Avalonbay Communities Inc (AVB) — Q1 2021 Earnings Call Transcript

Okay, great. Thanks, Jason, and welcome to our Q1 call. With me today are Ben Schall, Kevin O'Shea, Matt Birenbaum, and Sean Breslin. Ben, Sean, and I will provide comments on the slides that we posted last night, and all of us will be available for Q&A afterward. For our prepared comments today, I'll start by providing an overview of Q1 results. Sean will elaborate on operating trends in the portfolio. Our fundamentals have improved materially since the beginning of the year, and we'll also review our Q2 outlook. Then Ben will provide some thoughts as to why we believe we are positioned for outsized growth as the recovery and expansion take hold. Now let's turn to results for the quarter, starting on Slide 4. In terms of operating results, it was another tough quarter. Core FFO growth was down by over 18% in Q1. Same-store revenue declined by 9.1% on a year-over-year basis. Given the timing of the pandemic, which began towards the end of Q1 '20, this past quarter will be the toughest year-over-year comp we'll face this year. On a sequential basis, the decline in same-store revenue leveled off at 1.5% from Q4, which compares to a sequential decline of 1.6% in Q4 of '20. Sean will touch more on the sequential trends in his comments. Lastly, we completed almost $600 million of development in Q1 at a projected initial yield of 5.6%, well above prevailing cap rates we're seeing in the transaction markets, where cap rates are drifting down to or below 4%. Given the improvement we've seen in fundamentals, we're ramping up the development pipeline and expect to start $650 million this quarter in Q2, with much of that to be match funded with expected dispositions of approximately $500 million in the second quarter.

All right. Thanks, Tim. Moving to Slide 9. We've seen an acceleration in the trends we spoke about on our last call with physical occupancy continuing to increase during the quarter, now approaching 96%, and average move-in rent value growing steadily over the last 4 months. For April, our month-to-date average move-in rent is roughly 5% above what we experienced in January of this year and approximately 8% below the pre-COVID peak rent we achieved in March of 2020.

Thank you, Sean. Supported by this backdrop of improving operating fundamentals, we believe that we are well-positioned to generate outsized growth as the economy recharges. As we look to the composition of our existing portfolio, each of the subsegments highlighted on Slide 15 have been impacted in varying degrees during the pandemic, and each has its distinct growth opportunities as we look forward. Our largest segment at 40% of revenue is in what we've called out as 'other suburban' to differentiate it from more densely populated job center suburban markets. This 40% of our portfolio was the least impacted by the pandemic, and our current average asking rent is 6% above the pre-pandemic peak rent we achieved in March of last year. We continue to push asking rents in these submarkets, and concessions have largely been eliminated. Our next largest segment at 28% of the portfolio represents communities in job center suburban markets, including our transit-oriented development. This is places like Redmond, Washington; Tysons Corner in Virginia; and Assembly Row in Massachusetts. Operating fundamentals in many of these suburban locations have been more significantly impacted, with asking rents still 3% to 4% below pre-pandemic levels and with the continued use of concessions in certain markets. Our expectation is that as people increasingly return to the office and nearby restaurants and as other amenities start to reopen more fully, we will increasingly see prospects that seek out these environments for walkability, ease of transportation, and the array of services provided. For our communities in urban environments, we have a mix of core urban, effectively central business districts, and secondary urban locations like Jersey City, New Jersey, and the Rosslyn-Ballston Corridor in Northern Virginia, which make up 19% and 13% of our portfolio, respectively. As Sean noted, occupancy in our urban portfolio has climbed more than 500 basis points, and rents are trending upward in pretty much all of the urban environments. This has occurred with urban office usage still at very low levels of less than 20%. As a return to offices starts to gain real momentum this summer and leading up to Labor Day, we do expect a significant rebound in our urban portfolio, similar to prior cycles. This is a theme that we expect to be evident across much of our portfolio. And as shown on Chart 1 of Slide 16, Class A communities, which represent approximately 70% of our portfolio, have historically outperformed early in cycles. We expect similar trends in this recovery, particularly as the traditional higher-income AVB resident is poised to benefit financially as the economy heats up. While our residents stand to benefit from the recovery, it is also becoming more challenging for those interested in buying a home to afford one, given the acceleration in home prices in many of our coastal markets. Chart 2 on Slide 16 shows this long-term affordability trend and the growing attractiveness of renting versus owning a home in our markets.

