Avalonbay Communities Inc

NYSE:AVB

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to AvalonBay Communities Second Quarter 2020 Earnings Conference Call. [Operator Instructions]. Your host for today's conference is Mr. Jason Reilley, Vice President of Investor Relations. Mr. Reilley, you may begin your conference.

[Jason Reilley, VP, IR]

Thank you, Matt, and welcome to AvalonBay Communities Second Quarter 2020 Earnings Conference Call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There's a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10-K and Form 10-Q filed with the SEC.

As usual, this press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during the review of our operating results and financial performance.

And with that, I'll turn the call over to Tim Naughton, Chairman and CEO of AvalonBay Communities, for his remarks. Tim?

[Timothy Naughton, Chairman, CEO & President]

Thanks, Jason, and welcome to the Q2 call. With me today are Kevin O'Shea, Sean Breslin and Matt Birenbaum. Sean, Kevin and I will provide commentary on the slides that we posted last night, and then all of us will be available for Q&A afterwards. Our comments will focus on providing a summary of Q2 results, an update on operations and some perspective on development in the balance sheet now that we've entered an economic recession.

But before getting started on the deck, I thought I would offer a few general comments about the environment we are currently facing. To say things have changed over the last 4 months is certainly an understatement. We are in the middle of the largest global health care crisis in a century. The economic downturn is the most severe we've seen since the Great Depression and on the heels of the longest expansion on record. And social unrest is at a level we haven't experienced since Vietnam and the civil rights movement over 50 years ago.

It's been said, but these are indeed unprecedented times. And these events aren't just having an unprecedented impact on economic activity but also on income and wealth distribution across industries in the broader population. For those companies and workers leveraged to the virtual economy, they're actually doing quite well, and some are even thriving. For those companies and workers that operate in the real economy of bricks-and-mortar like AVB, we're certainly feeling the normal effects and then some of the downturn. And then for those companies and workers in the travel, leisure and entertainment sectors, among others, they are basically in shutdown mode. These sectors as well as others will undoubtedly need to be restructured over the next few years. Many companies will not survive, and their employees, if evenly temporarily furloughed for now, will join the ranks of the permanently unemployed over the next several quarters. And unfortunately, those impacted by these events or most impacted by these events are those in lower-paying service jobs and minority populations. As a result, this downturn carries not just the normal economic risk of prior recessions but also profound health, social and political risk that are likely to shape the length and shape -- shape the length and of the economic recovery.

So while this was a sudden and quick downturn, the timing and shape of the recovery is hard to project. And that presents a unique challenge in managing our business and communicating our expectations to you, our shareholders. Having said that, we'll do our best to be as transparent and direct as possible as we all try to understand and engage how the current environment will play out in our business in the months and quarters ahead.

Right now, let's turn to the results for the quarter, starting in -- on Slide 4. As expected, Q2 was a challenging quarter. Core FFO growth was down almost 2% driven by a same-store revenue decline of almost 3%, or 2.2% if retail is excluded. And on a sequential basis, from Q1, same-store revenue was down 4.5%, or 3.9% excluding retail.

We had no development completions or new development starts this quarter. And we've had no starts so far year-to-date. And lastly, we raised over $700 million in capital this quarter at an average initial cost of 2.8%, with most of that coming from a $600 million long 10-year bond deal at a rate of around 2.5%. As Kevin will share in his remarks, our liquidity, balance sheet and credit metrics are very well positioned heading into this downturn.

Turning to Slide 5. I wanted to drill down a bit more on the decline in same-store residential revenues this past quarter. As this slide demonstrates, the decline was primarily attributable to a loss of occupancy and uncollectible lease revenue or bad debt.

Economic occupancy was down 120 basis points, while bad debt was 200 bps higher than normal. Higher-than-normal bad debt is likely to continue, given the breadth and depth of the downturn, coupled with eviction moratorium in many of the markets in which we operate.

We also experienced higher concessions in the quarter and lower other income as we waived various fees this past quarter for our residents, including late payments, common area amenity and credit card convenience fees. Average lease rate for our same-store portfolio in Q2 was actually up 1.8% over Q2 of 2019, reflecting embedded rent growth on leases entered into in 2019 through Q1 of this year.

Turning to Slide 6. As I mentioned in my opening remarks, this downturn poses a unique risk relative to other recessions. In addition to the household contraction and consolidation that occurs due to job losses in any downturn, the pandemic is driving other trends that are impacting rental demand. These include work-from-home flexibility that is shifting some renter demand from higher cost and urban/infill markets. Many renters are relocating, perhaps only temporarily, to lower-cost markets or submarkets, leisure areas or even back home with their parents.

Second, record-low mortgage rates and the desire for space is accelerating demand for single-family homes. Many homebuilders reported strong orders in sales this past quarter, particularly towards the back half of the quarter. And homeownership rate is on the rise.

And lastly, we're seeing reduced demand from 2 important segments of renters, corporate and students, as most temporary corporate assignments have been canceled, while higher education is adopting remote learning models and limiting on-campus activities for the fall. These factors will likely weigh on performance until the public health crisis has abated. On the other hand, they will also likely contribute to a more robust recovery once employees begin to return to the workplace.

With that, I'll turn it over to Sean to discuss operations and portfolio performance in more detail. Sean?

