Good morning, ladies and gentlemen, and welcome to AvalonBay Communities First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following remarks by the company, we will conduct a question-and-answer session. Your host for today's conference is Jason Reilley, Vice President of Investor Relations. Mr. Reilley, you may begin your conference.

Thank you, Kathy, and welcome to AvalonBay Communities First Quarter 2020 Earnings Conference Call. Before we begin, please note that forward-looking statements may be made during the discussion. There are a variety of risks and uncertainties associated with forward-looking statements and actual results may differ materially. There's a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10-K and Form 10-Q filed with the SEC. As usual, this press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during the review of our operating results and financial performance. And with that, I'll turn the call over to Tim, Chairman and CEO of AvalonBay Communities for his remarks. Tim?

Yes, thanks, Jason. And welcome back to Q1 call. With me today are Kevin O'Shea, Sean Breslin, and Matt Birenbaum. I will provide a brief commentary on the slides that we posted last night. And all of us will be available for Q&A afterwards. Our comments today will focus on providing a summary of Q1 results, an update on operations so far this year including through April, an overview of development activity and the status of construction sites, and lastly, highlighting our liquidity position. Before getting started, I'd like to acknowledge that the last seven or eight weeks have been far from normal for any of us on this call, or any of our more than 3,000 associates at AvalonBay. Given our market footprint in large coastal metro areas in the US, we've certainly been impacted by this pandemic on a professional and personal level. Many of us have had to learn to adjust to a different work environment at home while managing new and shifting family dynamics at the same time. But even more of our associates have been asked to leave the comfort and safety of their homes most every day to provide housing and service for the more than 100,000 residents that call one of our communities home. What we do is fundamentally essential, and we are grateful and inspired by our team's amazing dedication and thank them for the commitment they demonstrate every day in service to our customers. I'll start the results of the quarter starting on Slide 4. It was a solid quarter. Highlights include core FFO growth of almost 4% driven by healthy internal growth with same-store revenue and NOI growth coming in at 3.1% and 3.0%, respectively. All of our major regions except Metro New York and New Jersey of course, same-store revenue growth of 3% or more in Q1. In Q1, we completed three development communities totaling $215 million at an average initial yield of 6.4%. We continue to track record of creating significant value through this platform over the cycle. Given the current economic situation, we have not started any new development or acquired any new community so far this year. And lastly, we raised over $900 million in capital this past quarter at an average initial cost of 2.9%, with most of that coming from a $700 million 10-year bond deal at 2.3% completed in February, a record low reoffer rate for a 10-year bond issuance in US REIT history. And with that, I'll turn it over to Sean who will discuss portfolio operations including what we've seen so far in April and now in May.

All right, thanks, Tim. Turning to Slide 5, the impact of COVID-19 and the various shelter-in-place orders had a material impact on leasing velocity in March as noted in Chart 1, with year-over-year volume down roughly 40% from March 2019. In April, however, as a result of our teams becoming more proficient with virtual and no-contact tours, and prospective residents becoming more comfortable venturing out to tour apartment homes, along with the various incentives we offer to increase conversion rates, we've seen velocity rebound, it was only modestly below 2019 levels. The volume of notices to vacate for the month also reflects this trend. Unfortunately, the reduction in leasing volume in March coincided with our normal seasonal increase in the volume of notices to move out from our communities. As noted in Chart 2, this resulted in fewer move-ins and move-outs during the month of April. Taking collectively and as depicted on Slide 6, availability increased and occupancy suffered. As indicated in Charts 1 and 2 on Slide 6, availability was trending well below 2019 levels throughout most of the first quarter. That spiked in the second half of March when leasing velocity fell materially. The 30-day availability peaked at roughly 50 basis points greater than last year, during the third week of March, but has ticked back down a bit over the past six weeks or so. The impact of reduced leasing volume in March ultimately impacted physical occupancy as well, as noted in Chart 3, with April down roughly 75 basis points from March and 50 basis points from last year to 95.3%. In Chart 4, you could see the impact of the recent environment on April rent change, which ended the month at essentially zero. This diagram reflects our efforts to help mitigate the impact of COVID-19 on residents by offering a no rent increase lease renewal option to undecided folks and our response to the weakening environment which included offering incentives to increase prospective resident conversion rates. This did in fact increase from about 23% in March to 34% in April. Turning to Slide 7, we collected about 96% of what we would have typically collected in an average month from our customers, which is noted in Chart 1. If you look at the collection rates by segment, the rate for our market-rate customers was the highest, with our corporate housing or short-term rental customers, which only represent 3% of build residential revenue, the lowest. In terms of May collections, over the past few days, we're trending at about 94.5% of normal levels or about 150 basis points behind April, but it's early in the month. There are differences in how the calendar lays out with deferrals being on a Friday in May versus a Wednesday in April, and other nuances that influence daily payment volume. Moving to Slide 8, the collection rate for our highest-income customers has been the best, which isn't too surprising given the impact of the pandemic on the various service-related businesses throughout our markets. In terms of regional collection rates, the tech-led Pacific Northwest and California regions have been the strongest, and Southern California the weakest. Unfortunately, the impact of the pandemic on entertainment and tourism businesses in Southern California has been pretty severe. Most of the studios and other businesses producing content have been shut down for several weeks now, and all the major tourism-related sites, including Disneyland, Universal Studios, and many other venues are closed. Without operational overview, I'll turn it over to Matt who will address construction and development.

