaced suburban demand significantly in our markets, while demand in urban submarkets was stronger. This cycle, we expect the opposite to occur; beyond 2021 and 2022, we anticipate stronger demand and increased supply in some suburban areas. This change is partly driven by millennials reaching adulthood, a rise in economic activity in the suburbs, and the issue of affordability. As economic activity increases, we should see greater rental demand in suburban locations as well. While we began to notice this trend prior to the pandemic, we believe it is a longer-term shift that will persist over the coming years.

Sean, I want to go back to your comment about you see signs of stability in at least occupancy heading into August. Does that comment hold for the current pockets of weakness that you alluded to, L.A., Boston, San Francisco?

In the short run, John, yes. And we are starting to see some student demand come back in some of these urban submarkets based on announcements that have been made to date as it relates to the hybrid learning environments, both on-campus and distance learning, and just anecdotally, getting a lot of feedback from some of the student population that they had enough time at home. And even if they only could be on campus a couple of days a week, they want their apartment back. So whether that holds or not, obviously, it's a function of the health crisis and the decisions that are made across the university systems. But in general, I would say we are seeing it relatively sort of stabilize a little bit. That being said, between now and year-end, as I mentioned in my prepared remarks, the health crisis and the economic environment will dictate whether things kind of shift up or down in terms of demand as we move forward here.

It makes sense. The 200 basis point impact from bad debt in the residential portfolio during the quarter indicates that it remains elevated. Is it reasonable to predict the trajectory over the coming months? Will it worsen significantly or improve noticeably? I find it difficult to fully assess markets like Los Angeles, especially with the eviction moratorium continually being postponed. Any insights on the future path of bad debt would be appreciated.

Yes, John. I'm glad to provide my thoughts, and Kevin or Tim can add in as well. Right now, it's challenging to foresee the situation due to the ongoing health crisis and the macroeconomic landscape. There has been federal support for individuals that has helped subsidize their incomes, which was reflected in the personal income growth reported this morning. Assuming the environment remains stable through the end of the year, we can expect collection rates to remain reasonable. However, any significant change in these factors could impact those rates either positively or negatively. These are the key factors we will all keep an eye on to assess whether we anticipate an increase or decrease in bad debt going forward.

I just want to go back to some of the big-picture comments, Tim, that you've discussed so far, including some of the comments during the Q&A. And I very much appreciate how difficult it is to figure out the medium to long term. As you're thinking, again your comments about the lower-cost options elsewhere, Southeast, increasing homeownership, I mean can you talk a little bit more how this is impacting, let's say, Avalon's medium- to long-term strategic plans, whether that includes new markets? I guess can you share some thoughts on that?

Yes, Jeff. We've addressed this before. As many have pointed out, the pandemic has accelerated existing trends rather than creating new ones. Consider major tech companies and employers in places like New York and California; they are diversifying their workforces by exploring other markets, such as Amazon in D.C. and establishing bases in Austin and Denver. We want to align ourselves with the innovation and knowledge economy, which entails following where the workers are heading. If employers continue to pursue jobs, with the job being designed around attracting employees rather than the reverse, we aim to be present in those areas. This was a key factor for our entry into Denver and Southeast Florida. Additionally, the fiscal challenges facing some blue states seem to be worsening, which likely influences our strategy regarding overall affordability and the migration of populations to specific markets. We want to be part of those secondary markets experiencing spillover effects. What’s occurring is beneficial for the innovation economy. While it may not be detrimental to cities like San Jose, San Francisco, and Boston, it’s important to acknowledge that some advantages will extend to other emerging innovation markets. These are markets we want to target. Our strategy involves reallocating or recycling capital, with a focus on New York, and potentially California in the future, to expand in established markets like D.C., Seattle, and Boston, as well as exploring new markets we are not currently present in.

