Earnings Call Transcript - AVB Q4 2020

Operator, Operator

Please stand by. We are about to begin. Good morning ladies and gentlemen and welcome to AvalonBay Communities' Fourth 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.

Jason Reilley, Investor Relations

Thank you Eli and welcome to AvalonBay Communities' fourth 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 is a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the Company's Form 10-K and Form 10-Q filed with the SEC. As usual, this press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available on our website at www.avalonbay.com/earnings and we encourage you to refer to this information during the review of our operating results and financial performance. With that, I'll turn the call over to Tim Naughton, Chairman and CEO of AvalonBay Communities for his remarks. Tim?

Timothy Naughton, Chairman and CEO

Thanks Jason and welcome to our Q4 call. With me today are Kevin O'Shea, Sean Breslin, Matt Birenbaum and for the first time Ben Schall. Sean, Kevin and I will provide commentary on the slides that we posted last night. And all of us will be available for Q&A afterwards. Before turning to our prepared remarks I would like to take a minute to introduce Ben who many of you have met either during his previous job or since the announcement in early December. Most recently Ben served as the CEO and President of Seritage Growth Properties where he led the company from its inception and oversaw the transformation of the company from a portfolio of stores into a mix of shopping, dining, entertainment destinations. Prior to Seritage Ben was COO of Rouse Properties, owner of regional shopping malls and before that he was SVP with Vornado Realty Trust. Ben brings a deep background developing, operating, activating real estate in addition to broad experience in many markets in which we do business. This is only Ben's second week on the job. So he will likely have a limited role on the call today, but I thought I'd give him the floor for a couple of minutes to share a few comments. Ben?

Ben Schall, Chief Development Officer / President of Development (New Hire)

Thank you Tim. It's terrific to be here and I'm truly honored by the opportunity to join this team and organization. AvalonBay is one of the rare groups of companies in my mind, led by Tim and the senior team that has been able to successfully shape, build and grow an enterprise of this quality and scale and do so with a core culture with a focus on integrity, caring and continuous improvement that remain a real differentiator for the organization.

Timothy Naughton, Chairman and CEO

Great. Thanks Ben and great to have you and welcome again. Our prepared comments today will focus on providing a summary of Q4 results and some perspective on 2021, and how it impacts our plans for this year. Before I get started on the slides maybe just offer a few introductory comments on the quarter and the year. The fourth quarter was a tough end to what was already a very challenging year for the company and the business. The normal effects of an economic downturn on the apartment sector were magnified by work from home mandates, civil unrest in our city centers and the growing strength of the for-sale market.

Sean Breslin, Chief Operating Officer

All right. Thanks Tim. Moving to slide 7, you can see the impact of the pandemic on physical occupancy and the absolute effective rent we achieved over the past year broken out between urban and suburban submarkets. Chart 1 reflects our suburban submarkets which make up about two thirds of our portfolio. We experienced some deterioration in both occupancy and rate during the spring and summer of 2020, but have recovered most of the occupancy over the past four months and as of January, effective rental rates were up about 1% sequentially from December and were roughly 4% below where we restarted 2020. The primary driver of the weakness in our suburban portfolio has been the performance of assets located in job-centered hubs where employers have adopted extended work from home policies and transit-oriented developments where use of mass transit has declined materially during the pandemic. Some examples include Assembly Row in Boston, Tysons Corner in Northern Virginia, Mountain View and Cupertino in Northern California and Redmond in Washington State.

Kevin O'Shea, Chief Financial Officer

Thanks Sean. Turning to slide 9 we highlight our financial outlook for 2021. Although we prefer to provide our traditional full year outlook the uncertain resolution of the pandemic and the related regulatory orders including eviction moratoria across our footprint has reduced our visibility on performance later this year. Consequently, for 2021, we are providing operating earnings outlook for the first quarter only and we are providing guidance for development, capital activity and other select items for the full year. Nevertheless, to assist investors in deriving their own perspective on our outlook for the year we have enhanced our disclosure and expected performance in the first quarter 2021. Specifically we identified actual residential revenue performance in January 2021 for our same-store communities which reflected a year-over-year decrease of 7.8% and a sequential decrease of 40 basis points from December 2020.

Timothy Naughton, Chairman and CEO

Thanks Kevin. Turning to slide 15, I thought I might provide some longer-term perspective on this downturn in our business. This slide shows an index for same-store rental revenue since 1999 or over the 22 years since the AvalonBay merger. A couple of things worth mentioning here: first you can see the long-term trend is positive and reflects a healthy business. Over the last three cycles annual compounded same-store revenue growth has been roughly 3%. Rents have grown a little faster than that during the expansionary phase of the cycle, generally contract for one to two years during a downturn as they're doing now and then re-accelerate during the recovery phase at the start of the next cycle. Housing has been a consistent performer over many cycles as demand has generally grown in tandem over the cycle with net completions roughly matching the pace of household formation most years except during recessions when a number of households temporarily contract. During downturns it can be difficult to project operating performance. No two downturns and recoveries look exactly alike. Just to demonstrate that the downturn in the early 2000s was reasonably deep for the apartment sector. In fact, it took almost five years for rents to recover back to their prior peak across our footprint, and rents didn't fully recover for 15 years. The downturn in the late 2000s was comparatively steeper as the economy and labor market was significantly impacted by the financial crisis and while it was steeper it was also shallower for the apartment sector as rental demand benefited from the correction in the for-sale housing sector. The current downturn brought on by the pandemic has been the steepest yet for the economy and for the apartment sector and while we are perhaps seeing the early signs of stabilization it is difficult to predict the timing and strength of the recovery given the myriad of uncertainties that directly impact our business whether economic, regulatory or health-related. Importantly though, we are confident that the apartment housing markets will recover, that we will return to sustained growth in rents and revenues over the next cycle just as we've seen over the last several cycles. Multifamily will be a good business for the long term. Turning now to the last slide and summary, operating performance continued to decline in Q4 during the quarter and the early part of Q1 we began to see early signs of stabilization and some important operating trends. We saw healthy sequential gains in our urban submarkets recovering about half the occupancy we lost earlier in the year. Rent growth began to level off after declining for most of the last three quarters and some regions even began to see modest sequential improvement. The transaction market has recovered and strengthened significantly in recent months with suburban assets generally now selling at or above pre-COVID values. As Kevin mentioned, our balance sheet liquidity remained in great shape and well-positioned to support new growth opportunities. In fact, given recent operating trends and improved capital transaction market conditions, we decided to activate the development pipeline starting three new developments this past quarter after having been cautious for most of 2020. Our start to 2021 will focus on submarkets that have been less impacted by the downturn where the economics still offer reasonable risk-adjusted return. And with that Eli, we are happy to open up the call for some Q&A.