Great. Thanks, Ben. Turning to the last slide to summarize some key points for the quarter, Slide 20. Q1 was a challenging quarter in terms of results. But as I mentioned before, it is expected to be the toughest year-over-year revenue comp we see this year. In addition, the recovery in fundamentals is taking hold in our markets as Sean discussed. Many suburban submarkets are now at or above pre-COVID levels, while the early improvement we're seeing in urban submarkets should gain strength midyear and into the fall as workers return to the office. Lastly, as Ben mentioned in his remarks, we believe we are very well positioned over the next few years due to a number of factors, including our coastal market footprint, a portfolio that heavily concentrates on urban and job center infill suburban markets, the rising cost of homeownership, healthy performance and a ramp in our development pipeline, margin improvement in our stabilized portfolio due to innovation in the operating model, and our leadership position in ESG, where the investment we've made over the last several years is paying off in terms of OpEx savings and stakeholder engagement. With that, operator, we'd be happy to open the call for questions.

Maybe just starting off with guidance. I was wondering if you can talk through the decision to not issue full-year guidance at this point. Just given that we already have Q1 results and the operating trends that you've walked through, what held back that decision to institute 2021 guidance?

Nick, this is Kevin. Yes. As we've indicated before, providing quarterly guidance, which is what we've done this quarter, is consistent with how we have been managing the business as we move through a pretty dynamic environment and in an uncertain period of time. But given the stability and the growth that we're seeing in April and as we head into May, as Sean pointed out, we do expect to be able to provide guidance for the balance of the year in connection with our second-quarter call after we've had a chance to complete our customary midyear reforecast, which is a lot more thorough than the Q1 reforecast process that we do for this call.

That's helpful. And then for the $650 million of starts this quarter, what's the expected initial yield on those? And then is that on in-place rents or trended rents?

Nick, it's Matt. Yes, those deals, the yield is very consistent with where our current development is. It's kind of high 5s, and that's pretty much in every case. When we quote yields, we're quoting based on today's rents and today's cost. We don't trend it. In fact, on our development attachment, we don't mark those rents to current market until we get at least about 20% leased. So that's why we see most of the rents in the attachment are still what we were carrying when we started the job. My guess is, given where we are today and given the ones we haven't started at today's market, there's probably a good chance that we'll exceed the underwriting on those by the time they stabilize.

I think Nick addressed two of my questions, so let me ask a different one. To follow up on the development question, we could likely say the same thing for the past 5 or 10 years, but market cap rates can't decrease any further than they are now. Could you share your thoughts on the potential for market cap rates to expand from here and the implications for narrowing the yield differential as you consider the high 5s development yield target? How much of a buffer do you incorporate into your thinking on this?

Rich, Tim here. As Kevin has mentioned many times before, we consider this when thinking about match funding the development book. This quarter, we demonstrated that it's mostly match funded, and if we anticipate capital market risk, we will aim for nearly 100% match funding. This means that by the time we begin construction, the major capital commitment—whether in the form of equity, debt, or asset sales—will have already been secured.

Okay. That's fine. And then just on the expense guidance, I know that we are lapping a tough comp in 2Q, and there's a little bit of detail in the slide deck on this. But maybe just break down some of the categories where you expect the biggest year-over-year growth in expenses.