[Sean Breslin, COO]

All right. Thanks, Tim. Turning to Slide 7. The factors Tim highlighted on the previous slide impacted leasing volume throughout the quarter, which is down roughly 10% year-over-year. Turnover for the quarter fell about 5%. So the volume of resident notices to leave our communities exceeded leasing velocity, most materially in May when we experienced about a 25% increase in lease breaks for a variety of reasons, including corporate apartment operators shutting down operations in certain markets. As a result, move-outs exceeded move-ins for the quarter. As of yesterday, net lease volume for July is roughly on pace with the volume of notices to vacate our communities, which should help stabilize occupancy as we move into August.

Moving to Slide 8. We experienced a 120 basis point decline in physical occupancy from April to June, with most of it occurring in May as a result of the lease break volume I mentioned a few moments ago.

Chart 2 on Slide 8 depicts both lease and effective rent change for the quarter. As detailed in our earnings release, blended lease rent change was down 40 basis points in Q2, while effective rent change was down 3.1%. Rent change for July has improved slightly from June, but the nature of the health crisis and economic environment will dictate the ongoing demand for rental housing and our pricing power as we move through the balance of the year.

Turning to Slide 9. You can see the regional distribution of both lease and effective rent change for Q2. Northern and Southern California were the most challenging regions for a variety of reasons, while the Pacific Northwest performed the best.

Moving to Slide 10 to look at performance metrics by submarket type. Urban submarkets deteriorated more materially during Q2 as compared to suburban submarkets. From an occupancy standpoint, urban submarkets declined by 270 basis points from April to June, while suburban submarkets fell by only 50 basis points. And from a rent change perspective, urban submarkets trailed suburban by roughly 200 basis points. While the weakness in urban environments is pretty broad-based across our portfolio, it's most pronounced in San Francisco, Boston and parts of L.A. Unfortunately, demand in urban submarkets is suffering from a variety of factors, several of which Tim mentioned in his prepared remarks, including a desire for more affordable price points, extended work-from-home policies across corporate America, a lack of short-term and corporate demand, uncertainty regarding on-campus learning at urban universities and a general concern about population density.

Shifting to Slide 11 to discuss our development portfolio. Construction delays at the beginning of the pandemic weighed on both deliveries and occupancies during the second quarter.

As noted in Chart 1 on Slide 12, deliveries and occupancies for the first half of the year fell short of our expectations by roughly 450 and 650 units, respectively, which translated into an NOI shortfall of approximately $2 million. Fortunately, following some initial shutdowns at about 1/3 of our construction sites for a short period of time, all of our jobs are currently under way, albeit with a slower pace of deliveries expected across certain assets.

I will now turn it over to Kevin to further address development starts, funding and the balance sheet. Kevin?

[Kevin O'Shea, CFO]

Thanks, Sean. Turning to Slide 12. In response to the current environment, we have chosen not to start any new construction projects so far this year despite having initially guided in the beginning of the year to about $900 million in new construction starts for 2020.

Looking ahead, we expect lower construction costs will benefit many of our future planned starts. And we are prepared to wait for this expected correction on hard costs before breaking ground so that we can lock in a lower basis on these investments. Although real-time construction cost data are difficult to come by, initial indications suggest we are beginning to see a softer labor market and a reduction in overall construction activity makes their way into subcontractor pricing.

As for development that is currently under construction, as you can see on Slide 13, we are in a remarkably strong position from a financial point of view. Development under construction is already 95% match funded with long-term capital, which not only mitigates the financial risk of development, but also means that we have locked in the investment spread profit on these developments by having matched the long-term expected returns on the projects with equity and debt price when we were starting these projects.

Finally, as shown on Slide 14, we continue to enjoy an exceptionally strong financial position today. This is particularly evident when comparing our key credit metrics today to those from the fourth quarter of 2008 when we entered the last recession. Specifically, since late 2008, our net debt-to-EBITDA ratio has improved to 4.9x from 6.5x. Our interest coverage ratio has increased to 6.9x from 4.5x. Our unencumbered NOI percentage has increased to 94% from 77%. And our credit rating has improved to A3, A- from Baa1 to BBB+. This strong balance sheet position provides us with great flexibility to pursue attractive investment opportunities that may emerge as this downturn unfolds.

And with that, I will turn it back to Tim.

[Timothy Naughton, Chairman, CEO & President]

All right. Thanks, Kevin. Just turning to the last slide and offering a few summary comments. Q2 was a challenging quarter driven by the suddenness of the pandemic and the depth of the downturn. So far, the impact on same-store performance has been driven by lower occupancy and elevated bad debt. Contributions from NOI and new development lease-ups were less than expected due to construction delays and weaker absorption. We have curtailed new developments dramatically and have not started any new communities so far this year. Despite the strength in the for-sale market, we do expect construction costs to fall over the next few quarters. And we'll incorporate that into our capital allocation plans.

And then lastly, the balance sheet is very well positioned in both an absolute since -- and relative to prior downturns, which as Kevin said, just gives us plenty of financial flexibility to address challenges or opportunities as they arise.

And so with that, Matt, we'll open the call for questions.

[Operator]

[Operator Instructions]. Our first question will come from Nick Joseph with Citi.

[Nicholas Joseph, Citigroup]

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

[Matthew Birenbaum, CIO]

Hey, Nick. This is Matt. Yes. I mean it is -- we have deals that could start. And we are -- we do have a fairly high degree of conviction that hard costs should start to correct here. So that's -- the main thing we're looking at is kind of where our hard cost is trending, what the subcontractor bid coverage look like.