Operator, Operator

Of course. Thank you. And we will go ahead and take our first question from Nick Joseph from Citi. Please go ahead.

Analyst (Citi - Nick Joseph, represented), Analyst

Hi, it's here for Nick. I wanted to ask you sort of on development underwriting and ultimately bring that into the conversation because it's a little bit about mixed-use and how you're now underwriting these projects. How are you thinking about those ancillary commercial locations that are going to be part of the community whether they be retail or even office and historically AvalonBay has partnered with others to do those. I think about the deal you bought in Virginia where Regency took the retail, I think about Assembly where a partner brought you in to do the residential. How do you think it's going to evolve? Can those pieces stay capitalized separately or will it require someone to come in and take a loss on retail or office to support the multifamily rental? Effectively, do you have to get higher returns on multifamily to make the math work?

Timothy Naughton, Chairman and CEO

Yes, Michael I think we talked a bit about this in the past and obviously it's probably more interesting given the events of the last few quarters. Yes, we pursue mixed-use in a number of ways often times partnering as you suggest whether it's with federal partners or Regency or in a number of projects where it's more of a condo structure. We may be building out the core and shell and ultimately turning back the retail to them and that's been sort of the MO in cases where it's been a pretty significant piece of retail. We felt like we were able to reasonably separate the execution and it helps with the management of the two pieces. We are also doing a fair bit of mixed-use that I sort of think horizontal more kind of if you will where we may be assembling maybe semi-integrated sites. A good example of this would be where there may be a separate adjacent use that is technically part of the community but it was on a separate parcel not a condo structure but a separate parcel by a different retail developer that also had a for-sale housing component. It also had an age-restricted component as well. So particularly in suburban locations we will look to do that. I would say some of the infill locations will probably contain a partner with some of the top retailers in the country. Then the third category, which is where your question was headed, is when the uses are so linked that it's probably in the interest of the asset that it be controlled by a single entity where that entity is a partnership or where we control the entity 100%. I think probably our preferred solution in that case is where we are partnering with somebody expert in the area of retail to underwrite and help operate that, but our partner would venture with us and so we would be looking at the economics of the entire venture together and trying to optimize them in terms of trade-offs, so we inevitably make between the ground plane which is the retail and the residential complex. So I think if you sort of fast forward over the next 5 to 10 years I think you'll see more of the third category emerging and companies like us will be partnering with experienced retail operators and agencies to make that happen.

Analyst (Citi - Nick Joseph, represented), Analyst

And then just in terms of the rent recovery, I know you pointed out that the timing and strength of recovery quickly in the submarkets is difficult to project. You made a comment about the early 2000s and San Jose didn't recover from a rent perspective to prior peak for 15 years. I guess when you think about New York in terms of this which you still have a fair amount of exposure to, what are you trying to underwrite? So I would assume having a view would dictate your capital allocation decisions about rotating capital out of these markets or trying to go deeper overall. If you have a 15-year timeframe that can make it a lot more difficult. So where is your mindset today about when you expect rent recovery and fundamentals in New York and San Francisco to return?

Matt Birenbaum, President of Investments / Head of Capital Markets

Yes. Thanks. I didn't use the San Jose example to suggest that's what will happen to New York City or downtown San Francisco. Obviously, the San Jose case was extreme because there had been a big spike during the tech run-up in the late 90s into 2000, so a lot of that period of gain was just before the tech crash. I think part of the point is that some of these cycles can be long. We still believe in New York and San Francisco. We believe in our coastal markets as an investment; they are centers of innovation, great research universities, and over-index in terms of the knowledge economy and productivity. Those characteristics are critically valuable particularly for startups and companies. Now those companies continue to grow and mature they are going to distribute the workforce as we have seen over the last year to satellite markets and other markets and with additional work-from-home and hybrid positions perhaps more dispersion will occur. I think it's too early to underwrite precisely what the relationship between demand and supply will look like over the next five years. We don't see those markets in long-term decline to be clear. When you think about customer power cores in this country it's still Boston on the East Coast and LA to San Francisco on the West Coast and those are long cycles too. Those aren't themselves over in 5 or 10 years. So inevitably we are looking to allocate capital to some other markets that may be beneficiaries of spillover effect from New York and San Francisco to DC, Seattle or Boston as well as recent expansion markets Denver and southeast Florida. There are probably other expansion markets in our future as well that have some of the same characteristics—research universities, attractive knowledge workers—as particularly some of these larger mature companies disperse their workforces across a wider geography.

Analyst (Citi - Nick Joseph, represented), Analyst

New York and Texas, that will be other sort of sales to do it or just rotating capital to expand?

Timothy Naughton, Chairman and CEO

Yes. I don't think we are at a point where we think it makes sense to pursue sales just given the performance of markets right now. I think all of us are going to feel a lot better when we see how much they bounce back. I am not saying they are going to bounce 100% back from where they were a year or even two years ago. But until there is a little bit more visibility I just don't think the bid-ask on assets in those markets will be narrow enough. In urban markets we are seeing rents down 18%, down more than that in Northern California and New York submarkets. So it's safe to say that some of the next growth for the portfolio is going to be in other markets. That doesn't mean you abandon those regions; they will continue to be core to our portfolio. But from a capital allocation standpoint growth will probably come from other markets.