Yes, Rich, this is Sean. I mean, I hate to say it, but it's pretty broad-based. If you think about what happened in Q2 last year, things really shut down. So turnover declined, we drew back to strictly essential maintenance only for our resident customers. We pulled back on marketing, given sort of the demand shock. We had discussed the hiring freeze. If you think about all the various maintenance activities, payroll, etc., we're expecting all of those to look more normal as compared to the depressed levels that we experienced in Q2 of 2020. So it's relatively broad-based. Most of it is on what I would call the controllable side of things, with a more modest increase in taxes and insurance. But all the activity cost and payroll really are coming up pretty materially on a year-over-year basis.

I want to spend maybe a little bit more time talking about your suburban versus urban portfolio. We're right there with you on the urban portfolio and the inflections that we're seeing, and we think they're very real. But as you think about the urban portfolio, you and your peers have noted that rents are above, in many cases, pre-COVID levels. How are we supposed to think about those suburban markets going forward? Is there any chance that they begin to normalize while urban markets are inflecting? Or do you think that there’s more than sufficient demand coming from a younger generation that can support that?

Yes, Rich, Sean. I'm happy to start, and anyone else can jump in. I think you said that rents in our urban portfolio are above the pre-COVID peak. That's actually not the case. In other words, asking rents in the urban portfolio are down about 8% from the pre-COVID peak. But in the suburban portfolio, we're up a little more than 2%. Certainly, we'll see a snapback, and we've already started to see that in the urban submarkets. But the suburbs are pretty healthy. If you keep in mind the slide Ben showed, there are still a number of these job center suburban submarkets that have probably another leg to come because people have not been called back to the office. If you think of just maybe even the headline FANG stock as an example, they have called people back to Google and Facebook and Apple and Amazon and Microsoft over at Redmond. There’s some pretty good embedded demand that should be coming back to those environments to support the suburban portfolio. Additionally, as Ben pointed out, if you look at the single-family side, it's a very tight market. Prices are up kind of double digits on a year-over-year basis. So the ability to exit into that product is more constrained. I think several factors give the suburban portfolio a strong tailwind. You may not see the same percentage gain over the next couple of quarters as people return to urban environments, but there are still good demand tailwinds for the suburban portfolio over the next couple of quarters as well. Tim, do you want to add to that?

Yes. Richard, I think the other aspect to your question is just the notion that we would expect, as the economy reopens and these urban markets reopen, to see convergence in performance. There's going to be some normalization. It doesn't mean we're going to see suburban rents fall while urban rents rise due to compelling supply-demand dynamics happening in the suburbs. I mentioned in the last call that I think out over the next few years, supply in urban markets is frankly likely to be much lower than what we see in the suburbs. You may see the relationship between urban and suburban flip in this coming cycle relative to what we saw in the last cycle where urban demand was stronger, but urban supply outpaced that. Looking out 3 or 4 years from now, it wouldn't surprise me to see urban outperforming suburban markets. This is one reason we've been somewhat agnostic, wanting to have a diversified portfolio. Really, winners and losers tend to emerge at the MSA level, and performance normalizes over time between urban and suburban markets. It's a dynamic market on both the demand and supply sides. But we are at a moment in time where urban is significantly underperforming suburban, but we think we're on the precipice of convergence.

The reason I focus on it is I look at your weekly asking rent chart that shows we're back to pretty close to pre-COVID levels. But it strikes me that given this dynamic you're talking about, if you're looking at that one singular chart and suburban is above COVID while we're inflecting on urban, isn't there a good chance that asking rents could overshoot on a weighted average basis as this recovery continues?

Absolutely. Considering the reopening combined with the amount of fiscal and monetary stimulus being injected into the economy, we could see a recovery closer to a V-shape than we initially anticipated 3 to 6 months ago. It’s likely to be an uneven recovery, still favoring the educated and knowledge-based jobs. The slide Ben showed clearly broke down the portfolio into four buckets: the other suburban at 6% rent growth, job center suburban down a little over 3%, secondary urban down 6%, and core urban down 8%. Those are substantial disparities from just a year ago, which we expect to start leveling off as the economy reopens.