There may be one deal that we would start here that's kind of got some exceptional circumstances that's actually in an opportunity zone. And we're looking at starting with some third-party joint venture capital, which is, as you know, is very unusual for us. But for -- kind of for wholly owned balance-sheet-funded starts, that's really what we're watching. It's kind of interplay between potential reduction in hard costs and, frankly, reductions in NOIs on the other side and kind of looking at what the total basis looks like, what costs look like relative to their long-term trend line and what rents and NOIs look like relative to their long-term trend line as well.

[Timothy Naughton, Chairman, CEO & President]

Yes, Nick. It's hard to know exactly. If you looked at last cycle, we've lost about 4 or 5 quarters. Part of my introductory comments around what this economic downturn might look like, it's maybe different from others that we've seen where others may have been sort of -- maybe drifted a bit more into the recession. This was quite sudden. And others were maybe in a quicker bounce back. We think this could be a more drawn-out bounce back and likely to be more and more -- you've heard certainly the Nike Swoosh with more people -- more and more, you're hearing sort of the K-shaped recovery, where it's going to be very uneven depending upon even demographic and the population.

So just given the public health and economic aspect of this one, it's hard to know for sure. But as we showed on that one slide, we're just starting to see construction costs correcting. Last cycle, they correct on the order of 15%, maybe a little bit more. And it's -- we're probably going to need to see the kind of double-digit corrections before we start to have a little bit more faith that we're buying deals out of the basis that we'll look good sort of next cycle.

[Nicholas Joseph, Citigroup]

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

[Kevin O'Shea, CFO]

Yes. Hey, Nick. This is Kevin. I'll jump in here, and Tim may want to add a couple of comments. And you're right, as we -- as you saw in the earnings release, we did announce a share repurchase program of $500 million. And really, the genesis behind that is we believe our stock is, as you alluded to, trading at a compelling value, both absolutely and relative to our other investments, including development. And because we have the balance sheet strength and liquidity to pursue a program, we intend to do so. Though as we indicated in our earnings release, we're likely to fund that on a long-term basis with asset sales and potentially some incremental debt, but we do intend to proceed. And probably we'll do so initially on a measured basis until we have clarity on those sources. But I think at this point, that's probably our most attractive investment that we have today.

[Timothy Naughton, Chairman, CEO & President]

Yes -- no. I -- maybe to just add a little bit, Kevin, I agree. I think you had 2 things working. It's the best -- it's the most attractive investment, and you've got the disparity between what equity's costing and what -- certainly what debt's costing as being supported artificially by the Fed right now as we know.

And our belief is while there's not a lot of visibility on asset pricing, we're -- we feel pretty strongly that asset prices haven't corrected near what equity prices have corrected. We've seen in the order of 30% on the equity, and probably -- we think probably less than 10% on asset sales. So that informs our conviction as well in terms of what the alternatives are in terms of capital sources.

[Operator]

Our next question will come from Rich Hightower with Evercore.

[Richard Hightower, Evercore ISI]

So I'm on the second chart on Page 8, just on the blended like-term rent change chart. And just help us understand some of the details there across new and renewals and what you're seeing currently, urban and suburban and maybe some of the weaker markets you mentioned, Boston, San Fran and L.A. Just help us understand some of the -- what goes into the mix there.

[Sean Breslin, COO]

Yes, Rich. It's Sean. Happy to walk you through it a little bit. I mean as we noted on an effective basis, blended rent change was down about 3% for the quarter. If you look at it on a lease basis, it was down only about 40 basis points. And certainly, based on what I mentioned in my prepared remarks, we're seeing the greatest weakness in Northern and Southern California. And if you double-click through those regions, probably the softest spots are San Francisco and throughout L.A., particularly in some of the entertainment-oriented economies around L.A., so think about Hollywood, West Hollywood, Burbank, San Fernando Valley, et cetera.

And then the other markets, we're basically anywhere from sort of 0 to minus 2%. And across the other markets, the softest spots are probably in New York City and throughout the urban submarkets within Boston. And as I mentioned in my prepared remarks, generally, across the portfolio, what we're seeing in the urban submarkets is rent change is trailing suburban by about a couple of hundred basis points.

And as you probably noted in the chart, our economic occupancy and physical occupancy are both trailing what we're seeing in the suburban submarkets as well. So certainly, a tougher place to be as it relates to both rent change and occupancy in those environments.

And as it relates to kind of where things are today, if you look at it in the context of July, effective rent change is down about 3.5%, a little bit better than June. And lease rent change is down about 2%. And in both cases, renewals do remain positive right now, sort of in the 50 to 70 basis point range, slightly lower than what we experienced in Q2 but still positive in July at this point.

[Richard Hightower, Evercore ISI]

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

[Sean Breslin, COO]

Yes, Rich. It's Sean. I can provide a couple of comments, and then Tim can chime in. I mean it's really a function of how some of those factors evolve over the next few months here. I mean urban submarkets, we've mentioned several of the factors that are sort of driving it. So I think what I mentioned in my prepared remarks is sort of the nature of the health crisis, and the economic environment will dictate when people start to come back to the urban submarkets and at least some in a more material way.

