Apr 24, 2014
Executives
Jason Reilley - Director of Investor Relations Timothy J. Naughton - Chairman, Chief Executive Officer, President and Member of Investment & Finance Committee Thomas J.
Sargeant - Chief Financial Officer and Executive Vice President Matthew H. Birenbaum - Executive Vice President of Corporate Strategy Sean J.
Breslin - Executive Vice President of Investments & Asset Management Kevin P. O'Shea - Executive Vice President of Capital Markets Sean M.
Clark - Senior Vice President of Asset Management/Redevelopment
Analysts
David Toti - Cantor Fitzgerald & Co., Research Division Michael Bilerman - Citigroup Inc, Research Division Nicholas Joseph - Citigroup Inc, Research Division Nicholas Yulico - UBS Investment Bank, Research Division Ryan H. Bennett - Zelman & Associates, LLC Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division David Bragg - Zelman & Associates, LLC Derek Bower - ISI Group Inc., Research Division Vincent Chao - Deutsche Bank AG, Research Division Karin A.
Ford - KeyBanc Capital Markets Inc., Research Division George Hoglund - Jefferies LLC, Research Division Michael J. Salinsky - RBC Capital Markets, LLC, Research Division Paula J.
Poskon - Robert W. Baird & Co.
Incorporated, Research Division
Operator
Good afternoon, ladies and gentlemen, and welcome to AvalonBay Communities' First Quarter 2014 Earnings Conference Call. [Operator Instructions] I'd now like to introduce your host for today's conference call, Mr.
Jason Reilley, Director of Investor Relations. Mr.
Reilley, you may begin.
Jason Reilley
Thank you, Allen, and welcome to AvalonBay Communities' First Quarter 2014 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 J. Naughton
Thanks, Jason, and welcome to our Q1 call. Joining me today are Tom Sargeant, Kevin O'Shea, Sean Breslin and Matt Birenbaum.
As all of you know, I'm sure at this point, this is Tom's last earnings call in his glorious career here at AvalonBay. Tom's been here for 28 years with Avalon and Trammell Crow Residential before that the last 19 as a CFO.
And as you all know, Tom just has been a great steward and leader with really an unprecedented track record as a CFO in the REIT industries. So I think, I speak for everyone on both sides of this call and tell Tom we'll miss him and we wish him the best in his retirement.
So in terms of the format for the call, we're going to do it the same way as we did last quarter. We received a lot of favorable feedback from our format last quarter.
And earlier this morning, we did post a management letter and a slide deck before the market opened. I'll be providing management commentary on the slides and then all of us will be available for Q&A afterward.
My comments will focus on providing a high-level summary of the quarter's results, providing management's perspective on the economic in apartment cycle. I'll then focus a bit on redevelopment and corresponding impacts on portfolio performance.
This scenario, we believe it's not that well understood by the markets, stuff that we've been talking about a little bit recently in private conversations with many of you. And then lastly, I'll touch on development performance and funding so far this cycle, an area that we think we'll increasingly differentiate our performance as the cycle matures.
So with that, let's get started. I'm going to turn to Slide 4 with a review of Q1 results.
Q1 -- in Q1, we posted a solid OFFO growth of around 8% per share driven in part by healthy same-store revenue growth of 3.7%, which was up a bit from 3.5% reported last quarter. In addition, was helped by the completion of $100 million in new developments, which is stabilized at an initial yield of more than 7%.
We also started 4 communities totaling $300 million in Q1 and raised a like amount of capital, approximately $300 million in a combination of variable rate debt and dispositions with an initial cost of capital of right around 2.5%. Turning to Slide 5, we believe this cycle has room to run for both the economy and the apartment industry.
Job growth is really only at the point now where the economy is just recovered the 8 million jobs it lost from the last downturn. And while cumulative job growth so far this cycle is similar to last cycle, it's only about 1/4 of what we experienced in the 90s, when we had a longer economic cycle.
And so from our standpoint, the labor market is up, plenty of capacity to support economic growth. When you look at the apartment segment, just look at the rent growth, rent's are only about 5% nationally above prior peak, which occurred 6 years ago.