Analyst (Citi - Nick Joseph, represented), Analyst

Okay. Thanks Tim.

Operator, Operator

And we will go ahead and take our next question from Richard Hill from Morgan Stanley. Please go ahead.

Richard Hill, Analyst (Morgan Stanley)

Hey, good afternoon guys, and Ben it's nice to hear from you on the AvalonBay earnings call. Look forward to working with you. Hey guys I wanted to spend a little bit more time thinking about the bridge from Q1 versus Q4. I recognize that the sales in Q4 probably had a $0.04 to $0.05 hit and I appreciate the additional disclosure on capitalized interest which is another $0.01 to $0.02 but it still seems like the guide midpoint is a little bit lower than maybe we were expecting. So as you think about that given the green shoots is it something to do with the mix of apartments coming online or how should we think about that difference which given the green shoots I would've expected maybe the guide to be called $0.05 to $0.07 higher. Maybe I am just trying to understand how you get there and if you can break that down a little bit more for us?

Kevin O'Shea, Chief Financial Officer

Rich this is Kevin. Maybe I will sort of take a shot at that. I'll try to walk people through it. So just as a reference point we anticipate core FFO per share at the midpoint declining from $2.02 in Q4 to $1.90 in Q1. In terms of this $0.12 sequential decline relative to our budget what we have is an $0.08 sequential decline in residential same-store NOI, a $0.04 sequential decline related to dispositions that were completed in the fourth quarter. You need to bear in mind, we did sell about $450 million of assets in the fourth quarter that were present for much of the fourth quarter and are no longer present in the first quarter. So that's the $0.04 sequential decline from that line item. There is a $0.04 sequential decline as well from increased overhead in strategic initiatives. Those total call it $0.16 or so and they are partially offset by a sequential increase in other community classifications primarily which include increasing lease NOI from development and a commercial NOI which is expected to recover sequentially because that was burdened in Q4 by the way straight-line rent receivables. So that was kind of the backdrop for it. Again it's hard for me to reconcile against your expectations which would seem to have been about $0.05 higher but that's the backdrop. I would be happy to answer any follow-up questions you may have.

Richard Hill, Analyst (Morgan Stanley)

That's very helpful. That's very helpful and I follow all of that. What I was trying to understand a little bit more was the $0.08 headwind to same-store NOI because it seems like the quarter is going to be maybe a little bit more challenging than Q4 despite some of the green shoots that have emerged and maybe I'm just asking a naive question but I wanted to maybe understand why same-store NOI is a headwind versus Q4 despite what looks like to be improving occupancy and improving effective blended rents.

Sean Breslin, Chief Operating Officer

Yes Rich. This is Sean. I'll provide some high-level commentary that may help and then if you're looking for additional detail we can certainly take it offline. One thing to keep in mind here is that while we're talking about green shoots in terms of leveling off of rents and such, we do have the cumulative effect of both lease rent reductions as well as the amortization of concessions that will bleed through the P&L as we move through 2021. In other words, the expectation would be as you look forward over the next couple of months the impact from the amortization of concessions and the cumulative effect of those lease rates will be higher than it has been in Q4. So in other words, we granted about $47 million in cash concessions in 2020. We only amortized about $16 million of those. So there is still another $31 million of concessions that will amortize through 2021. So that will continue, as Tim mentioned in his talking points, to impact the growth rates as we move forward over the next several months. So that provides some additional color on the headwind.

Richard Hill, Analyst (Morgan Stanley)

Yes. That's very helpful guys and I think the simple explanation—and sorry for complicating it—is there is just an earned benefit that still has to burn off over time which makes it a tougher comp but that's very helpful. Hey, one more clarification question and I'll get back in the queue but that $0.04 of strategic initiative that you mentioned is that one-time or is that recurring as we think about modeling?

Sean Breslin, Chief Operating Officer

It's recurring. It's part of our full year guidance for overhead costs which includes a significant component which is investment in building out our digital capabilities and other strategic initiatives and so it's the capability that we've been adding and continue to add to our business and is therefore occurring throughout the course of the year. So it's something that you can kind of think about as continuing on.

Timothy Naughton, Chairman and CEO

Yes Rich just to add on to that one as well, we may talk about it in more detail in the coming quarter or two but it ties into some of the information that we provided back in late 2019 in terms of our investment in digital capabilities, AI and machine learning. If anything, that investment has only accelerated as we've moved through the pandemic. If you think about what's been happening with virtual tours and self-guided tours and smart access and things of that sort, I think if you talk to not only us but our peers and others there's even more conviction in making those investments and the ROI associated with them. We would expect to continue to invest in those capabilities over the next couple of years for sure and then see those payoffs come through.

Matt Birenbaum, President of Investments / Head of Capital Markets

Hey Rich just to add to that as we are making those investments in innovation there's a bit of a geography issue. You may be hitting the overhead line but the benefit often flows through to the assets and so when they save some payroll or other costs it may not be obvious because the payroll expense is a big number and the property expense is a big number compared to what the strategic initiative number is.

Richard Hill, Analyst (Morgan Stanley)

Got it. Guys thank you very much. I know this was sort of wonky modeling questions but I really appreciate you spending the time to detail it out a little bit more. Thanks guys.

Operator, Operator

And we'll now move to our next question from Rich Hightower with Evercore. Please go ahead.