All right. Great. Thanks, Sean. To provide an update on how the pandemic is impacting our construction operations, Slide 9 shows our 19 development communities across our eight regions. We started to experience slowdowns in the second half of March in Northern California and Seattle as regional shelter-in-place orders were announced and availability of both labor and materials started to be impacted. By early April, the Northeast saw similar impacts. As such in April across all 19 projects, our average daily manpower was reduced by an average of roughly 50% with wide variations as reflected on the slide. Projects indicated in green have seen relatively little impact, while those in yellow have been proceeding at a significantly reduced pace, and those in red are temporarily shut down except for basic life safety and asset preservation activity. Residential construction is considered an essential activity in many jurisdictions. And just in the last week or so, we started to see a lifting of some of the more extreme restrictions. The four projects in Seattle and the Bay Area just recently moved from red to yellow. We have been working diligently to adjust our on-site health and safety practices to ensure appropriate social distancing among our subcontractor trade partners, add daily health checks, onsite wash stations, and move our supervisory staff to staggered shifts as part of our ongoing response. These 19 development communities represent a projected total capital cost of $2.4 billion, which is our lowest volume of development underway since 2013. As shown on Slide 10, we shifted to a more cautious stance as far back as 2017. Our development starts over the past few years have averaged just $800 million, a little more than half of our mid-cycle run rate of $1.4 billion per year. This puts us in a strong position as we navigate the shift from expansion to recession. Slide 11 shows a breakdown of our future development rights. We've been managing this pipeline of future growth opportunities to provide us with maximum flexibility at relatively modest cost and control over $4 billion of next cycle development projects with a total investment of just $120 million. The development rights pipeline includes 28 different projects, with more than 20% of the projected capital in flexible public-private partnership deals, and another 20% in asset densification opportunities where we are pursuing entitlements to add additional apartment homes at existing stabilized communities. Both of these types of opportunities offer flexibility to align timing with favorable conditions in the construction and capital markets. Kevin will now provide some comments on our liquidity and balance sheet.

Thanks, Matt. Moving to Slide 12, as shown in the next two slides, we ended this recession very well prepared from a financial perspective with a healthier liquidity position, modest near-term maturities, and a well-positioned balance sheet. Turning first to liquidity, as you can see on Slide 12, liquidity at quarter-end totaled $1.8 billion from our credit facility and cash on hand. This compares to the $900 million in remaining expenditures and development underway over the next several years, of which about $400 million is expected to be spent over the remainder of 2020. As a result, at quarter end, our $1.8 billion in liquidity exceeds remaining spend on development in 2020 by roughly $1.4 billion and our liquidity exceeds total remaining spend on development over the next several years by nearly $1 billion. Turning next to our debt maturities. On Slide 13, we show our debt maturities over the next 10 years and our key credit metrics. For debt maturities, we have only $70 million of debt maturing in late 2020 and only $330 million in debt maturing in 2021, for a total of $400 million in debt maturities over the next seven quarters. Plus looking at over the balance of 2020 and incorporating both development spend and debt maturities, our quarter-end liquidity of $1.8 billion exceeds remaining debt maturities and spend on development over the rest of 2020 by $1.3 billion. In addition, our liquidity exceeds all of our main development spending over the next several years. And all of our debt maturities through 2021 are $500 million. So you can see from this that we enjoy healthy liquidity relative to our open commitments through 2021. In addition, we also enjoy considerable incremental liquidity from cash flow from operations and excess dividends, as well as from our ability to source attractively priced debt capital from the unsecured and secured debt markets, to the extent the asset and equity markets remain unattractively priced. In this regard, at quarter-end our net debt to core EBITDA of 4.6 times is below our target range of five times to six times, leaving us meaningful capacity to absorb leverage increases as we proceed through these challenging times. And unencumbered NOI with at or near an all-time high of 93%, reflecting a large unencumbered pool of assets that we could tap if necessary for additional secured debt capital. With that, I'll turn it back to Tim.

Great. Thanks, Kevin. Just wrapping up and turning now to Slide 14. Overall, Q1 was a very good quarter, with results a bit better than we had expected. Despite the slowdown we began to experience in the second half of March and April, we felt much of the impact of the shutdown. Certainly, although we were able to still collect most of what was built for the month with only 6% uncollected by month-end, which is about 400 basis points lower than normal. Progress at many of our construction sites were impacted by the pandemic. We expect that orders by some of the state and local governments to temporarily halt inspections and construction will result in the delays in delivery options scheduled in several communities, which in turn will push some of the lease-up NOI projected for 2020 into next year. Most sites that have been impacted are currently in the process of either reopening or slowly returning to full manpower, as most states are now permitting new construction as an essential service as Matt had mentioned. Our shadow pipeline of $4 billion in development rights, which is controlled mostly through options or represents densification opportunities at existing communities offers good flexibility in terms of timing future starts well supported by market conditions. And lastly, as Kevin just mentioned, we're in great shape financially. We have ample liquidity to fund existing investment commitments, modest levels of debt maturing over the next several quarters, and strong access at attractive pricing to the debt markets. So with that, Kathy, we're ready to open up the call for questions.