You've been a very consistent seller of assets at attractive returns and economic gains throughout your history. But right now, with cap rates compressing and 1031 on the table for potentially being repealed, do you think about expediting sales at all?

So John, your question about the potential repeal of 1031 is relevant. We've utilized 1031s, but not extensively. Generally, we have a gains capacity of about $200 million to $300 million in a typical year that we can handle on the sales side. Ultimately, it depends on how much portfolio recycling we need to undertake. We've been proactive about this in recent years. We have used 1031s on a limited basis to mitigate the tax impact. However, for the most part, we've absorbed the gains capacity embedded in our earnings.

So it's not just the 1031 but just the cap rates compressing so much. Is this a better time today to sell assets that are maybe a little older in your portfolio than it would be in the last few years?

Yes. I think that's a fair point. It's something we debate when we look at asset sales, equity, and debt. Debt is still the most compelling source of capital for us today. Asset sales are creeping closer given what we're seeing, the additional compression in cap rates and asset values. Many suburban submarkets are up from pre-COVID levels. It's a fair point. It does inform our capital allocation decisions at the margin.

Okay. You've had notably stronger rental growth in April in Southeast Florida and Denver. Do you see that outperformance continuing for the rest of the year? How important is it for you to either expedite your exposure in those markets or potentially enter new markets, given this validates your strategy to enter them?

Yes. John, this is Sean. I'll take the first one, and then I'll let Tim discuss the expansion market strategy. One thing to recognize is that those two expansion markets represent a very small basket of assets. Noise from one asset to another can create some volatility here. The kind of growth we've seen on a year-over-year basis in Q1, I would not expect that to persist at the same level moving forward for the balance of the year. There's just some unique factors with one or two of those assets. When you only have three or four in the basket, they can significantly affect the overall numbers within one quarter.

Yes, John, this is Matt. To the second question regarding our appetite, we have stated we are looking to grow both of those markets to be roughly at least 5% of our portfolio. Right now, including nonsame-store, they're probably about 2% each. We still have a way to go. We have starts planned in both of those regions in the next quarter or two, so we are continuing to move forward with development there. We have additional pipeline starts expected in '22 for each of those regions and we're actively pursuing acquisitions in those markets as well. We will continue to do what we've done in the past, which is find acquisitions, rotate capital out of some of our legacy markets to fund that. As it relates to other markets beyond those, we are looking at markets that are going to be over-indexed to the knowledge economy and higher-income jobs, which we believe will drive outsized performance for our portfolio. We believe Denver and Florida are two of those markets, along with others that fit that description over time.

So I heard you adjusting maybe at the margin some of the products that you're planning to deliver. You mentioned townhomes and direct-entry-type product. If a hybrid office environment is sort of the first landing point for the office business, is that actually a good thing for multifamily in your properties, in particular? Because residents would need to be close to the office, but they're also going to spend more time at home, so more attention spent on having usable space where they live. Do you see hybrid offices as a good thing for your business?

Rich, I think as I mentioned before, we're agnostic about whether it's urban or suburban, generally looking at where we think there’s better value. We expect suburban household formation should be stronger this cycle than in the last cycle, as people won’t have to commute as many days. It spreads the workforce out within an MSA and possibly across broader geography. There will also be some individuals who can telecommute full-time. For those in a hybrid situation, absolutely, we believe some people at the margin will consider living 10 to 15 miles further out because they only have to be in the office 2 or 3 days a week versus 5. We are positioned to capture them in either case.

Right, right. Any other sort of post-pandemic changes that you're seeing in terms of how the business is behaving? Are there any silver linings, such as perhaps more likelihood to live alone? Are you seeing anything like that, or is it just too soon to tell?