I wanted to follow along those lines of bigger-picture questions and go back to some of your prepared remarks. Specifically, about homeownership, we've seen some similar trends with homeownership, particularly under the age of 35 cohort. Do you think those are just near term given the decline that we've seen in interest rates? Or do you think there's a more secular shift that's going on there?

Yes, Rich, I can address that and others may have insights as well. One factor could be the composition of the millennials, as there are more individuals under 35 in the 30 to 35 age group than there were five years ago. They are beginning to enter the prime homeownership stage. I believe a significant part of this trend is driven by demographics and is being accelerated by the current interest rates. We haven't noticed a significant shift with our residents; reasons for moving have decreased for purchasing homes. However, homeownership is rising nationally, which impacts the overall renter pool and affects all landlords to some extent. We consider ourselves somewhat insulated from this trend, as it is likely more influenced by the single-family rental market and other demographics in various regions. Nonetheless, it does impact the broader renter landscape.

Got it. That's helpful. I've been a little bit surprised there hasn't been more focus this earnings season on the election coming up in a couple of months and potentially a rent regulation depending upon what parties have power. I'm wondering if that is something that you're focused on. Obviously, the Biden plan has housing as a big focus, and affordability on the other side of COVID-19 is obviously more challenged. How are you thinking about that maybe over the medium to long term?

Most of the regulatory risks we face are primarily at the local and state levels rather than at the national level. We would likely be more worried if another Democratic nominee emerged nationally. Our markets have always been more regulated compared to others, and being in blue states has contributed to the appeal of our markets. The barriers to entry have created some supply constraints on new housing, which has led to increased rents and rent growth over time. The key issue arises when price controls and rent control come into play. In places like New York and parts of California, there are forms of vacancy control that are manageable for apartment owners. However, when pricing has to be controlled on vacant units as they become available, that type of rent control is something we must avoid as an industry, as it would be detrimental to housing markets. This is an issue we will continue to monitor and combat as it is harmful not only to us as landlords but also to the long-term stability of the housing market. It does not address housing crises effectively at the local level; while it may be politically convenient, it represents poor policy from a legislative standpoint.

Understood. And then one more question, if I may. In the past, you've done a really good job thinking about how your development and your land development is really under option and you don't have to move forward with it. So I'm wondering, as you survey the landscape post-COVID-19, are there any land that you have under option and maybe high barrier or blue states that you might want to not move forward with? And you had mentioned Florida, I think, earlier in your remarks. Are there any other markets where you prefer to maybe focus on development going forward versus some of the markets that you're in right now?

Yes. Hey, Richard. It's Matt. As it relates to our current development rights pipeline, you're right, we only own 2 of those 28 deals, our land owned that we bought from a third party. So we give a lot of optionality. And it's really deal by deal. There may be deals in there that are not going to work without some type of restructuring. There are other deals that probably will work. And there are some deals where we may say the land is a good price, and we may close on the land and carry it for a while and wait for hard costs to come down. So it's a little bit of all of the above. It doesn't really factor into the geographic mix. It's really bottom-up in terms of where we're finding the best opportunities. And so we have a couple of development rights in some of our expansion markets, including 2 in Denver and one in Florida, that are working their way through the system. We have development rights in our legacy markets as well. I don't think we've seen any particular trend yet in terms of kind of an impact to the land market or development economics more so in one market than another, other than where you're seeing, obviously, rents taking the biggest hit so far.

Another development question for you. I was wondering if you could frame up how the development pipeline that is active is positioned relative to the headwinds you cite on Slide 6. And then I'm basically trying to get a sense of the potential volatility around your 5.7% projected development yields.

Hey, I'm sorry. Is that about the development under way or the development rights on the future starts?

No, I believe you all shifted a few years ago toward a more suburban focus, but I'm unsure if they technically meet your criteria for the infill you mentioned as a challenge on Page 6.