Rich Hightower, Analyst (Evercore)

Hey good afternoon guys and again welcome to Ben on these calls. So my first question I kind of want to hone in again on San Francisco and New York and the big sequential occupancy gains in the fourth quarter. Obviously a lot of that must have been driven by pricing in the market as opposed to anything related to return to office or sort of the normal seasonal leasing pattern that we might consider. As you think about the pace and the drivers of the demand going forward as we go through 2021, what do you think the key drivers are that we should be expecting and how does that overlay with what normally happens starting in the spring? How do we fold in return to office and how do you guys think about the moving parts given the business is going to be a strange year in all respects?

Sean Breslin, Chief Operating Officer

I think the factors that we would like to monitor are first, what you mentioned in terms of reopening offices and bringing people back to work and mixed-use environments. That is obviously a key driver. We are not expecting 100% return but certainly a very high percentage are very likely to return. The second component is reopening of major urban universities that drive demand in knowledge centers—students, staff, faculty—and it's not just the student body but also the campus employees. Markets like New York and San Francisco have significant university populations. Then what's likely to follow is more business activity where there was corporate demand, things of that sort. We think you might see some of that in the summer depending on how the vaccination of the population occurs over the next few months. Employers could want people back in the summer or fall when students are returning to school. The timing will be determined by vaccination rollout and pandemic progress. Given lease expirations from quarter to quarter, you would need to see meaningful return to office happen in late spring to early summer to have a material impact on 2021 results; otherwise the impact will be more evident in 2022.

Rich Hightower, Analyst (Evercore)

Okay, that's helpful Sean. I guess my second question here you're obviously ramping up development starts this year. What's the chance that you guys even go bigger than the $650 to $850 million guidance if you think we're really on the cusp of the next multi-year recovery in multifamily?

Timothy Naughton, Chairman and CEO

Well, it's a good question. As I mentioned in my prepared remarks some of the decision is a function of what we've seen in the market and capital markets. At this point we're basically funding development with planned dispositions. Given where our leverage is right now we're trying to protect our credit metrics. As we said in the past it's hard with gain ratios around 50% to sell too much because we'd end up having to dilute, and then it's not as capital efficient. So if equity markets recover more to levels reflective of intrinsic value and NAV we might have access to those capital markets to expand the balance sheet. Also not all deals are ready to go: entitlements and permitting often take a year or more. So the number is probably not going to flex up too much even if conditions were great. I suspect it will be in this range unless market conditions move dramatically one way or the other.

Rich Hightower, Analyst (Evercore)

Got it. Thank you.

Operator, Operator

We'll take our next question from John Pawlowski from Green Street. Please go ahead.

John Pawlowski, Analyst (Green Street)

Thanks, Matt could you give us a sense for the two Northern California dispositions? How do you think values ultimately compared to what you could have gotten on the sales pre-COVID and any cap rate color for those two deals?

Matt Birenbaum, President of Investments / Head of Capital Markets

Sure John. We sold two deals in Northern California in the fourth quarter. Eastern Marin was our only asset in Marin County. That's a unique asset in a very supply-constrained part of the world with very little existing stock and almost no new construction. I would say that one wasn't impacted much at all. We think the cap rate was in the high threes, maybe around a 3.9. It may be down slightly from where it would have been a year ago but it's such a special asset that it's a bit of a one-off. The other asset we sold at the end of the year was Eaves Diamond Heights, that's an older rent-controlled asset in the city of San Francisco and we were a little motivated to close by year-end because the city increased their transfer tax to the highest in the country at 6%. There was some dollar savings by closing before year-end. That deal was about a 3.7 cap with 470,000 units. I would say a year ago that asset probably would have sold for 8% to 10% more, although it's hard to know. It may not be as impacted in terms of the NOI as some of the other assets just because it was a rent-controlled asset, so some of the rents were below market, but there may be less lift for the buyer on the way out because there will be more constraints on ability to raise rent. So probably a little lower valuation maybe than some other assets in San Francisco.

John Pawlowski, Analyst (Green Street)

Okay. Great. Thanks. And then second question for Sean sticking with Northern California just curious your thoughts particularly in San Francisco, San Jose when a lot of your private competitors' occupancy is well below your own level and it feels like the entire market's offering one to three months free. So the short question is are you going to be able to sustain the occupancy and sustain stable rents as your private competitors play catch up or do you feel like the floor is underneath or is it going to be a choppy few quarters here?

Sean Breslin, Chief Operating Officer

If you look at how the quarter unfolded, not just in Northern California but across some of the more impacted markets—New York City, Redmond, etc.—we've seen rents decline as we've built occupancy and now they have sort of leveled off. Across the portfolio we're pretty close to where we think market occupancies are and so rents should get better. The question is by how much as the rest of the market adjusts. Some competitors will act differently, but given what we've seen the belief is we'll probably bounce around the bottom for the next couple quarters. I wouldn't say we expect a sharp uptick, but some marginal improvement is reasonable given where rents were to get occupancy. We're trying to stabilize and compete without as much inventory available and therefore rents won't need to be as soft. Every pocket's different and supply dynamics matter locally.

John Pawlowski, Analyst (Green Street)

Okay. Great. Thanks for the time.

Operator, Operator

We'll take our next question from John Kim with BMO Capital Markets. Please go ahead.

John Kim, Analyst (BMO Capital Markets)

Thank you. Comparing the downturn versus the prior recessions on page 14, it's very helpful. One of the big similarities between now and the early 2000s is the home ownership rates and the strength of the housing market and I'm wondering if you think this is a factor that's most important in terms of the pace of recovery this time around or have landlords including yourselves aggressively cut the rent so that the recovery time could be quicker?

Timothy Naughton, Chairman and CEO

Hey John it's Tim. It's a good question. I'm definitely seeing the for-sale market strength. Part of that, like the early 2000s, is demography. The leading edge of the millennials are coming into their prime home-buying years. I do think what's happening is an acceleration of folks who may have bought a year or two from now deciding to buy sooner because of quality-of-life choices in urban markets during the pandemic. We've viewed for some time that housing demand between renting and buying would be more balanced over the next decade. The last decade was more of a renter decade, the decade before more of a homeowner decade. Given mortgage finance system improvements, demographics and household formation trends, the marginal supply of single-family and multifamily feels about right to address demand. Today we are producing close to about a million single-family units and maybe 300 to 400 thousand multifamily units—it feels about right relative to marginal demand. The pandemic may accelerate some purchases but over two to four years it strikes us as a reasonable balance.