Yes. Rich, it's Sean. I'd say it's probably a little too early to tell. When we reach the other side of the pandemic, things will stabilize, and we'll have a better sense of whether the resident profile has really changed regarding suburban or urban assets. As we continue to communicate with our residents, that may inform our product choices in some of those suburban markets in terms of larger floor plans, what we provide regarding workspace or work lounges in the buildings, and perhaps more townhomes in some cases. It’s probably a little too early to focus on that just yet.

Matt, curious if you can give us some sense of the compression in development yields, not on starts that you're about to initiate, but if these construction cost pressures prove more persistent a year from now, what kind of development yield compression will we be looking at?

I wish I knew, John. I do think that cost pressures are rising. But on the other hand, there's also the numerator. We are still underwriting deals with rents that are for the most part less than they were at prior peak levels because much of our suburban development is in job center suburban areas. Some rents in the other suburban category are higher than the prior peak in terms of what we’re underwriting. I do think there's still room to grow in terms of the numerator. On the denominator side, our total capital cost for the deals we’re lining up now isn’t much higher than it was a year ago, possibly a bit higher than it was six months ago with some increases in lumber; but other trades' costs have come down a bit. There will be cost pressures going forward and we're mindful of that. If anything, the margin right now is wider than it was on deals we started a year or two ago due to changes in asset values and cap rates. So there's probably a bit of room there.

Yes. John, I'd say the market is betting on NOIs outpacing total development costs over the next 12 months. There's clear inflation pressures due to supply chain issues, raising questions about how transitory or permanent those pressures will be. However, good pressures are also building on the rent side. I expect that supply will remain stubbornly in the 350,000 to 400,000 range. I believe conditions are looking better now than they were a year ago.

Okay, that makes sense. Understood. Last one for me. Sean, in markets where you've had to increase concessions significantly, as we anniversary the vintage and leases signed with concessions, do you expect occupancy to decline in the next few months due to lower retention?

Yes. Good question, John. It speaks to the durability of the customers that have allowed us to build occupancy. We will see. If you look at sort of our portfolio income levels for residents being down 6% on a year-over-year basis, there’s some embedded capacity to pay. However, whether people want to pay remains to be seen. In Q1, we saw good lift. Turnover was up, but not for financial reasons, rather for standard reasons such as roommate situations. There hasn’t been much financial pressure. As we progress through the second and third quarters, particularly in urban areas, we will have a better sense of this. There could be a little pressure. Additionally, as we get past the eviction moratoria, some of the bad debt could convert into physical vacancy, which may cause some fluctuation in occupancy as we approach the back half of the year, especially in places like L.A.

Just a question on development, given the positive outlook that you have in your markets and some of the benefits you spoke about from the stimulus entering the system, how are you guys thinking about sizing up the development pipeline overall in the next couple of years?

I can start, and maybe Ben or Matt want to jump in. As Ben mentioned, we are optimistic about our outlook and expect to exceed $1 billion this year. In previous years, during the last cycle, our development pipeline was in the range of $1.4 billion to $1.5 billion. We had scaled that back to approximately $800 million to $900 million during downturns. We believe we can easily flex that up to $1.2 billion without issue and possibly $1.5 billion. Those are the ranges we’re looking at, depending on potential entries into new markets and expansions.

Got it. Regarding some initiatives you outlined, $10 million from the technology deployment, and then another $25 million to $30 million, what's the total investment that goes into generating that incremental NOI?

Yes, Austin, good question. The technology initiatives around the digital platform, the AI that Ben described, will be roughly around $30 million. The smart access and smart home component investment is TBD based on customer adoption and desired features. That's uncertain for now. But foundational elements for infrastructure, the digital platforms and all that will be approximately $30 million.

Just circling back to the development question. I'm curious, last cycle and typically at the beginning of a cycle, you've seen a significant trough in supply. That's part of the reason you ramp development at the beginning of the cycle. We haven't seen much of that this time. Does that moderate your expectations regarding the size of the program versus how large it got in 2013, '14, and '15?