Thank you. We will take our first question from Nicholas Joseph from Citi.

Thanks. Hope you guys are doing well. Just first, maybe on construction on the delays that you've seen and also being seen really across the space. So just wondering how that impacts expected supply in 2020? And on average, how long do you think individual projects will be delayed in terms of deliveries?

Sure, Nick, this is Matt. Regarding total delivery in 2020, it's still too early to provide a clear picture. Over the past few years, even prior to the pandemic, we observed that actual deliveries were typically 10% to 15% lower than our initial expectations due to factors like labor and inspection constraints. Therefore, I anticipate that the number of deliveries will likely be down more than that compared to the early third-party reports. However, the actual outcome will depend on how the situation evolves over the next few months. With respect to our pipelines, we have noted that five projects have postponed their initial occupancy by a couple of months, and we currently believe that their final completion will be delayed by about a quarter. This impacts around a third of our 19 active projects. The remaining projects are either in less affected areas or are early enough that they haven't seen significant delays yet. Of course, this situation could change, but that's the current outlook.

Thanks. As states and cities begin to reopen, how are you considering repositioning your amenities to promote social distancing? Additionally, looking at medium and long-term developments, how do you foresee changes to amenity spaces in light of broader trends such as remote work?

Yes, Nick, this is Sean. I'll take that one, and others can jump in if they like. But in terms of the existing amenity space, yes, we do have a team that is taking a look at what the occupancy standards are for different types of spaces. Not only in our communities, but at our offices as well. And what kind of limitations that will place on the occupancy limits that were in place before the pandemic. So we're going to see that reduced pretty materially, but it depends on the type of space. Depending on what they're talking about, fitness center equipment with space two feet apart, we may have to go back and redistribute the equipment to have more spacing, as an example. Chill spaces where there was, what's called soft seating that was side by side with tables around, that may have to be a space where we just reduce the number of items in there, in terms of chairs and same thing in terms of our swimming pool. So, there's a fair amount of work underway to sort of redefine the various spaces that our communities to make sure they comply with the proper social distancing protocols, and it's just going to take some time to work through each one. And then in terms of the longer-term trend, it's probably a little too early to tell now but certainly there was a trend, we see more people working from home, whether they were telecommuting, or whether they were just sort of independent contractors working from home, that are producing content or contracting business for different types of industries. Entertainment, in particular, comes to mind for a place like LA, so that trend will likely continue. I think it's probably a reasonable conclusion from what we see. But to what degree, it's probably too early to tell at this point.

Thank you.

Yes.

And we'll take your next question from Rich Hightower with Evercore.

Good afternoon, guys. Hope all is well. So I wanted to get your reaction to one of your competitor's comments yesterday, regarding a little bit more underperformance in garden style communities versus high rises due to the collections. Are you seeing the same in your portfolio or do you have any comments along those lines?

Yes, Rich. It's Sean. I can share a few thoughts on that. We've looked at collection rates in maybe a few different ways. Certainly, we talked about it by segmenting it in terms of what was presented on the slides in my prepared remarks. But in terms of some other metrics that we look at and have been following, first is sort of price point, As versus Bs. As are running about 100 basis points higher than Bs at this point in time. What we're generally seeing across most of the markets is that suburbans are performing about 25 basis points or so better, but not terribly material. Probably the one exception is New York where the urban environment collection rate is better than the suburbs, given the impact we've seen in Westchester. It's been pretty material in terms of the pandemic. And then in terms of high rise versus garden and mid-rise, high rise is slightly better, but there's not a lot of high rise products to benchmark against to be honest. Most of that for our portfolio is going to be in New York, a little bit in D.C. It's just not a big sample size, so I probably wouldn't draw too many conclusions about the product type differences.

Okay, so maybe a little bit of differentiation there in terms of what you're seeing versus maybe I guess elsewhere in the sector. Okay, that's helpful color. And then I guess just as you think about foot traffic and demand patterns picking up now that we're into May and things have kind of come off the bottom, are you seeing any differentiation between suburban and urban within the portfolio along those lines?

Not significant at this moment. I would say it’s primarily influenced by the market. The areas that are more active seem to be reacting more to the recovery, and we notice that people still prefer virtual tours over self-guided options. In contrast, in the Mid-Atlantic, individuals appear to be more at ease with self-guided tours, leading to fewer virtual tours. Therefore, the distinction seems to be based on market factors rather than price point or location, as you mentioned, urban compared to suburban.

Okay, great. Thank you.

We'll take our next question from Jeff Spector with Bank of America.

Hi, everyone. This is Alua Askarbek filling in for Jeff Spector. Thank you for answering the questions today. I was curious if you could provide more details on the current condo sales. I believe you mentioned one more contract signed in the fourth quarter of 2019 during the call. I'm assuming those are the ones that have closed so far. Are there any new projects in development? Is the market performing as you anticipated, or do you expect to make significant price reductions, or are you planning to hold firm?