Yes. When you consider the 2.4 billion in development currently underway, the yield is at 5.7%. Out of the 19 projects, we've completed enough leasing to adjust rents to market for only 5. For these 5 projects, rents are slightly above projections by about $30. However, yields are somewhat lower due to cost overruns on a few projects. Overall, 5 of the 19 are essentially at market rates, while the other 14 are more difficult to assess. Many of them are in markets that have not experienced significant rent decreases yet. The portfolio is mainly suburban, and the only project we would classify as urban, apart from the Hollywood project under construction, is the one in downtown Baltimore right now.

And then what about with the work-from-home trend? Are you noticing any demand for your larger units, people looking for maybe another room for an office or maybe rooms with a view?

Yes. Wes, this is Sean. I mean we've been digging into that, and at least based on sort of early returns, I would say it appears as though suburban direct-entry product, which often is a townhome, is doing a little bit better in the current environment. And the data is a little bit mixed. But overall, that appears to be a positive trend for us in terms of that product type across the portfolio.

I want to add that when we look at our development as an industry, the average unit size has been decreasing for the last cycle, roughly by 10%. However, in the last year or two, our development starts indicate that the average unit size is beginning to increase again. This shift can largely be attributed to our focus on more suburban assets. Even before the pandemic, we noticed changing demographics leading to a higher demand for 3-bedroom units, which we rarely built in the past. Now, nearly every project we undertake includes at least 3 bedrooms. Additionally, we are constructing more 1-bedroom dens and 2-bedroom lofts compared to five years ago.

This is Sumit Sharma in for Nick. A question about your bad debt expense. And I just want to be clear. Maybe you've stated this earlier, so I apologize in advance. But of the 2.7% of uncollectible rent, I guess how much was part of the bad debt provision or reserve? Some of your peers have talked about reserves of the tune of around 200 basis points or so. And just getting a sense of how much went into reserves, how much is deferred, how much is write-offs and cash bad debts.

This is Kevin O'Shea. I'm having difficulty hearing you, but I'll provide an overview of what we did regarding bad debt, and then you can ask any questions you have. Our policy is to reserve delinquent base residential rent for three months and other delinquent items after two months. For residential revenue, we generally reserve about 50 basis points of residential revenue, which we did in Q2 for our same-store portfolio. Additionally, in Q2, we set aside a further reserve of approximately 200 basis points or $10.7 million, including for residents who did not make any payments during the quarter. This brought the total reserve for the same-store residential revenue portfolio to about 250 basis points or $13.6 million. We continue our collection efforts and are encouraged by recent trends, which show collection rates for unpaid April and May rents improving to about 97.5% from roughly 93% or 94% at month end. I hope this information is helpful and responsive.

Yes, that's great. I apologize for the poor sound quality. I’d like to ask a different question regarding concession activity. I'm curious about which types of units, specifically two bedrooms or three bedrooms, are experiencing the largest concessions. Earlier, someone mentioned changes in developments and unit mix. From a concession perspective, where are you observing the most significant drops in rent or the largest concessions being offered?

Yes, this is Sean. I'll give you some general thoughts on that. So first, as you might imagine, from what we described in our prepared remarks, concessions are generally greater in urban environments as compared to suburban environments. So let's start with that. Within urban environments, we tend to see fewer concessions on the more affordable price points, which tend to be the studios and 1-bedrooms in those submarkets as compared to the larger units. Initially, we thought there might be sort of steadier demand for larger units and people looking to work from home with extra space. But I think the affordability issue sort of weighed on that a little bit, and we've seen better performance out of the studios and smaller 1-bedrooms. And then the suburban environment, I wouldn't say there is a common theme as it relates to unit type. It's really submarket-driven and the nature of the demographic within that environment. We've got very high-quality towns in suburban Boston with great schools, and 2 and 3 bedrooms have solid demand and ones not quite as much. And if you revert to some submarkets in L.A., the more affordable price points in studios and 1-bedrooms are in better shape as compared to the larger 2- and 3-bedroom units given the shutdown of some of the entertainment studios and such. So it's not a common theme as much as it relates to the suburban unit type as much as the specific suburban geography.