John Kim, Analyst (BMO Capital Markets)

That's very helpful. Thank you. Second question is for Kevin: the impact in your earnings from concessions to double this quarter versus last quarter, can you remind us how concessions have trended throughout the year last year for the average concessions granted by quarter?

Matt Birenbaum, President of Investments / Head of Capital Markets

Well, maybe Sean if you want to speak to the average concession value?

Sean Breslin, Chief Operating Officer

If you look at the leases we signed, Q3 the average concession per lease signed was about $1,100. In Q4 the average was about $1,315 but it trended down as we moved through the quarter. For example, October was about $1,450 per lease, November about $1,400, December about $1,190 and then just under $1,000 per lease in January. So the trend has been toward lower concessions. In terms of the accounting, we granted $47 million in cash concessions in 2020 but only amortized $16 million of those in 2020, so there's still $31 million of deferred concessions that will be amortized through 2021. Any concessions granted in 2021 will also be amortized. I hope that provides a sense of the headwind for 2021 from those deferred 2020 concessions.

Kevin O'Shea, Chief Financial Officer

I can add a couple of things John. If you look at our earnings release for the full year 2020 we granted $46.6 million of concessions—that's the granted number. In Q4 we granted about $19.5 million, Q3 about $15.3 million, and Q2 roughly $12 million. In terms of what we amortized, we only amortized about $16 million in 2020 so there is still a material amortization carrying into 2021.

John Kim, Analyst (BMO Capital Markets)

Is it fair to assume that the year-over-year comps will be impacted by the concession amortization?

Timothy Naughton, Chairman and CEO

It is a function of what concessions we grant in 2021. If everything else were equal and concessions went to zero effective February 1, the remaining concession amortization on the books today would peak in the April/May timeframe. We're still granting concessions, maybe at a lower rate, so it's likely the peak burn-off will drift into the summer depending on the volume and size of concessions over the next few months.

John Kim, Analyst (BMO Capital Markets)

That's helpful. Thank you.

Operator, Operator

We will now take our next question from Austin Wurschmidt from KeyBanc. Please go ahead.

Austin Wurschmidt, Analyst (KeyBanc)

Great. Thanks guys. Just wanted to touch on the occupancy rebound again—economic occupancy is now approaching the mid-95% range. I think you were 96% plus pre-pandemic. How do you change your view towards continuing to build occupancy given your view that it could be until summer before you start to see a surge in demand as people firm up back-to-office dates and then into the fall for the student population? How does that balance continuing to reduce concessions versus trying to build occupancy to give yourself cushion as you get into the spring leasing season and expirations start to increase?

Sean Breslin, Chief Operating Officer

Austin this is Sean. From a strategy point over the next 2-3 months as I mentioned earlier we think across suburban and urban markets we are in the range of market occupancy based on multiple data points. We have the ability to triangulate where market occupancy is and we are comfortable operating around market occupancy or slightly above by 100 to 200 basis points. Anything beyond that and you're likely giving up too much rate to hold that higher occupancy. So while occupancy may drift up a little over the next couple months, it isn't expected to spike materially beyond what we've seen over the last four months. For us it will be more about maintaining marginal improvements in physical occupancy and finding where we can push rents and see sequential improvement in effective rents at that occupancy. If the macro environment pivots that will influence strategy but that is our current approach.

Austin Wurschmidt, Analyst (KeyBanc)

Got it. Thank you and then you referenced the 18% decline in rents in urban markets. It sounded like you've gone further down in the renter pool from a credit perspective. Can you give any metric to show how significant that change in renter profile has been or maybe an affordability ratio comparison versus years leading up to the pandemic?

Sean Breslin, Chief Operating Officer

Good question. Our credit standards have not become more lenient; given eviction moratoria, reaching deeper into the rental pool is more a function of income and the fact that rents are down. People can now qualify for apartments they may not have qualified for last year. In terms of ability to pay in the future, incomes are down but rents have come down more; so rent-to-income ratios have improved a bit, which suggests more ability to absorb future rent increases. Also remember for accounting we amortize concessions, but residents pay cash based on the lease. For renewal offers we typically price off of the lease rent rather than the effective rent, so tenants are often paying the full contractual rent even if the effective rent accounting reflects concessions. If you're asking about release rent change versus blended change, release rents were down about 7% while effective rents were down about 11% for the quarter.

Austin Wurschmidt, Analyst (KeyBanc)

Right and what's the decrease in the gross or face rent versus that 18%?

Sean Breslin, Chief Operating Officer

As I said, on a rent change basis rather than blended values, effective rents were down about 11% and release rents were down about 7% for the quarter.

Austin Wurschmidt, Analyst (KeyBanc)

Yes, I saw that for the quarter. More curious over the course of how that 18% number would compare and is income still down less than that face rent number when you remove concessions as you referenced?

Sean Breslin, Chief Operating Officer

That's correct. Incomes are down less than the reduction of rental rates.

Austin Wurschmidt, Analyst (KeyBanc)

Okay. Thank you.

Operator, Operator

We will now take our next question from Alua Askarbek from Bank of America. Please go ahead.

Alua Askarbek, Analyst (Bank of America)

Hi everyone. Thank you for taking my questions. I know we're going a little long so I'll be quick. I wanted to ask a little more on the demand side—are you still seeing a lot of bargain hunters coming into urban markets looking for deals or are you starting to feel a little more demand coming in outside of those markets?