And on the suburban side, it's really a function of sort of portfolio mix. And in some places, it certainly is very helpful. There are some submarkets where, even though it's suburban, it's a little bit painful right now. I'll pick one specifically, like Mountain View in Northern California, where Alphabet is headquartered. Given their extended work-from-home policies, it tends to be a weaker submarket even though it's technically considered suburban. So I'm not sure there's a one-size-fits-all answer here as it relates to that. At least, that's my general thoughts at this point in time. But Tim, do you have anything you want to add?

[Timothy Naughton, Chairman, CEO & President]

Yes. I just -- maybe just -- I've mentioned suburban had been outperforming urban before -- prior to the pandemic. And we had been seeing a trend, both on the demand [Technical Difficulty] next year, urban supply to outpace suburban by a fair amount in our markets, but also on the demand side, which, last cycle, supply and demand was stronger in the urban submarkets. This cycle, it's probably going to be the opposite, where both -- when you get beyond sort of '21, '22, where you're likely to see stronger demand in some of the suburban submarkets and more supply. And that's partly because millennials are coming of age, there's more economic activity starting to occur in the suburbs, and part of it's affordability. So as you see more economic activity, that ought to drive more rental -- renter demand in the suburbs as well. But -- and we already started to see that trend a little bit before the pandemic, but it's just a longer secular trend that we expect that will continue over the next few years.

[Operator]

Our next question will come from John Pawlowski with Green Street Advisors.

[John Pawlowski, Green Street Advisors]

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

[Sean Breslin, COO]

In the short run, John, yes. And we are starting to see some student demand come back in some of these urban submarkets based on announcements that have been made to date as it relates to the hybrid learning environments, both on-campus and distance learning, and just anecdotally, getting a lot of feedback from some of the student population that they had enough time at home. And even if they only could be on campus a couple of days a week, they want their apartment back. So whether that holds or not, obviously, it's a function of the health crisis and the decisions that are made across the university systems. But in general, I would say we are seeing it relatively sort of stabilize a little bit.

That being said, between now and year-end, as I mentioned in my prepared remarks, the health crisis and the economic environment will dictate whether things kind of shift up or down in terms of demand as we move forward here.

[John Pawlowski, Green Street Advisors]

Makes sense. And then the 200 basis point drag from bad debt in the quarter on the residential portfolio with the opening remarks or something to that effect that it remains elevated. Is that a reasonable betting line just the trajectory over these coming months? Or will it get meaningfully worse or meaningfully better? I guess I don't understand -- I don't know how to completely think through markets like in L.A., where this eviction moratorium keeps getting kicked down the road. So just curious, comments around the trajectory of bad debt from here will be helpful.

[Sean Breslin, COO]

Yes, John. I'm happy to comment, and then Kevin or Tim can chime in as well. I mean at this point in time, it's obviously difficult to predict, given the nature of -- we already have mentioned the health crisis, the macroeconomic environment. Obviously, there have been federal support for people to date in terms of being able to sort of subsidize their incomes, which I think came through this morning in terms of personal income growth. So I think assuming it's a relatively static environment through year-end, you probably expect those sort of collection rates to hold within reason. But to the extent there is significant shift in any one of those variables in a meaningful way, obviously, that could pick it up or down as a result. But I think those are the primary variables we will all be monitoring to try and determine whether we think it's going to tick up and/or down. So...

[Operator]

Our next question will come from Jeff Spector with Bank of America.

[Jeffrey Spector, Bank of America Merrill Lynch]

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

[Timothy Naughton, Chairman, CEO & President]

Yes. Sure, Jeff. I think we've spoken to this in the past. As many have said, I mean, I think the pandemic is -- they're -- these trends aren't necessarily new. They're -- a lot of them are being accelerated. And you can certainly think about sort of big tech and employers in places like New York and California. They're already diversifying their workforces in other markets whether it's Amazon in D.C. or having bases in Austin or Denver. And so we want to be leveraged really to the innovation and knowledge economy. And so that means kind of going where those workers are going. And to the extent jobs -- employers continue to chase jobs, rather jobs -- sort of the job is chasing the employee rather than the employee is chasing the job, then we want to be in those markets. That was one of the reasons we got into Denver and Southeast Florida.

I would say one of the things that -- you look at the -- just a fiscal situation of some of the blue states, obviously, are being exacerbated as well. And so I think that probably informs our thinking also and just the overall affordability driving -- in driving some of the populations as some of these markets, we want to be in those sort of spillover markets.

We think what's happening is good for the innovation economy. So I don't think it's bad necessarily for San Jose and San Francisco and Boston but recognize that some of the -- some of those benefits are going to spill over to some other sort of secondary innovation markets as well. And those would be good markets for us to be in.

And so we look to do a few things. One is to kind of reallocate or recycle capital -- some capital in New York certainly, and probably in the future, some out of California to both expansion -- our existing expansion markets as well as markets like D.C., Seattle and Boston and then also potentially some new markets that we're not into today.

[Jeffrey Spector, Bank of America Merrill Lynch]

And is that -- and I appreciate the comments. I mean I guess, the -- your thoughts on work-from-home and the permanency of work-from-home, does that impact the decision process at all? Or do you feel like that it's just a temporary adjustment right now, but maybe it will be more going forward but not to the extent that some in the media are portraying or some on The Street are portraying?

[Timothy Naughton, Chairman, CEO & President]

Yes. Yes, it's hard to know. And I know that the office guys get that question a lot. I can sort of speak from our own experiences. We would expect we would have more work-from-home activity kind of going forward. But there are certain jobs where there -- that are more kind of individual contributors where they can be efficient working away from the office space, but that is not close to the majority of the jobs in this company or most companies.