Looking into bad debt and delinquencies, have you guys run an analysis on your resident base to see what age, income or profession this is mostly centered on?

Yes. Alex, this is Sean. We have to run some data on that. And I think what I would tell you is it's more industry-specific than it is typical demographic make-up in terms of gender, age, things of that sort. It tends to be self-employed, sort of freelance workers, content producers, folks like that, that have been impacted most materially. And then some of our East communities, some of the service-based sectors that have been impacted as well, whether it's foodservice, hotels, things of that sort, some of the occupations that Tim alluded to earlier in his opening remarks. So it really is more occupation-driven than anything else.

Got it. And just to touch upon the Park Loggia sales, how was the selling on that this quarter? And I noticed the average unit price was a little higher. So I'm assuming some of the higher units got sold. Was there any discount to February levels that you needed to offer to enhance the sale process?

Yes, hi Alex. This is Matt. The closings we experienced in the second quarter mostly consisted of deals that were under contract before that time. While there were some quick closes in the second quarter, such as one of the penthouse units, the average price at any given time is largely influenced by the specific units that settle based on their scheduled timelines. Therefore, I don’t think you can draw many conclusions from that. Currently, we have 54 units closed and another 12 under contract, totaling just over $200 million. There is some negotiation, especially at the higher price points, which was a trend even before the crisis. We haven’t significantly changed our pricing strategy since COVID began, as the market still lacks sufficient traffic and transaction velocity to warrant it. I'm not convinced that lowering prices would lead to a substantial increase in volume. We believe we were already offering a compelling value, which was evident from the strong sales pace prior to the shutdown in early March. More supply is on the way, and while we are seeing a bit more negotiation at the higher price points, we anticipated that. In terms of our expectations, there haven’t been any major changes to our pricing yet.

So two questions. The first one is do you guys have an idea of how many residents are living in your apartments who are paying rent but aren't actually there? So they've moved away, but they're still paying rent.

Yes, Alex, this is Sean. That's a tough number to come up with. So the blunt answer is no, we don't. Unless they voluntarily come to us and say, "Hey, I'm going to be gone for a certain period of time. Can you do something for me?" There isn't a mechanism for tracking that, which would provide any real sense of accuracy.

Okay. So as your apartment managers are seeing, I guess, maybe mail not being picked up or what have you, there's not a way to sort of track and understand if those people plan on coming back or they're going to exit whenever their term ends?

Not necessarily. I mean people have mail picked up. I mean you think about buildings that are 500 units and they have 1,000 people in them, it's really hard to get a sense for that unless there is something specific related to a mail hold that we're aware of or a package delivery. But I wouldn't say you could count on that as a representative sample that would give you an accurate estimate.

Okay. Kevin, regarding the development program, you had intended to initiate significant starts this year, but that hasn't happened. At what point, considering you are delivering but not replacing those deliveries, do the current capitalized costs begin to diminish and those expenses start reflecting in the income statement? How long would the delays need to continue before we see those expenses appearing, since they would no longer be capitalized?

Hey, Alex. This is Tim. I’ll jump in and Kevin might have something to add. If we have team members in development or construction not actively working on a project, whether it's one in progress or in planning, they are expensed and reflected in the income statement. Although we haven't initiated any projects this year, we still have over $2 billion under construction and $4 billion in planning, which means we're managing a $6 billion pipeline. We're working to rightsize it, and this quarter’s capitalized overhead is about 10% lower than the average from the last four quarters. This decline has occurred alongside recent departures and retirements of some senior staff over the past 6 to 12 months as we prepare for the next cycle and our current situation. It's also worth noting that approximately half of that group's compensation is performance-based. If they aren't producing as much, there will be automatic adjustments in the overhead. Our goal is to be well-positioned and appropriately sized for the beginning of the next cycle, allowing us to scale up as opportunities arise. This quarter, capitalized overhead is about $11 million, with around $6.5 million related to development, $3.5 million to construction, and just over $1 million to redevelopment. Annualized, that amounts to about $25 million for development and approximately $12 million for construction, which supports a range of $800 million to $900 million in activity. If we determine over the next 3 to 4 years that this volume isn’t feasible, headcounts will need adjustment. However, we anticipate being in a position to increase our team in the coming years, ensuring we have the right leadership and personnel. As we navigate this recession, we are still managing a pipeline worth $6 billion, which is about 25% lower than its peak, likely between $7.5 billion and $8 billion.