Sure. This is Matt. Some people couldn't hear the question, which was about Columbus Circle condo sales and recent progress. As of today, we have closed 41 units, generating $129 million, with an average price of $3.15 million per condo. We have 22 additional units under contract with binding deposits, representing another $70 million in proceeds, slightly higher priced at about $3.17 million to $3.18 million per unit. Sales activity for new contracts was strong in January and February. If you look back to our first quarter call, we had 54 contracts at that time, and we've added nine since, amounting to around $40 million in incremental sales since then. Most of this came in February and early March, but once stay-at-home orders were issued, we transitioned to 100% virtual tours with our sales agents in mid-March, leading to a significant slowdown in traffic during late March and early April. However, in the last two or three weeks, traffic has picked up again. Despite being virtual tours, we're seeing over 30 visitors per week, which is a strong number and similar to pre-March conditions. Until people can physically see the units—hopefully within the next month—we won't know how this traffic will convert into additional contracts. Pricing has remained consistent, with no changes in levels—whether asking prices or what we're achieving—over the last 10 to 20 contracts compared to earlier ones. There are various price points in the building depending on location and floor, so it isn't exactly comparable across the board. So far, there has been no impact on pricing, but we’ll have a better understanding once we can get people back into the building and observe new contract activity, which we hope to see soon.

Okay, great. Thank you.

We'll take our next question from John Pawlowski with Green Street Advisors.

Hey, thanks. Sean, as you guys roll out concessions in different markets, which markets are responding better in terms of traffic coming in and the rollout specials? And which few markets just aren't responding no matter how generous you become?

I mean, the general response has been pretty healthy across most of the markets. I mean, I guess I'd have to tell you that based on what you probably have heard from others, just pointing out some of the weakness in L.A., probably taking slightly more concessions on average in the L.A. market as compared to others to get those conversion rates to sort of reasonable levels. But in terms of the rebound, for the most part, I would say that it's been pretty steady with some limited exceptions, and the exceptions really relate to hotspots and obviously, specifically in and around New York, where people are still pretty hesitant, given the environment, to be out shopping for apartments. People are doing virtual tours, and the concessions are reasonable, but not as much as what was required in L.A. to get people to spur to action given what was happening in that market environment, which was already weak, as you may recall, at the beginning of the year. The pandemic certainly only made it that much more difficult in terms of people who are qualified being able to come out and shop for an apartment and be able to afford to rent an apartment, given what was happening with all the studios being closed, and a lot of people that produce content in Southern California, with their shops being closed. So that's probably the one market where it's been a little more challenging.

Okay. And then last one for me, just a question about D.C. and the defensiveness of that market. Obviously, a winner on a relative basis during the GFC. In your mind, the price point of your portfolio in the D.C. metro and the employer base, now that it's shifted, is D.C. different this time, or would you still put it up there against any other market the next 12 months, 24 months, just in terms of rent growth and occupancy trends?

I think based on what we know as of now, and just thinking about the composition of the workforce, I think D.C. should hold up relatively well. If you think about the nature of the pandemic and how things have started, and the impact on joblessness to date for the most part, as opposed to kind of a trickle down, it's really a trickle up type thing where a lot of the job loss is heavily concentrated at those lower-level service jobs. You're talking about food service or bars, restaurants, hotel workers, things of that sort. It may trickle up some. And in certain geographies, where people are paid well, again, like L.A., to produce content, maybe a disproportionate impact. But D.C., highly educated population, a lot of professional services, defense, etc. It's expected to hold up relatively well. And we've seen that thus far, even though it's only been sort of six weeks at this point in terms of what's happening. But others may have different thoughts to add.

No, I agree. I mean, between the knowledge base, knowledge nature of the economy, the federal government, state, and local governments are going to be pinched and are beginning to see cutbacks there. But not as much in areas of the federal government. I think it's fair to say that D.C. was hurt a little bit initially just because of our exposure to hospitality. You have obviously both Hilton and Marriott here, which had massive furloughs early on in the pandemic. But I think over time, Sean is right. I would expect it to stand up pretty well relative to the rest of the world, John.

Okay, great. Thanks for the time.

We'll take our next question from Austin Wurschmidt with KeyBanc.

Hi. Good afternoon, everyone. I was curious if you were to negotiate a new contract today on a construction project, what do you think hard costs would be versus pre-COVID-19?

Good question, Austin. It's Matt. We certainly think the direction is headed down. I think as you see here in this very moment, I'm not sure that you would see that yet. On several of our projects, we have decided to defer. One of the reasons we deferred some of our potential 2020 starts is because we think that there will be a better buying opportunity in, I don't know, three quarters, four quarters maybe. So I think it takes a while to work its way through the system, and probably we'll see it first in some of the early trades like concrete or site work where deals aren't starting. Those folks will start to see they have excess capacity and probably start to cut pricing first. They'll probably take longer before it gets to some of the finished trades where there's funding stuff underway and that need to be finished; and if anything, may take longer than finished over the next four quarters to six quarters. So one of the advantages we have is because 90% plus of our construction, we are our own general contractor. We can kind of time that and play that strategically a little more than if we were using a third-party general contractor, which is the way a lot of the private side of the business works. So still too early to tell. We'll see what happens. In the last downturn, it was down maybe 15%. And that was an extreme correction. But time will tell. I think Tim wanted to add something.