And so we view it as kind of more of a marginal effect that gives people a little bit more flexibility about where to live if they want to work from home. And secondly, they're probably not that focused on career growth. They're probably not going to manage a lot of people working from home at least over the next few years in my view.

So I would say, does it really affect our view in terms of where we want to be? Probably less so than the fact that big employers like the Googles and Apples of the world are already diversifying their workforces in other markets with satellite operations there. So whether it's a satellite operation or people working from home, they're likely to get out to some of the same markets, I would think.

[Operator]

Our next question will come from Rich Hill with Morgan Stanley.

[Richard Hill, Morgan Stanley]

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

[Timothy Naughton, Chairman, CEO & President]

Yes, Rich, I can speak to you, and others may have a view. I think part of it may be -- if you just looked at the composition of the millennials, it's a little bit as a -- that they have gone through the pipe. So there's a lot more of those that are under 35 in that 30 to 35 cohort than there were 5 years ago. So they're starting to enter into those kind of prime homeownership. Yes, so I think a lot of this is being stimulated by demographics and really being accelerated by what we're seeing in terms of interest rates. We're not seeing it yet with our residents. Reasons for move actually went down to purchase homes. But homeownership is going up nationally, and it has an impact on the overall renter pool that affects all of us as landlords at some level. We may be a little -- we think we're probably less at the sort of the epicenter of it. It's probably mostly coming from single-family rental and other demographics and other markets. But it does have an overall -- it does have an impact on a broader sort of renter pool, if you will.

[Richard Hill, Morgan Stanley]

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

[Timothy Naughton, Chairman, CEO & President]

Richard, it factors in. I mean most of the regulatory risks we face is really at the local and state level, not as much at the national level. I think we'd would probably be a little bit more concerned if there was another nominee that was a Democratic nominee at the national level. But our markets have always been more regulated than other markets. We are in blue states. It's always -- it's part of what's been the appeal of our markets is sort of the barriers to entries created some supply constraints on new housing, which has helped elevate rents and rent growth over time.

I think the issue that you're starting to touch on is the key one, which is when it starts to leak into the price controls and rent control, that becomes the issue for us and the type of rent control. Certainly, in New York and parts of California, you have vacancy we control. That's usually pretty manageable in terms of as an owner of apartments. Where you have -- when you lose and you have to control pricing on vacant as they become available, that's the kind of rent control as an industry we have to absolutely avoid and it is -- it will be awful for the housing markets if that occurs.

So that's something we're going to continue to watch, we're going to continue to fight as an industry because it's -- one, it's not good for us as landlords for sure, but it's not good for the housing market long term. And it's not a way to solve any housing crisis at any local level. It's politically expedient, but it's -- from a policy standpoint, it's absolutely poor policy.

[Richard Hill, Morgan Stanley]

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

[Matthew Birenbaum, CIO]

Yes. Hey, Richard. It's Matt. As it relates to our current development rights pipeline, you're right, we only own 2 of those 28 deals, our land owned that we bought from a third party. So we give a lot of optionality. And it's really deal by deal. There may be deals in there that are not going to work without some type of restructuring. There are other deals that probably will work. And there are some deals where we may say the land is a good price, and we may close on the land and carry it for a while and wait for hard costs to come down.

So it's a little bit of all of the above. It doesn't really factor into the geographic mix. It's really bottom-up in terms of where we're finding the best opportunities. And so we have a couple of development rights in some of our expansion markets, including 2 in Denver and one in Florida, that are working their way through the system. We have development rights in our legacy markets as well. I don't think we've seen any particular trend yet in terms of kind of an impact to the land market or development economics more so in one market than another, other than where you're seeing, obviously, rents taking the biggest hit so far.

[Operator]

Next question will come from Wes Golladay with RBC Capital Markets.

[Wesley Golladay, RBC Capital Markets]

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

[Matthew Birenbaum, CIO]

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

[Wesley Golladay, RBC Capital Markets]

No -- yes. Sorry, the active pipeline. I mean I believe you guys pivoted a few years ago to more of a suburban footprint, but I don't know if they technically qualify, in your view, as more of the infill that you cite as a headwind on Page 6.

[Matthew Birenbaum, CIO]

Yes. I mean when you look at the 2.4 billion in development under way, you can kind of look at it in terms of -- you're right, the current yield is at 5.7%. Those deals are still -- there's only 5 of those 19, where we've actually done enough leasing that we mark the rents to market yet. And on those 5, actually, the rents are slightly ahead of pro forma by about $30.

So now the yields are a little bit behind because there's been some cost overruns on a couple of deals. Generally speaking, so 5 of the 19 are more or less mark-to-market. The other 14, you could handicap them. A lot of them are in markets that have seen less downward rent pressure so far. It is a predominantly suburban portfolio. In fact, looking at it, I think the only deal in that, that we would consider urban other than Hollywood, which is under construction, would be the one deal in downtown Baltimore right now. And yes...

[Wesley Golladay, RBC Capital Markets]

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

[Sean Breslin, COO]

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

[Matthew Birenbaum, CIO]

And I would say, just to add to that, this is Matt, that when you look at our development, as an industry, the average unit size has been trending down really for the last cycle, probably came down 10%. What we've seen, at least in the last year or 2, our development starts, the average unit size has started to move the other direction. A lot of that has been our shift to more suburban assets. But also, even before the pandemic, we were starting to see, just with demographics heading where they were, greater demand for 3-bedroom units, which we didn't use to -- hardly build at all, now almost every project we build has at least about 3 bedrooms in it. And more of the kind of 1-bedroom den and 2-bedroom loft, we're definitely building more of that product than we were 5 years ago.