What's the positive impact that you typically see in terms of traffic- and leasing-wise in the May, June, July time period from the influx of new college graduates renting for the first time in your core markets in a normal year? And what have you seen thus far this year? It seems like very few college grads in your core markets have actually rented apartments this year versus a normal year given how early COVID hit, and so that might be a big driver.

Yes, Rob, Sean. Good question. A couple of thoughts on that, not necessarily specific data since it's a little hard to capture. But in our particular case, I mean we don't have a lot of student-oriented assets. They're pretty select across certain markets, particularly in the urban environments, I would say. But your broader question really probably relates to the percentage of the market that is really made up of the student population that sort of brings the occupancy up in the entire market. That's something, to be honest, we've been trying to get our arms around that. Not quite there yet in terms of what that represents in each one of those submarkets. But there are certain submarkets, like we have a property here in the district that's pretty tied to ABU that when they announced their plans to have a hybrid learning model, we did 80 leases in 1 week. So there are submarket stuff like that, that are highly dependent upon it. But I think the broader question is one we're still trying to answer, which is sort of collectively what the demand is. From the student population is one segment, and then from the short-term and corporate rental market is the other segment. We think the short-term corporate piece is probably in the 2% to 3% range. And we're trying to understand that in terms of the student population, particularly as universities may shift their on-campus housing options to the extent that they're trying to sort of de-densify some of those communities. So it's a little bit of a moving target. It's probably hard to answer right at this exact moment. But certainly, the peak time for that demand is, as you described, as we're moving through the pre-leasing season, that you're going to see sort of basically April through June, like you might see on some of the student housing rates. And you want to be pre-leased in those buildings in the 90%-plus range as you get towards the end of July and before they show up in August. So we're on track for that at some of the buildings, but there are places in and around urban Boston, Berkeley, places like that, where they are falling short because of the uncertainty around the ultimate learning model.

I was really focused on the 21- to 22-year-olds who have just graduated and secured jobs at investment banks, tech companies, consulting firms, and similar organizations, typically located in cities like New York, San Francisco, and Boston. These individuals are renting for the first time and bringing in their offer letters for leasing. How significant is this influx of former students entering the workforce for the first time in these major gateway cities?

Yes. It's probably challenging to answer this, except for the specific programs like training or corporate programs, which might account for about 2% to 3% of our markets. What we are really discussing is the ongoing demand from graduates entering the rental market. However, it is a bit more difficult to quantify that demand at this time.

Yes, Rob, that relates to what I mentioned earlier regarding the typical contraction and consolidation of households during a downturn. This is part of what you're describing. Young adults who struggle to find jobs after college often end up living at home or sharing a house with multiple roommates instead of renting their own apartments. In previous recessions, we've observed occupancy rates decline by a few hundred basis points. While you might still see some new supply, it's common to experience a reduction in household demand of about one to two million housing units nationwide during a normal downturn. A significant part of this is, I believe, exactly what you're highlighting.

Okay. Lastly, what are you observing today compared to the beginning of the year regarding construction costs, both hard and soft? How significant has the change been? Where is the most slack currently? Are there any areas where you are noticing increased cost pressures, either up or down, due to the trends in single-family homes or the decline in new construction in other sectors?