Yes, Austin. I think as we move forward, we have seen significant pressure on construction costs, with increases of 6% to 8% over the last three years. This has created challenging circumstances, which leads us to believe a correction is likely. We expect declines in wages, commodities, materials, and subcontractor profits, which should exert downward pressure on pricing. However, we anticipate some general conditions might increase due to changes in protocols and social distancing, possibly affecting productivity. That said, as subcontractors reduce their workforce, they tend to retain their most productive teams, which can lead to cost advantages as we emerge from a downturn. Overall, we do expect costs to decrease, as it will be necessary to align with the economics, especially since net operating incomes are either flat or declining, and costs have increased since the pandemic began. We are also looking for opportunities in the equity markets.

That's really helpful. I mean, you guys had previously expected to start $900 million. That I think you alluded to. Some of those projects you delayed purposely would be potential for cost to come in. What percent of that $900 million of cost is fully baked at this point?

I would say none of it. I mean, are you talking about the cost or the start commitment? We haven't committed to starting anything this year.

The cost on some of our projects.

The only costs that are accounted for are related to the land we already purchased. We bought two parcels of land during the first quarter that could have started in 2020. So far, we have spent $38 million on those two deals. Some of the soft costs are included, but we haven't purchased any construction for those projects yet.

Okay. Understood. Thank you. And then last one for me, Kevin, maybe to pull you in here a bit. The balance sheet's certainly in great shape. But if you don't start any or only a small subset of that $900 million, where do you expect leverage to finish the year?

Yes, Austin, we will likely provide a more detailed update on our capital plan for 2020 during our mid-year call. This will give us clearer visibility on various factors, including net operating income, investment activities, and capital market activities. Currently, we are at a very low leverage level of net debt to EBITDA at 4.6 times, compared to our target range of five to six times, which was an intentional decision. We have worked to reduce that leverage over the past few years to give us more ability to navigate potential downturns, and we find ourselves in the position we aimed for, which allows us significant flexibility to take advantage of opportunities in the coming months and the capacity to increase our development spending. As I mentioned earlier, we have abundant liquidity relative to our commitments in the near term. Although our guidance has gone through various adjustments, our initial goal was to raise $1.4 billion in external capital. So far, we have successfully raised $900 million of that amount, achieving two-thirds of our initial target. We may not need to raise as much as we planned, but the main takeaway regarding why we haven't upgraded our guidance is that our capital needs moving forward are quite modest. You can expect the balance sheet to remain relatively stable in terms of absolute debt levels based on what we currently know.

That's helpful. I guess I was getting it. It seems like it could be lower to the extent you get some lease ups and you don't have the incremental spend but we'll wait and see what you have to say in 2Q. Thank you.

Next question from Nick Yulico with Scotiabank.

Hi, this is Sumit in for Nick. Thank you for taking the question. Just following up on the development discussion. You mentioned as a footnote that you've lowered the yields on your development. I'm just wondering if you could give a little more color as to what kind of introduction you're looking at for near term or development or developments in research versus a stock that's going out in 2021, 2022?

Sorry, can you repeat the question? This is Matt. The question was about the yield shown on the development?

Yes. You footnoted yield as slightly reduced saying that you brought down the yield or you brought down assumptions for development nearing completion. So just trying to get a sense of what's the split in the yield reduction particularly for developments that are more near term in 2020?

As a general rule, our practice has been that when a deal gets more than 20% leased, then we kind of remark the rents to market to reflect the experience that we're actually having. Until that time, we tend to carry the rents at what we initially underwrote. So we've talked for years about the fact that we don't trend rents, and that's what we mean by that. In this particular release, we only have the three deals that are completed, and in that case, those rents reflect the actual rent roll in place. Those are all more than 90% leased but are on the schedule. Then there's three other communities where we have enough leasing done that we've reflected the most current rents there on the chart there on Attachment 8. The other 16 assets, we haven't done enough leasing yet, so those are still the original pro forma rents. That's consistent with what our practice has always been. I guess we did add a note just to make clear that we have not endeavored to update those because of any changes in the environment related to the pandemic. We're still carrying in some grants that were in the initial pro forma. When we get leasing activity, we will adjust them accordingly. So it's really not any change from our current practice. I think it was just an additional disclosure to make sure I understood that. It's more volatile environment than it's been. Sean, do you want to talk to how they're currently leased?

Yes, just to add one thing on that as Matt indicated. Just for the first quarter, there were six assets in lease. If you look across the rents for those six assets, four of them were producing rents at that time average for the quarter that were above the original proforma. One was equivalent to our original proforma and one deal in Northern Seattle was modestly below our original proforma. But you blend all that together, rents at that point in time were roughly 3% above proforma at $80 or so, but there were some cost changes on those deals. So the net reduction in yield really was only about 10 basis points to a weighted average of 5.9, so really immaterial in the context of the whole basket.

Thank you so much.

We'll take our next question from John Guinee with Stifel.