Sean Breslin, Chief Operating Officer

Good question. In the current environment everybody is looking for a deal, but we're seeing well-qualified people with good incomes coming in. We're not seeing a flood of people who simply cannot afford what we're charging; those more distressed bargain hunters exist but are a smaller proportion. In terms of net new demand coming from other geographies into urban centers, we don't have precise numbers on hand, but the fact occupancy is improving in many markets suggests net new demand is arriving rather than just recirculation of existing demand.

Alua Askarbek, Analyst (Bank of America)

Okay. Got it. Thank you. And then just a quick question on Boston or New England overall: it looks like the effect the rents really dropped off in Q4. Is there anything behind that other than maybe the supply issues you guys have been talking about?

Sean Breslin, Chief Operating Officer

No, it's the same phenomenon. Urban markets in Boston are still challenged. It's choppy—it's not quite as bad as New York City or San Francisco—but urban markets are driving most of the weakness. There are some infill pockets, like Assembly Row and Newton/Chestnut Hill, that are weaker, while more distant suburbs with good school districts are performing better.

Alua Askarbek, Analyst (Bank of America)

Got it. Thank you.

Operator, Operator

And we will take our next question from Nick Yulico from Scotiabank. Please go ahead.

Nick Yulico, Analyst (Scotiabank)

Hi thanks. I just wanted to go back to the slide in the presentation where you gave the occupancy and blended rents for the suburbs and urban environments. I'm wondering for those two buckets suburbs versus urban if you could give a feel for the composition of the blended rent—what percentage was renewals versus new leases for the different regions?

Matt Birenbaum, President of Investments / Head of Capital Markets

Yes Nick it's a good question. It's a big dataset and it changes month by month, so we'd prefer to walk through that offline rather than try to run that here on the call. You can look at our turnover rates in the earnings release to get a sense of the mix for the period.

Nick Yulico, Analyst (Scotiabank)

Right. I was sort of wondering if it was similar to the turnover rate because my question is if turnover is at its lowest point in the year in the fourth quarter and first quarter we are looking at a blended rent number that is in some cases stabilizing or slightly picking up versus higher turnover periods. I'm trying to understand what we should read into this—if you're starting fewer new leases, which are where the worst pricing is, and going into the spring where you have a lot of new leases, is this stabilization in January and Q4 meaningful or just reflecting more renewals?

Sean Breslin, Chief Operating Officer

Good question. It's a little early to tell whether this is the absolute bottom. We're pleased that during what is typically a seasonally lower period and when turnover rose year-over-year, we managed to pull back on concessions and see slightly better blended effective rents for about three to four months. That gives us a sense that we're pricing in the right neighborhood while building occupancy. So we don't need to be as aggressive. Whether this holds into the spring leasing season remains to be seen. We're somewhat cautious and think in the near term we'll probably bounce around the bottom with marginal improvements, but it's too early to definitively call a durable bottom.

Nick Yulico, Analyst (Scotiabank)

Okay. Thanks. That's helpful.

Operator, Operator

We'll take our next question from Richard Anderson from SMBC. Please go ahead.

Richard Anderson, Analyst (SMBC)

Hey thanks good afternoon everyone. When I think about percentages they can be misleading because if jobs are lost in your markets in 2020 you need 2x growth to get back to the absolute numbers. The same logic applies to the 18% decline in your urban effective rates—you'd need 30% plus off the lower base to get back to the same per unit rent. When you look at your slide on page 14 it took three to six years post prior downturns to recover. Does this environment, which is somewhat more binary given a virus-vaccine timeline, mean the recovery back to prior levels will be tighter than that three-to-six-year range?

Sean Breslin, Chief Operating Officer

That's one of the key questions—whether this is a V-shaped recovery. It's really about jobs and household formation. Suburban markets could be back quickly, possibly quicker than three to five years. Urban markets and tech-intensive suburban submarkets like Mountain View and Palo Alto may take longer and could be another three to four years to get back because they rely on job growth in high-density sectors. So you could see a faster recovery in suburbs and a slower one in certain urban markets.

Richard Anderson, Analyst (SMBC)

So that leads to my second question: you're not giving full year guidance because of limited visibility beyond 90 days, but you're ramping development. Is your confidence a couple years out higher than near-term? I imagine it is, but where is the development you're turning on specific to markets that weren't as impacted?

Timothy Naughton, Chairman and CEO

It's a good point. Suburban rents could be back in a year—many are down just 4%—so it's not a huge lift. We're activating development in markets where we believe the risk-adjusted returns make sense. We are cautious about financing and will fund starts largely with dispositions unless equity markets improve substantially. So we're focused on markets less impacted by the downturn.

Richard Anderson, Analyst (SMBC)

All right. Thank you.

Operator, Operator

We will go ahead and take our next question from Anthony Paolone from JP Morgan. Please go ahead.

Anthony Paolone, Analyst (JP Morgan)

Yes, thanks. On the expense side is there anything for 2021 that could bring expense growth back down to sort of an inflation number or does turnover and other dynamics step this up for higher growth this year?

Timothy Naughton, Chairman and CEO

Good question. A lot of what we're seeing is pandemic-related: higher turnover costs, extra cleaning, temporary labor, overtime, associates on leave. These factors will play through and put pressure, particularly in the first half of the year. It should get easier in the second half as comps normalize.

Anthony Paolone, Analyst (JP Morgan)

Okay and same question for Kevin: $160 million to $170 million of total overhead for 2021—do you have the comparable number for 2020 just to understand the increase?

Kevin O'Shea, Chief Financial Officer

Core overhead for core FFO is $160 million to $170 million for 2021. The reference point for 2020 was about $150 million to $151 million, so it's about a $14 million year-over-year increase. Most of that is related to investments in strategic initiatives—about $7 million of that is the strategic initiative spend—plus about $5 million for growth and some additional compensation costs including executive transition costs.

Anthony Paolone, Analyst (JP Morgan)

Okay, got it. Thanks a lot.