Yes, we are starting to see some changes, but it's still early. Initially, we've noticed this in smaller-capital expenditure projects. These are usually short-term jobs, like facade restorations or concrete repairs that last 2 to 6 months. When subcontractors complete one of these projects, they might not have immediate new work lined up. We're observing this trend, and in some areas, we've experienced moderate savings. While these savings may not be substantial, they are significant compared to the past few years, where construction costs have increased much faster than inflation. For new construction, it's still early to tell since most projects are in progress. The initial signs will likely show up in early-stage work such as earthwork, pipework, and demolition, and there will be regional variations. Reports suggest that in South Florida, there might be some emerging signs due to the lack of wood frame construction, as it's primarily concrete because of hurricane codes. Additionally, there is a lot of cruise ship restoration happening, and hospitality projects have faced cancellations, leaving subcontractors with more capacity. However, this trend hasn’t reached most of our other markets yet. Some commodities are experiencing price drops, while lumber prices have risen significantly recently, likely due to trends in the single-family and home renovation markets. There are various factors at play, but construction pricing typically lags behind market changes, and we expect it will take some time for these adjustments to reflect in our system.

So Tim, you mentioned, or maybe somebody else, but in kind of the suddenness of what happened, made a lot of decisions for you, particularly as it relates to development postponement. If memory serves, in the '08, '09 time frame, you did have a sizable write-off related to your development pipeline. And if I'm wrong about that, I apologize, but I'm going on memory. I'm curious, though, as you fast-forward to 12 years later today, is there anything about what happened then that you took from a lesson learned and is sort of allowing you to sort of walk the tight rope here without having any sort of disruption like that? I'm just wondering how that experience during the great financial crisis has manifested itself at how you look today. I know you mentioned the difference in balance sheet in your prepared remarks, but I'm just wondering just in terms of how you approach the business, particularly on the development side.

Yes. I would say the primary issue has been land. We recorded around $80 million in total write-offs or impairments, a significant portion of which was related to land. Compared to the size of our development rights pipeline, we've completed deals where the profits have exceeded that amount. Homebuilders were facing impairments in the billions, while ours was about $60 million, primarily on our land. We have been very disciplined in maintaining our options. As Matt mentioned earlier, there are deals that may not succeed, and we might encounter sellers who are unwilling to make necessary adjustments to bridge any gaps. I believe we could see some future write-offs, but those would be associated with pursuit costs, which are relatively low compared to the size of our controlled pipeline. The main challenge we face is the limited land inventory we have this cycle compared to the previous one.

And the only thing I would add to that, this is Kevin, Rich, is just, obviously, we've discussed many times in recent years, one key lesson we took from that downturn was to be a whole lot more match funded with respect to the development under way in terms of having the long-term capital in place. And so you see that lesson being applied here in a very visible way with respect to the $2.5 billion we have under way right now, with 95% already match funded. So that obviously leaves us a lot more foot forward this time around to pursue opportunities that may pop up.

Great. There has been considerable discussion in this call about suburbs outpacing urban areas. I believe you have a structure that is approximately two-thirds suburban and one-third urban, and you might still be seen as a premium option in those suburban markets. Do you think that this separation could ultimately benefit you in the long run as the situation normalizes, with people possibly not returning fully to the urban core but coming back enough to support your suburban portfolio?

Yes. Rich, I mentioned earlier that there was already a trend in place. We had begun to shift our portfolio towards suburban areas. Looking at our history, we've created significant value, particularly in suburban infill projects. As millennials age, we are seeing increased economic activity in the suburbs. The urban-light lifestyle, which includes mixed-use developments in suburban settings, offers attractive opportunities that are less dense and generally more affordable compared to our urban projects. We were already heading in this direction, and recent developments may just accelerate that shift. The demand factors we observed earlier are likely being amplified by recent events.

Okay. Well, great. Thank you, Matt. I know all of you have a number of calls you need to be on today. So I just want to thank you for being with us, and enjoy the rest of your time. I look forward to talking to you soon.