Great, John Guinee here. I have two quick questions. First, has this situation led you to consider speeding up or slowing down your expansion into other markets like South Florida and Denver? Secondly, if there is a slowdown in development statistics in 2020, how would that impact G&A and interest costs in 2021 since you can no longer capitalize personnel and development interest expenses?

John, this is Tim Naughton. Maybe take the first and Kevin if you want to take the second piece of it or not. With respect to our market footprint, as we talked about in the past, we had to potentially diversify a bit of our exposure to the larger cost markets into other knowledge economy types of markets part of what drove our entry into Denver and Southeast Florida for sure. There have been other markets that have been on screen as well. We've been pretty active in terms of our investment in both those markets, both in terms of acquisitions and in development and also funding third-party developers. We've tried to really activate all the levers, if you will, with respect to those markets. So we really haven't been held back by a desire to get in those markets. It's a function as much of opportunity as anything. We'd expect that to continue. That will make you tend to trim from some markets and recycle some capital or they tend to make sense to the balance sheet, invest capital in those markets so we can do that as well. But right now, it's more to debt and asset recycling. So I don't think anything's changed there. We'll continue to evaluate other markets that we think could make sense for us in the long term that we think are over-indexed to the innovation economy and therefore we think will outperform over a long period from a demand standpoint. I think your second question had to do with G&A around development. I can maybe start that and Kevin if you want to come in. We're always going to try to right-size the development organization to what we need and the opportunities for the next two, three years. To the extent we delay deals this year, it means we're probably going to have more stacking up in 2021 or 2022. So part of it is to make sure that you're properly positioned not just for what you have to do for the next six months but really for the platform over the next three or four years. To the extent this becomes a very protracted recession, that changes the calculus obviously. That's not how we're viewing the environment today. We are viewing this as kind of a slow buildup from a sharp downturn. If we do see a meaningful contraction and construction costs to the balance of 2020, then you start to see some recovery in 2021. You start to see 2022, 2023 could be a really good time to be delivering the product which would argue for heightened starts in 2020. We want to make sure we've got the right type development and construction organization really over the next three or four years, not just over the next six months and not much has changed in terms of our view that it needs to change materially. In part because we'd already brought it down from as Matt had mentioned around $1.4 billion to roughly $800 million sort of late cycle. It's already sized for late-cycle downturn type dynamics. Kevin?

You'll need to cover things and as a result of some of those that decline and start falling. We did have some recent staff reductions in our cap odds groups last year. And so when we put our budget together for this year, we did expect capitalized overhead for 2020 to be a bit below what it was in 2019. If you look at what happened in the first quarter, capital overhead did sequentially increase a little bit in the first quarter due to a few one-time items such as increased benefits and payroll costs. But for the full year 2020, we would expect that that capital overhead runway would decline in the back half of the year somewhat based on what we know today.

Great, thank you.

We'll take our next question from Alex Goldfarb with Piper Sandler.

Good afternoon. Just two questions from me. One, in the beliefs about the impact of locked fees $1.4 million per month, can you just talk about your expectations? I'm assuming the eviction moratorium market, obviously, they're no late fees. Then you based on wherever you don't have amenities open, you aren't charging amenities so how should we think about this $1.4 million a month? Is that something you should be thinking about for the next few months or is your view that whatever maybe by mid-summer, a bunch of communities will fully be open where this number won't be as big as it is right now?

Alex, this is Sean. Just to use some perspective of about 80% of that $1.4 million was in terms of commentary amenity fees because our amenities are closed. So our expectation is you're going to see a slow build of that line item over the next few months. As the states begin to reopen, we resize our occupancy limits as I was describing earlier in response to a question, and then it will slowly rebuild. We don't expect it to snap back, I guess I would say, just because the pace of opening is going to be different by jurisdiction based on the local market environment, but that's the majority of it that should fully rebuild. The rest of it was small stuff related to some late fees and credit card convenience fees and things of that sort.

Regarding your line of credit, you had drawn $750 million and then promptly repaid $535 million. It seems you have around $150 million from condo sales. It's notable how quickly you accessed and then returned those funds. What prompted this change in your strategy? Was it due to uncertainty about bank funding or the Federal Reserve’s involvement, or did you realize after delaying several projects that you didn't need all that money immediately?

Hey, Alex, this is Kevin. We drew a portion of our line of credit, basically so that $750 million out of $1.75 billion in mid-March. We really did it on a precautionary basis, not because of anything in our business, not because of our development activities, not because we had any particular use. We didn't have commercial paper. There was really nothing related to AvalonBay that caused us to draw that $750 million. Instead, it was really just a reaction to the initial stage of the pandemic and its impact on the capital markets before the Fed had fully stepped in to stabilize the markets. So it was really done on a precautionary basis to ensure that we had greater control over capital, that would give us incremental abundant time and room to maneuver through what we thought would be a choppy set of months ahead of us.

Maybe just to straighten that out. Once the Fed came in, obviously, the bond markets became very constructive and we had thought as split the bond market if we needed to, so that was the reason that ultimately we just paid back.

Okay. Thank you.

We'll take our next question from Rich Anderson with SMBC.