[Operator]

Our next question will come from Nick Yulico with Scotiabank.

[Sumit Sharma, Scotiabank]

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

[Kevin O'Shea, CFO]

Sumit, this is Kevin O'Shea. I'm not -- I'm having difficulty hearing you, but maybe just to give you an overview of what we did with respect to bad debt, and then you can ask questions to the extent that I'm not responding to some of your questions.

So first of all, our policy is to reserve delinquent base residential rent for 3 months and other delinquent items after 2 months. For residential revenue, we typically take a reserve of about 50 basis points of residential revenue. And we did so in Q2 in our same-store portfolio. In addition, in Q2, we took a further reserve of about 200 basis points or $10.7 million, including for residents who didn't pay anything during the quarter. That resulted in a total reserve for the same-store residential revenue portfolio of about 250 basis points or $13.6 million. So of course, we continue the collection, our effort -- our collection efforts, and we're certainly encouraged by recent collection trends, which show collections against unpaid April and May rents improving to about 97.5% from about 93%, 94% at month end. So that's the story in residential revenue. Is that helpful? Is that responsive?

[Sumit Sharma, Scotiabank]

Yes. No, that's great. And apologies for the bad sound quality. Another question, following up a different kind of area. I'm just wondering, in terms of the concession activity, you actually provided a lot of information on urban versus suburban. Trying to understand where -- what kind of unit types are being -- are seeing the biggest concessions, 2 bedrooms, 3 bedrooms. I think a few moments ago, someone was talking about developments and how it's changing with the unit mix. I'm just wondering, from a concession standpoint, where you're seeing the biggest drop in rent or where you have to give the largest amount of concession.

[Sean Breslin, COO]

Yes, this is Sean. I'll give you some general thoughts on that. So first, as you might imagine, from what we described in our prepared remarks, concessions are generally greater in urban environments as compared to suburban environments. So let's start with that.

Within urban environments, we tend to see fewer concessions on the more affordable price points, which tend to be the studios and 1-bedrooms in those submarkets as compared to the larger units. Initially, we thought there might be sort of steadier demand for larger units and people looking to work from home with extra space. But I think the affordability issue sort of weighed on that a little bit, and we've seen better performance out of the studios and smaller 1-bedrooms.

And then the suburban environment, I wouldn't say there is a common theme as it relates to unit type. It's really submarket-driven and the nature of the demographic within that environment. We've got very high-quality towns in suburban Boston with great schools, and 2 and 3 bedrooms are -- have solid demand and ones not quite as much. And if you revert to some submarkets in L.A., the more affordable price points in studios and 1-bedrooms are in better shape as compared to the larger 2- and 3-bedroom units given the shutdown of some of the entertainment studios and such. So it's not a common theme as much as it relates to the suburban unit type as much as the specific suburban geography.

[Operator]

Our next question will come from Alex Kalmus with Zelman & Associates.

[Alex Kalmus, Zelman & Associates]

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

[Sean Breslin, COO]

Yes. Alex, this is Sean. We have to run some data on that. And I think what I would tell you is it's more industry-specific than it is typical demographic make-up in terms of gender, age, things of that sort. It tends to be self-employed, sort of freelance workers, content producers, folks like that, that have been impacted most materially.

And then some of our East communities, some of the service-based sectors that have been impacted as well, whether it's foodservice, hotels, things of that sort, some of the occupations that Tim alluded to earlier in his opening remarks. So it really is more occupation-driven than anything else.

[Alex Kalmus, Zelman & Associates]

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

[Matthew Birenbaum, CIO]

Yes. Hi, Alex. This is Matt. So the closings that we saw in the second quarter were almost completely deals that have been under contract earlier than that. Not entirely, there were a few deals we did in the second quarter that were quick closes, including, I think, one of the penthouse units which -- so the average price that's settled in any given time period is really more a function of just what units happen to settle based on scheduled settlements and so on. So you can't draw a lot of conclusions, I don't think, from that.

We have 54 units closed right now. We have another 12 under contract. When you add that together, it adds up to a little bit more than 200 million. We have -- there certainly is negotiation, and there's probably more negotiation at the higher price points. And that was a trend even before the crisis hit. So we have not really taken a different approach to pricing post-COVID. There just hasn't been enough traffic and transaction velocity in the market to really even justify it. I'm not sure that if we were to drop prices, we would see a significant change in the volume.

And we were offering a very compelling value, we believe, before, and it's still a pretty compelling value. And that was validated by the pretty strong sales pace we had before everything shut down in early March. So there is more supply coming. And I would say that there is a little bit more negotiation at the higher price points, but we expected that. So relative to our expectations, nothing's really changed with our pricing yet.

[Operator]

[Operator Instructions]. Our next question will come from Alexander Goldfarb with Piper Sandler.

[Alexander Goldfarb, Piper Sandler & Co.]

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

[Sean Breslin, COO]

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

[Alexander Goldfarb, Piper Sandler & Co.]

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

[Sean Breslin, COO]

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

[Alexander Goldfarb, Piper Sandler & Co.]