Yes. It was exceptionally profitable last cycle, particularly for the first three years. We're looking at development value creation margins that we hadn't seen before, probably around 40% to 45% in some instances. The range I mentioned of $1 billion to $1.5 billion seems right regarding the opportunity set within our markets and how our platform has scaled and what the balance sheet can handle without overly relying on equity markets remaining open.

Got it. You touched on bad debt a little but was curious if it's still lingering in the 3% range after several quarters. Has there been any movement in April? Have you seen any impact from the federal funds at this point?

Yes, Brad. This is Sean. I'm happy to address that, and Kevin could jump in if needed. We're not expecting any significant shifts in bad debt until we get past the moratoriums in place today, which will likely happen in the second half of the year. Many orders are set to expire in June, but may either extend or not; it’s too early to predict. So we aren’t seeing a lot of movements right now regarding bad debt on a month-to-month basis. I suspect that as customers begin to see the light at the end of the tunnel regarding eviction options becoming available, we’ll see some movement. We're also heavily involved in the stimulus. In some locations, we can apply in bulk on behalf of our customers; in others, we simply prompt them through emails. Thus far, we have received some funds, but the process has been painfully slow due to agencies being unable to manage the funds efficiently.

Going back to the development, I noticed that the yields on your projects in the pipeline are only 20 basis points lower. Can you walk me through this? The costs of 2x4 lumber and other construction materials are skyrocketing, with double-digit increases. Rents haven't been keeping up. I understand the wider margin due to cap rate compression, but I'm trying to understand why development yields appear to remain stable, despite softer rents, rising construction costs, and ongoing labor challenges. What is the reason for this? Please clarify for me.

Alex, it’s Matt. Regarding the projects currently underway, they are all contracted. So, much of our pipeline was contracted before the pandemic began. There were opportunities to renegotiate some of those land deals during the slowdown last year. If you consider the typical development deal; every dollar that goes into our total development budget has about 15% to 20% as land. Most of our pipeline is in land contracted before the pandemic. Then 15% to 20% is soft costs, including architectural and engineering fees. So there’s an offset there. About 60% to 65% going into hard costs is labor, with maybe a third relating to materials. If lumber has doubled, it probably increases total capital by 2% to 3%. Labor costs are a more significant factor, so that's what would really shift the equation. With lumber doubling, it might only account for a small increase in total capital budgets.

In reality, we underwrite on a current basis, as Matt mentioned—current costs, current rents, current OpEx. We've seen slight deterioration in yields, so the deals that Matt mentioned were starting in the high 5s. When we first put those in contract, they were likely low 6s. Thus, if you've seen rents somewhat flat over the last two years or particularly in suburban markets, it's reasonable to expect some slowdown in yields—maybe between 25 to 50 basis points. However, we've also seen cap rate compression offset that.

As you consider new markets to enter, there’s a cost and efficiency involved in achieving critical mass. How do you weigh outright acquisitions against building relationships with local landowners for development? How do you balance these two?

Alex, it’s Matt. We approach this as a combination of strategies. We're looking to acquire existing assets and have found that in expansion markets, there are opportunities to buy new or young assets without paying a premium on cap rates relative to older properties. We want to own some older communities in these regions for price diversification as well; therefore, we are actively seeking deals. We’re also developing third-party developers, having done so successfully; a deal completed last quarter in Doral was a partnership with a local merchant builder, which outputs mutual benefits. This model lets us grow our portfolio more quickly in expansion markets. So, we do not see it as an either-or situation but rather an integrated approach.

Additionally, this strategy allows us to allocate capital over varying time periods since not all ventures share the same timeline. Acquiring assets today might yield different returns compared to investments in third-party developments spreading out over the next 1 to 3 years, versus developing outright, requiring a longer entitlement process of 3 to 5 years. This diversification across time is advantageous.