Thanks. Good afternoon, everyone. First question, this whole thing started to take effect at the beginning of what would be considered the heavy leasing season for multifamily. My first guess was perhaps that was a good thing but then I thought about it, maybe it was a bad thing because there was more activity and tenants maybe had an arrow in their quiver to negotiate. So what do you think? Not that we could have changed it but do you think the industry or yourself was negatively impacted by the timing or how do you think that played out from a cadence standpoint?

Rich, it's difficult to determine the exact implications when one is in a state of complacency. Most of our rent growth for the year is achieved through improved market pricing and increased leasing activity, leading to a rise in our rent roll. This growth typically occurs between March and July, which presents challenges currently. Despite having several factors within our control, we haven't managed to address any of them.

Yes, can you guys do anything right? The second question is perhaps more realistic and pertains to the long term. You are often seen as visionaries, and I'm not sure if your variety of product types and price points emerged from the Great Recession, but let's assume for the sake of this discussion that they did. Do you think there will be an evolution in multifamily properties as a result of this? Maybe it's related to the work-from-home trend, possibly leading to more internal office space, technology enhancements, or equipment that people might need while working from home. Is this something you've considered, or do you have any thoughts on how multifamily might change over the next five years?

The ongoing trends will be influenced by the composition of households, particularly with the rise of single-person households, which significantly boosts demand for our services. Most of our households consist of singles and professional couples, with very few children. Regarding our product and service offerings, there seems to be a shift towards remote work environments. This trend, as mentioned by Sean, is likely to gain momentum. We had already initiated the inclusion of co-working lounges and meeting spaces within our communities, which are proving to be quite effective. Residents might prefer these settings over coffee shops like Starbucks, especially when they're working outside of an office. Additionally, there is a growing trend towards larger fitness centers, as people seem to favor working out in a community setting with their peers, possibly alongside younger individuals maintaining the facilities. Within the apartment units, we are also witnessing a shift towards more flexible and open layouts that can adapt throughout the day, transforming spaces like kitchens and dining areas into workspaces. I've observed people setting up their offices right by the windows in my apartment community, which shows a change in how residents utilize their spaces during the day compared to the past. Furthermore, the demand for reliable high-speed internet is increasing, and we are committed to supporting that need. Finally, I want to highlight our Smart Home initiative, particularly the convenience of remote entry. This feature allows for goods and services to be delivered directly to residents' units, streamlining access without requiring interaction with front desk staff. Overall, these trends were already in motion but are likely to accelerate due to recent developments.

Really good color. Thanks, Tim. Appreciate it.

Sure.

We will take our next question from Hardik Goel with Zelman.

Hey, sorry, guys. Can you hear me?

Yes, go ahead.

Thank you. I was curious about the development pipeline. I know Matt mentioned updates occur when there's full confirmation, but looking at the pipeline for projects set to deliver in 2021, either late or mid-year, how do you feel about the expected yield on those? I understand there's a lot of uncertainty, but what kind of buffer do you have that would still make it feasible to underwrite today?

Hey, Hardik, it's Matt. The deals that are set to deliver in 2021 were generally initiated last year, as they would have come to fruition sooner otherwise. With these deals, we'll have to wait and see how things unfold. Ultimately, it will rely on the market rents. Some of these projects had higher yields initially due to their locations, which potentially provides more flexibility. Additionally, there are a few projects early enough that we might see some construction cost savings. As I mentioned, we're sometimes shifting our approach from trying to expedite progress to slowing down a bit in hopes of benefiting from a more favorable market for construction services in the coming quarters. However, the risk remains similar to that of the stabilized portfolio; it revolves around the fluctuations in market rents between now and then.

I guess I'll just add to that. I think we're going to first recognize those deals are capitalized and in a different capital environment. So you've got to figure, you know, with both cost of capital as well as the underlying fundamentals, but as you saw Sean's remarks, rents in April were pretty flat on a year-over-year basis, I think there's a basis for believing that they should continue to come down. We've lost 20% of our workforce, and even if three quarters of that comes back as states start to open up, we're still looking at 8% unemployment, and likely see, you know, flat or maybe slightly negative household growth while we're still delivering some new supplies. So that's going to take its toll in the near term on. And as I mentioned before, I think, you know, it's ultimately, we could see a pretty strong, you know, late 2021 and 2022 delivery. People who start doing what we're doing, which is blank start, and you start to have a dearth of deliveries at a time and maybe economies starting to really regain its footing.

No, just kind of one other thing, Hardik. As you think about sort of development, how it flows through our earnings from a business model standpoint and compare it perhaps to the last downturn, as you know, we've emphasized how funded we are with respect to long-term capital being sourced to fund the development underway. At Q1, we were about over 80% match-funded with long-term capital against the development that's underway. So that's an important point. Tim touched on in his comments but I really do think, as you think about AvalonBay and how we might perform here in the coming years, it's an important distinction to draw in terms of how we are positioned from a balance sheet and funding point of view and a built-in accretion point of view with respect to development, relative to say the last downturn we had a lot more -- much more in the way of open and unfunded development commitments. At the time when 12 years ago developments were coming in at 5%6% yield and funding with that cost around 6%. Today is very different. We'll see whether the yields really shape out to be. But we know debt cost for us on a 10-year basis today are probably somewhere in the 2% range. So, and we don't really need much of that at all. And we're already over 80% match-funded and the development underway. So we really are in terrific shape from that standpoint, that sort of benefit from, you know, painting profit growth on the 80% or so that we've already paid for this underway. And to this extent, we have to source incremental capital and use debt to do so; that's likely to be an additional source of accretion.