Okay. And then, Kevin, on the development program, you guys were planning on doing meaningful starts this year. You haven't. At what point -- as you deliver but you don't replace the deliveries, at what point do the capital -- the current capitalized costs start to burn off and that starts to -- those expenses start to accrete to the income statement? Like where -- how far would the delays have to go, meaning before we would see the expenses start to appear on the income statement because they could no longer be capitalized?

[Timothy Naughton, Chairman, CEO & President]

Hey, Alex. This is Tim. Maybe I'll jump in, and Kevin may have something to offer. I mean certainly, if we have people working in development or construction that are not actively working on a job, whether it's one that's under construction or one that's going through the planning process, they get expensed. They go to the income statement. They don't get capitalized.

I think you still need to -- while we haven't started anything year-to-date, we still have over $2 billion under construction and $4 billion under the process. So we're still managing a $6 billion pipeline. Now we are trying to rightsize it. If you look at this quarter, it's about 10% lower than the last 4-quarter average of total capitalized overhead. And it's been trending down as we've seen -- we've had some recent departures and retirements over the last 6 to 12 months of some senior folks as we try to really start to sort of rightsize it for the sort of the next cycle and where we're currently at.

The other thing to remember, well, you probably don't know this, but roughly about half of that group's comp is incentive-based. So if they're not doing things or if they're not doing as much production, there's a sort of automatic adjusted factors in the overhead piece as well. But our objective is really just to be really -- is to be well positioned and rightsized kind of for the early part of the next cycle to be able to flex up if we need to as the opportunities arise if you -- so capitalized overhead this quarter is about $11 million. About $6.5 million of that is development. About $3.5 million is construction. And about a little over $1 million of it's redevelopment. If you annualize that, you get about $25 million in development, about $12 million maybe construction. That is a level that supports kind of in the -- I think we would talk about $800 million to $900 million range, sort of plus or minus. And that's what we're still geared for.

So to the extent we decide over the next 3 or 4 years, it doesn't make sense to be doing that kind of volume. Obviously, head counts will need to be adjusted. But we suspect, over the next couple of years, we're going to be in a position to sort of ramp up that group. We want to make sure we've got the leadership and the right personnel in place. And they're still managing as we go into this recession about $6 billion worth of a total pipeline, which is probably only about 25% off of kind of where its peak level, probably in the $7.5 billion to $8 billion range.

[Operator]

Our next question will come from Rob Stevenson with Janney.

[Robert Stevenson, Janney Montgomery Scott]

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

[Sean Breslin, COO]

Yes, Rob, Sean. Good question. A couple of thoughts on that, not necessarily specific data since it's a little hard to capture. But in our particular case, I mean we don't have a lot of student-oriented assets. They're pretty select across certain markets, particularly in the urban environments, I would say. But your broader question really probably relates to the percentage of the market that is really made up of the student population that sort of brings the occupancy up in the entire market. That's something, to be honest, we've been trying to get our arms around that. Not quite there yet in terms of what that represents in each one of those submarkets. But there are certain submarkets, like we have a property here in the district that's pretty tied to ABU that when they announced their plans to have a hybrid learning model, we did 80 leases in 1 week. So there are submarket stuff like that, that are highly dependent upon it.

But I think the broader question is one we're still trying to answer, which is sort of collectively what the demand is. From the student population is one segment, and then from the short-term and corporate rental market is the other segment. We think the short-term corporate piece is probably in the 2% to 3% range. And we're trying to understand that in terms of the student population, particularly as universities may shift their on-campus housing options to the extent that they're trying to sort of de-densify some of those communities.

So it's a little bit of a moving target. It's probably hard to answer right at this exact moment. But certainly, the peak time for that demand is, as you described, as we're moving through the pre-leasing season, that you're going to see sort of basically April through June, like you might see on some of the student housing rates. And you want to be pre-leased in those buildings in the 90%-plus range as you get towards the end of July and before they show up in August. So we're on track for that at some of the buildings, but there are places in and around urban Boston, Berkeley, places like that, where they are falling short because of the uncertainty around the ultimate learning model.

[Robert Stevenson, Janney Montgomery Scott]

Well, I mean, beyond the student stuff, I mean, I was really focused on the 21-, 22-year-olds that just graduated, that have a job with, let's say, an investment bank, a tech company, a consulting firm or whatever, that you normally get in New York, San Francisco, Boston, et cetera, renting for the first time, where they're bringing in an offer letter to you and they're leasing off of that. I mean that influx of students -- of former students, but now people entering the workforce for the first time, I mean, how significant is that typically in these big sort of gateway cities?

[Sean Breslin, COO]

Yes. And that's a -- it's probably a tough one to answer other than the stuff that's related to people that are coming in for a specific kind of program, like a training program or some other kind of corporate program, I guess, 2% to 3% of the market

[Technical Difficulty] our markets. What you're really talking about is just ongoing demand as people are graduating from universities, moving into the rental market. That's a little tougher to quantify overall at this point in time.

[Timothy Naughton, Chairman, CEO & President]

Yes. No, Rob, that is part of -- I cited earlier in my remarks about the typical household contraction and consolidation that you see in a downturn. That is part of it, which you're describing to me. Kids that can't get jobs when they get out of college, they stay at home or they go into a house with 6 guys, and there are 6 people instead of getting their own apartment.

So you'll see -- in past recessions, you've seen occupancies fall by a couple of hundred basis points. You may still be seeing a little bit of new supply. So it's not unusual to see contraction of household demand on the order of a million, 2 million housing units across the country in a normal downturn. And a big portion of that is, I think, exactly what you're focusing on.