Operator, Operator

We will go ahead and take our next question from Alexander Goldfarb from Piper Sandler. Please go ahead.

Alexander Goldfarb, Analyst (Piper Sandler)

Sure. Good afternoon and Ben welcome aboard. First question: you noted earlier about concession dynamics. Two questions here: first on guidance—why couldn't you provide a full year number even if a wide range because it seems like you're tracking to a base case and if that continues you would know where you'd be for the full year?

Timothy Naughton, Chairman and CEO

Alex, it's a fair question. It's more than one or two things that are at play. We didn't even get into the issue of eviction moratoria where a portion of units are effectively tied up. There is federal stimulus that may benefit us and help reverse some bad debt. Work-from-home timelines and office return dates make a big difference for demand and other income streams. When you put all these variables together it gets more complex and less reliable beyond 90 days. In past years we've provided full-year guidance because we had more visibility. Right now we're managing week-to-week and month-to-month and believe Q1 guidance is the most reliable near-term view. Others might choose to provide a wide range but we didn't feel we could provide a reasonably reliable midpoint and useful range for the full year.

Kevin O'Shea, Chief Financial Officer

To add, we could not satisfy the test of providing a reasonably reliable midpoint and a reasonably narrow useful range beyond Q1. There are variables—even if possible outcomes exist—that are beyond our ability to predict reliably for the full year, so we chose to provide Q1 guidance and full-year guidance on certain capital categories instead.

Alexander Goldfarb, Analyst (Piper Sandler)

Okay and then the second question is as you think about ramping development how do you balance investing in current markets versus expansion markets like Nashville or Austin? How do you reconcile allocation between development in current footprint versus entering new markets?

Timothy Naughton, Chairman and CEO

If acquisitions occur we'd likely sell more existing assets and recycle capital; that's been our approach. We've been recycling capital from the Northeast into markets like Denver and southeast Florida. If equity values recover substantially we could expand the balance sheet, but at current pricing we'll be strategic and use dispositions to fund development and selectively allocate capital to markets with attractive risk-adjusted returns.

Alexander Goldfarb, Analyst (Piper Sandler)

Okay and just finally the New York development site which one was that that was written off?

Matt Birenbaum, President of Investments / Head of Capital Markets

That was the investment we had in the East 96th Street RFP.

Alexander Goldfarb, Analyst (Piper Sandler)

Okay that was the Cuomo-De Blasio initiative, got it. Thanks.

Operator, Operator

And we will go ahead and take our next question from Brent Dilts from UBS. Please go ahead.

Brent Dilts, Analyst (UBS)

Hey thanks guys. Just one for me at this point. Could you talk about how the financial struggles of some of the largest U.S. transit agencies who are talking about permanent cuts to service might impact your transit-oriented properties?

Sean Breslin, Chief Operating Officer

Hi Brent. It's probably a little too early to tell. Ridership has fallen dramatically and as a result transit-oriented developments have been impacted because people don't need transit as much. Whether those cuts are permanent versus temporary is yet to be seen, and it likely won't be decided until we get beyond the pandemic and ridership normalizes. If transit capacity is cut dramatically it would be a negative for assets heavily reliant on transit, but it's too early to fully assess the long-term impact.

Matt Birenbaum, President of Investments / Head of Capital Markets

On the other side there may be marginal opportunity as transit agencies feel pressure to monetize land positions or engage in joint development. One of the deals we started this past quarter is Avalon Somerville at a commuter stop in central New Jersey and we are looking at other sites where transit agencies may be more aggressive in monetizing land positions.

Brent Dilts, Analyst (UBS)

Okay. Great. Thanks guys.

Operator, Operator

We'll take our next question from Rob Stevenson from Janney. Please go ahead.

Rob Stevenson, Analyst (Janney)

Good afternoon guys. What percentage of your 2021 development starts are locked in cost-wise at this point? And what are you seeing with respect to construction costs especially lumber given what's going on there and how decent is the labor supply these days?

Matt Birenbaum, President of Investments / Head of Capital Markets

Sure Rob. If we haven't started a job yet we have not locked in costs except for land and entitlements in many cases. Land and soft costs are around 25%-35% of total, hard costs around 65% depending on product type. At the beginning of the pandemic we had conviction hard costs would come down, particularly in overheated markets, but less conviction today given how the for-sale market has recovered. Lumber is very expensive right now. We haven't had to buy much lumber because we didn't start new construction for most of last year. If lumber pricing doesn't adjust back we may question some starts. Some mills were shut down due to COVID; supply should increase by spring. Our sense now is costs have leveled off—more of a flattening than a nominal decline in hard costs.

Rob Stevenson, Analyst (Janney)

Okay and given that where are yields on the new 2021 starts relative to the 5.8% yield on the current pipeline?

Matt Birenbaum, President of Investments / Head of Capital Markets

They're just about the same. The current development pipeline is mostly suburban. Some deals in lease-up are behind pro forma, some are ahead, so it balances out when comparing to near-term starts.

Rob Stevenson, Analyst (Janney)

Okay and last one: where are you in terms of the mix of condo sales at Park Loggia? Is what's left skewed towards higher or lower price points or is it fairly consistent?

Timothy Naughton, Chairman and CEO

We have closed 73 units and have another 15 under contract or with accepted offers, which would bring us to 88 total. We sold a few more of the higher-priced units including three of the four penthouses, so the remaining mix will skew a little more toward lower-priced units. Traffic has picked up—we're seeing 15-20 inquiries a week. In January we've averaged about four new deals a month the last three months versus about three per month earlier. Inventory remaining is a bit more affordable on average.

Rob Stevenson, Analyst (Janney)

And are buyers primarily primary residents or secondary residents? Also, any impact if New York City or State passes additional wealth taxes?