I’ll be really quick. I want to ask a little more about Park Loggia. It seems you had some traction on retail leasing this quarter. Can you tell us who the tenants are and what box sizes are left that you have to lease? Some time ago, you indicated it would generate about $10 million in NOI annually once it’s stabilized. Are you still on track for that?

Sure. This is Matt. Just to give you an update, as we mentioned in the earnings release, we leased the remainder of the second-floor space last quarter. So we're now about 87% leased on the retail. This leaves about 8,500 square feet of ground-floor space remaining with Broadway bunch. Our sense is for that remaining space, we’ll be patient to wait for market activity in New York, which should hopefully pick up in the next couple of quarters. The second-floor space leased was to a medical user. The first floor includes Fidelity, a financial services office, and Target, plus the remaining ground floor space is still available. We’ll review how much NOI we could generate, but obviously, street retail in New York is softer than it was. Thus, it depends on the remaining ground floor space.

Given the return to the office is expected to extend through the fall, how do you think this may impact the usual seasonal leasing trends as this year plays out?

Yes, Brent, it’s Sean. Good question. We’re not sure yet how it will play out, though I would say that we’re seeing some signs already. For example, in New York City, the distribution of signed leases indicates a greater number are coming from locations more than 50 miles away than normal. Companies further announce their return-to-office dates, and the trend for universities to resume on-campus learning this fall is quite favorable, which bodes well for major urban markets. Even as Ben mentioned, office occupancy is currently less than 20%. It doesn’t require much to shift the overall dynamics. If we achieve 50%, 60%, or 70% of normal usage levels, that represents a decent movement from the current state. So I expect a positive trend from now until Labor Day. It’s challenging to predict how the situation will evolve following that.

Makes sense. Lastly, in terms of new leases in urban markets, what trends do you see in demand by unit type or price point?

In urban areas with lingering challenges, we're still observing some difficulty with studio units catering to single households. Occupancy rates are trailing the portfolio average by a few hundred basis points. This trend is more prominent in expected areas such as New York City, D.C., San Francisco, and urban Boston. That’s the primary difference we’re seeing regarding unit types at present.

First question goes back to the margin potential from some of the technology investments. How should we think about the baseline for that 200 basis points improvement? If we look pre-COVID around the 71%, 72% range, that sort of peak cycle, how do you view a normalized margin? What would this savings do on top of that?

Yes. Good question, Dennis. We evaluate this using our stabilized base years. For the most part, it’s quite blended, but if you use 2019 as a proxy for controllable NOI margins, excluding taxes and insurance, that’s our perspective for base years. Movement from there, obviously, will have been altered during the pandemic due to current circumstances, but that's how we view it.

Essentially just controlling for property taxes versus pre-COVID?

Exactly, alongside insurance, which pushes those margins. If you take a detailed look at it back to '18 and '19, those extra margins, excluding that, were in the 80% range, 80%-plus, if you analyze each item in terms of what you got outlined in '18 and '19; '19 serves as the real base year.

Okay. That's helpful. It’s a more challenging question, but I’m wondering how you interpret the economies reopening in urban cities, especially with young adults returning to areas where they previously lived after spending time at home or doubling up. How do you measure that next surge in demand? Is there a persistent demand or a temporary air pocket once you satisfy that first layer?

Good question. I think many people who left urban areas are likely to return, but not all. Speculating on what percentage may return is difficult. Regarding potential air pockets, it really depends on the broader macroeconomic conditions. That includes conversations on job growth, income growth, and the normalized factors driving business. On the supply side, we discussed that slightly too. We anticipate a consistent supply flow and expect to have tailwind from the single-family market due to affordability issues in our legacy markets. I suggest monitoring macro conditions as they pertain to demand and supply when looking ahead.

Great. Thank you, Anna. Thanks, everyone, for being on the call today. I know it's a busy day and week. We look forward to catching up with you in early June, at least virtually during NAREIT. So enjoy the rest of your day. Thanks.