[Robert Stevenson, Janney Montgomery Scott]

Okay. And then lastly for me, what are you guys seeing today versus at the beginning of the year in terms of construction costs, both hard and soft? I mean how meaningful has been the delta? And where is the greatest amount of slack today? And is there any of these buckets that are -- that you're seeing more cost pressures either up or down on now given what's happening in single-family or what's happening elsewhere or the falling off of new construction in other sectors?

[Matthew Birenbaum, CIO]

Yes. Hey, Rob. This is Matt. It's -- we are starting to see it, but it is early. So where we started to see it first is really in some of the smaller-contract CapEx work. So if you think about it, those are the types of jobs that are short in duration. So if you're a subcontractor that's doing a facade restoration project for us or some concrete repair work, that might be a 2- or 3-month or 6-month job. And if they finish one up, they don't necessarily have stuff to replace it. So we are starting to see it there. And in some markets, we've seen mid-single-digit buyout savings on that work, which isn't all that meaningful. But given where we've been coming from, where we've just been seeing construction costs growing much faster than inflation for the last 4 or 5 years, it is a significant change.

On the new construction, it's probably still too early in almost all markets because everything is under way, and there's a lot under way. It's going to have to get finished first. So again, where you're going to see it first is going to be in early trades, earthwork, pipework, demolition, maybe a little bit concrete. And then regionally, it's going to vary as well. So what we've heard others say is maybe we're starting to see a little bit in South Florida because a big part of what drives that is also -- there's no wood frame construction there for one thing. It's all concrete because of the hurricane codes. And there's a lot of cruise ship restoration work. And hospitality work is not happening. That's been canceled. So the sub base there has more excess capacity. It hasn't really worked its way into most of our markets yet.

Some commodities are down. Lumber is up. Lumber is up quite a bit right now. So -- and that's probably in response to what's going on in the single-family market and just home renovation market. So there are some cross-currents there, but it generally takes a while. Construction pricing is a lagging indicator. And it's going to take a while for it to work its way through the system in our view.

[Operator]

And our final question will come from Rich Anderson with SMBC.

[Richard Anderson, SMBC]

So Tim, you mentioned, or maybe somebody else, but in kind of the suddenness of what happened, made a lot of decisions for you, particularly as it relates to development postponement. If memory serves, in the '08, '09 time frame, you did have a sizable write-off related to your development pipeline. And if I'm wrong about that, I apologize, but I'm going on memory.

I'm curious, though, as you fast-forward to 12 years later today, is there anything about what happened then that you took from a lesson learned and is sort of allowing you to sort of walk the tight rope here without having any sort of disruption like that? I'm just wondering how that experience during the great financial crisis has manifested itself at how you look today. I know you mentioned the difference in balance sheet in your prepared remarks, but I'm just wondering just in terms of how you approach the business, particularly on the development side.

[Timothy Naughton, Chairman, CEO & President]

Yes. Hey, Rich, Tim. I would say it's largely been in land. And when you say we had -- like we wrote off or had impairments on the order of about $80 million total, and a good portion of that was in land. And I would just say relative to the size of the development rights pipeline, we've had deals where profits have been larger than that in terms of value we created. So I -- we weren't -- I mean the homebuilders are -- were taking impairments into billions. We took a -- I think we took an impairment of -- on the order of $60 million. This time were just on our land. And so we've been really very disciplined about maintaining optionality. And some of the -- as Matt was talking earlier, some of the deals may not make. And we may have sellers that are unwilling to restructure to the extent restructuring sort of could close the gap. And we could have some future write-offs, I suspect, but it's really out of the pursuit cost, which is pretty cheap capital relative to the size of the pipeline that we control. So I would say the biggest issue is just -- we just don't have land inventory of any significance this cycle compared to the last one.

[Kevin O'Shea, CFO]

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

[Richard Anderson, SMBC]

Great. And then secondly, a lot of talk in this call about suburbs beating the urban core. You guys are, I think, pardon me if I'm wrong on this one, I think you're 60 -- 2/3 suburban, 1/3 urban, and perhaps, you're still an expensive option in those suburbs. But do you think that, that sort of breakout could ultimately help you out long term here as this sort of situation settles and that people maybe don't go all the way back in, but they come back close enough where it benefits you in your suburban portfolio?

[Timothy Naughton, Chairman, CEO & President]

Yes. Again, Rich, I think I was talking earlier, there already was a trend. We already were sort of started to tilt the portfolio suburban. And if you look kind of about our history, probably where we created the most value, at least in the development pipeline, is kind of that suburban infill. And I think as millennials get a little bit older, you see more economic activity in suburbs. I think the kind of this kind of urban-light kind of lifestyle, mixed-use kind of infill/suburban areas is probably -- provides -- offers one of the more attractive opportunities that's less dense than an urban environment, also has -- generally is more affordable than what we delivered in our urban areas. So we were already kind of moving in that direction. And maybe this just pushes us a little bit harder. But -- so I think the demand factors that were already in place are just -- are probably just being magnified by what's happened here in the last few months.

[Operator]

And with that, I would now like to turn the call back over to Tim Naughton for closing remarks.

[Timothy Naughton, Chairman, CEO & President]

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

[Operator]

Once again, that does conclude our call for today. Thank you for your participation. You may now disconnect.