That's just from my standpoint, guys. I have no problem with the balance sheet, I'd never have. I find it confusing when people are, you know, kind of begging you for that. And it's resulted in you guys holding $750 million on your balance sheet. It's kind of crazy to me. I was thinking more about the IRRs. And Matt and Tim, all you guys have talked about you know the 9% to 12% range through the cycle. To get 9% on assets started during the last downturn may be 12% in your best assets. What I'm trying to understand is on an IRR basis, obviously these things will lease up more slowly if they're coming on in a stressed environment. What is the IRR on the developments that are, you know, kind of 2021 and beyond? Is that a 9% number, 10% number, what does that number look like?

Yes, we have previously shared that during the last couple of cycles, when we began deals late in the cycle and delivered them during a downturn, the outcomes were significant. It's challenging to predict the exact performance, especially when starting from the beginning of a cycle compared to a downturn. Over a 10-year period, the return expectations can narrow, but we have been clear about our cost of capital. On the low end, it was approximately 8.5%, while the high end was around 13.5%. Therefore, I believe that conditions might improve. We experienced challenges from high construction costs initially, but developments starting in 2021 and 2022 could yield much better results.

Got it. Thank you. Some great color.

Thank you.

We'll take our next question from Haendel St. Juste with Mizuho.

Hi guys. Thanks for taking my questions. Just a quick couple of for me here. Just going back to April, I guess, collections show the market rate collections, I've seen some of this is income and claims related but I get more surprised it's even more meaningful lag in the corporate apartments business or can you just help us to identify or help us understand what are the key reasons around rent collection? And what's supposed to lead that?

Okay, you were a little muffled on some of it, but I heard the collection rate in the quadrant. And yes, it is more. I mean, the way I think about it is these are the kind of corporate profit home providers. It's not a corporation per se that are the end users here, but sort of intermediary that are, you know, essentially, that has a sales team that have reached agreements with various corporations or have a booking site essentially, that's the marketplace. And then they are leasing units from us and many of our peers and others. And those there, you know, think of it I guess I'll call it sort of like an extended stay hotel almost where the bookings basically dried up pretty quickly. And somehow some longer-term states from people who were there on consulting assignments for three or four months, they'll bleed out a little bit longer. And there are others who really were running more short term, 30 days. Their demand evaporated more quickly. So yes, we're working through the process with them just as we work with other residents in terms of referrals and plans and things like that. But, you know, that's why the collection rate was quite a bit lower than what we'd see from our market-rate apartments, which is generally higher quality residents, good household incomes, as indicated in my prepared remarks about the slide to be addressed.

That's helpful. Thank you. So just wanted to be clear, but ultimately, who is on the hook to the right, is it the individual or the corporate sponsor?

The intermediary is technically our credit. That's who we're dealing with. But their ability to pay certainly is based on what occupancy rates they have across their portfolio and to the extent they're 75% occupied with good corporate clients. That's what they can pretty much pay. Not many of these companies have, but none of them really have a really strong balance sheet to be able to handle, you know, three or four months without payments or 25% to 50% occupancy. So the nature of the pandemic and how long it lasts and the impact on travel will be significant in the next few months.

What percentage of the tours you've conducted this year in April or early May have been virtual? How does the conversion rate for those virtual tours compare to more traditional tours historically, and are you finding that you discussed more incentives to get the virtual tours to sign officially?

Yes, good question. You know, I don't have that right in front of me in terms of the composition of it, but I mean, I would say that virtual tours, you know, for our business, you know, are not nearly as effective as self-guided tours or escorted tours. But given the nature of the pandemic, it was actually nice to see a rebound activity in April, people are getting more comfortable with virtual tours through our website, or in some cases, we had community consultants that would basically do FaceTime through individual units. And then some of that was really at the discretion of the customer where they didn't want to come through with someone, they were fine doing it virtually. So, I think it's evolving but certainly reflects the nature of the business and where it's going in the future, in our view, and the technology investments that we're making, and we're already making that we may accelerate as it relates to technology and support. A lot of the sort of no contact type activity between our staff and our customers and our prospective customers. And that includes various things on the tour side and move in. We see the packages and even on the maintenance side, where we're doing diagnostic calls via FaceTime and other tools to try and diagnose issues for customers being able to sort of self-serve and self-help, in many cases, before actually someone goes to a unit. So I think this will just accelerate some of the things that we've already been putting forward.

Got it. Thank you.

There is showing no further questions at this time. I'd like to turn the conference back to Mr. Tim Naughton for any additional or closing remarks.

Thank you, Kathy, and thank you all for being with us today. I know you have many calls to cover. Normally, I would look forward to seeing you, but I don't think that's going to happen. Hopefully, we can talk to someone during that week and maybe even connect on a Zoom call. So take care and stay safe. Thank you.

That concludes today's presentation. Thank you for your participation. You may now disconnect.