Timothy Naughton, Chairman and CEO

This is not Billionaires' Row—it's a compelling value proposition by Manhattan standards, and we're seeing many family-type transactions and buyers purchasing for primary residences or for family use. We don't have a precise breakdown but a lot of the transactions are for families and primary use. As for potential tax changes, it's hard to say; our product is mid-market for Manhattan and we continue to see traction.

Rob Stevenson, Analyst (Janney)

Okay. Thanks guys. Appreciate it.

Operator, Operator

We will take our next question from Haendel St. Juste with Mizuho. Please go ahead.

Haendel St. Juste, Analyst (Mizuho)

Hey thank you. Good afternoon. First question on bad debt: it remained elevated in Q4 similar to Q3—first, are you expecting a similar level embedded in your Q1 guidance? Second, when do you think you can see some improvement there and does the extension of eviction moratoria until March 31 play a role in your thinking?

Kevin O'Shea, Chief Financial Officer

Haendel, this is Kevin. For Q1 we are expecting a persistent level of bad debt expense similar to what we saw in Q4, so not meaningfully different. Sean can add more on eviction moratoria.

Sean Breslin, Chief Operating Officer

On eviction moratoria there are various local orders affecting late fees and eviction processes. Some places have protections through June or beyond, such as California in some instances. So resolution of these rules will influence collections and bad debt recovery timing. Generally we expect bad debt pressure to persist into the first part of the year and potentially improve mid-year depending on vaccine rollout and economic recovery. Collections and other efforts will continue, but at this point the bad debt profile from 2020 will likely look similar in the near term.

Matt Birenbaum, President of Investments / Head of Capital Markets

To add context, reversing 250 to 300 basis points of revenue trends seen in recent quarters would move back toward more typical revenue changes like 50 to 60 basis points. That will likely need pandemic resolution and restoration of landlord remedies. Not something we expect to change materially in the first half of the year.

Haendel St. Juste, Analyst (Mizuho)

Got it. Second question on development: you noted your starts are Northeast suburban heavy—could you see more starts in West Coast or non-Northeast markets, particularly urban locations? I realize you haven't started a new West Coast project since mid-2019.

Matt Birenbaum, President of Investments / Head of Capital Markets

We do have planned starts in southeast Florida and Denver this year and a large start in suburban Seattle later this year. California is tough right now and we find the most challenged economics for new starts there, but we do have starts in expansion markets including Seattle and Denver.

Haendel St. Juste, Analyst (Mizuho)

And on spreads for expected development deals versus cap rates, is it fairly similar to the 50-75 basis point spread you referenced earlier?

Matt Birenbaum, President of Investments / Head of Capital Markets

I think the spread is more than that. Our current development book implies a yield of about 5.8% and those assets today would sell in the low 4s—so the spread is well over 100 basis points. Given low cap rates in Seattle, Denver and Florida, spreads remain wide.

Haendel St. Juste, Analyst (Mizuho)

Got it. Thank you.

Operator, Operator

We will go ahead and take our last question from Dennis McGill from Zelman & Associates. Please go ahead.

Dennis McGill, Analyst (Zelman & Associates)

Thank you. Just wanted to touch on supply and how you think it might play out in 2021 especially in urban environments. From our work there is still quite a bit to deliver and that would seemingly limit pricing power once you rebuild occupancy. How are you thinking about those competing balances?

Sean Breslin, Chief Operating Officer

Good question. We expect deliveries in 2021 to come down about 6% to 7% compared to 2020, representing about 1.8% of stock. All regions are expected down except the New York/New Jersey region where declines in NYC deliveries are offset by increases in northern New Jersey, particularly Jersey City (about 3,500 to 4,000 units increase). Northern California deliveries are relatively flat. In general the supply picture in urban environments, with the exception of the New York-New Jersey dynamics, will be better in 2021 than 2020 and that should support recovery. Of course, local dynamics and new supply pockets will impact outcomes.

Timothy Naughton, Chairman and CEO

One additional thought: much of the urban supply in 2021 and 2022 has already started. The likelihood of many new starts in 2021 and 2022 is uncertain, and it could be tough for people to get deals financed against a narrative of distributed workforces and satellite offices. We could see fewer starts in the next few years, and that could reverse the supply dynamic we saw the last decade that favored suburban performance. Over the next three to four years the story could flip and urban fundamentals could improve as supply tightens.

Dennis McGill, Analyst (Zelman & Associates)

That's helpful perspective. And then on the share repurchase in the quarter—can you talk about how you triangulate getting comfortable on the buyback and how you might think about that now with where the stock is? If it hangs out here longer term is buyback likely in 2021?

Kevin O'Shea, Chief Financial Officer

There are a number of variables. Our alternative use of capital is development, which today we see as an attractive use compared to buying back shares, although our shares can be compelling when trading below NAV. Price matters; earlier we were buying back in the $150 range which we viewed as compelling. We also consider effects on leverage and credit metrics. Net debt to EBITDA increased from about 4.6x at the start of the pandemic to about 5.4x in the last quarter, driven by declining EBITDA rather than taking on more debt. Engaging in a heavy buyback could work against leverage metrics. That said, we still have capacity and proceeds from dispositions to engage in buybacks if it made sense. At the moment, when we triangulate the alternatives, development still figures to be the best use of capital.

Dennis McGill, Analyst (Zelman & Associates)

Got it. That makes sense and I know it's been a long call, so thanks for the time and the transparency.

Operator, Operator

And with that that does conclude our question-and-answer session for today. I would now like to turn the call back over to Timothy Naughton for his brief closing remarks. Tim?

Timothy Naughton, Chairman and CEO

Thank you Eli and thanks everybody for being on. I know we've been on for a while. Thanks to all of you that hung in there for an hour and 45 minutes. I look forward to seeing many of you virtually over the next two or three months. Enjoy the rest of your day. Thank you.

Operator, Operator

And with that that does conclude today's call. Thank you for your participation. You may now disconnect.