And cumulative rent growth, this expansion, again, while 2/3 of what we saw in the 2000s is only about 20% of what we've experienced in the 1990s. Turning to Slide 6, we think the private sector should help sustain economic growth as well.
Profits are still increasing, so that retained earnings are providing capital and liquidity to help sustain additional economic growth. And generally, economic expansions have continued 2 to 4 years after profits have actually reached their peak during the cycle.
As companies eventually put profits and cash to work that they earned early in the cycle. Turning to Slide 7, we think the apartment markets and trends in the apartment markets are actually consistent with the cycle that is in the mid-innings.
When you look at both rents and replacement costs, they're largely on trend, at least a trend experienced over the last 15 or 16 years. Such that we believe the current activity and investment levels are not reflective, currently, of an overheated market that would normally lead to a correction, but are actually at quite normalized levels.
And in our view, supports a thesis that -- of apartment markets that are largely in equilibrium, but at a very healthy level. This is a further reinforced when you look at the supply/demand fundamentals going forward, just turning to Slide 8.
Over the next 3 years, we expect job growth -- are on the right-hand side of this chart, to be largely in line with deliveries. And the supply projection actually doesn't net out units taken out of service or lost to obsolescence.
It also includes, by the way, this is our markets. It also includes the imbalances we know that are -- that exist in D.C.
And it ignores or doesn't take into account just the unusually low level of single-family supply that we're experiencing today. Similarly, on the demand side, we're just looking at jobs here, we're not considering the pent-up demand from significant household consolidation that we saw during the correction or the higher share of multifamily households that are supported by demographics.
So when you just look at jobs versus new supply, it's looks it's about equilibrium, but I think, there's a reason to believe that's even better than that when you drill down underneath those 2 things. And then as you look versus the last 3 year, certainly not as favorable, but the last 3 years benefited from an unusually low level of supply, when supply needed to be low, as excess inventory was being burned off in the housing sector.
And we're now at a point where we believe excess inventory has been absorbed throughout the housing sector. We're basically at a period where markets are in balance today.
So turning to Slide 9 and how does this impact our portfolio. We look at the same unit rent growth after a weak December and January, which saw weak job numbers as well.
We started to see March and April rebound back to levels that were similar to what we experienced in 2013. Importantly, we continued to gain momentum throughout the quarter and into April.
So overall, not too different than what we experienced a year ago in the same-store portfolio. Turning to Slide 10, I'd like to shift now and talk a little bit about redevelopment and how it can impact portfolio performance.
As you know, AvalonBay does not include redevelopment in the same-store bucket for reporting purposes. We separate out redevelopment in its own bucket, as we believe it's a meaningful line of business, where we've been investing a fair bit of capital over the last few years.
But we do recognize that most of the industry, if not all, do include redevelopment for the purposes of reporting. And so for the purpose of comparison, we thought it would be helpful to take a look at what would happen if we included redevelopment in our same-store bucket from a reporting standpoint.
And as you could see, it would add about 30 to 60 basis points over the last 3 years, 2011 to '13 to same-store revenue growth if it were included and about 20 basis points in the first quarter of this year. Turning to Slide 11, same-store revenue then would have increased by about 40 basis points from 5.1% to 5.5% over the last 3 years if redevelopment were included in the same-store bucket.
And the same-store NOI would have increased about 60 basis points or about 100 basis points above the sector. And when you look at and compare it to the sector, turning to Slide 12, at 7.5% NOI growth over those 3 years, that would have placed AvalonBay towards the top of the sector or at the top of the sector.
We get about 100 basis points above the sector average over the last 3 years. Now we're just providing this analysis for cross comparability purposes.
Obviously, it is dependent upon the level of redevelopment by -- being undertaken by us, as well as the comps, so it's hard to know how comparable it is. But frankly the same is true, when if we exclude redevelopment from our same-store bucket and others are including it, it equally makes that a tough to compare performance by looking at same-store metrics alone and it's something we've been talking about with many of you over the last couple of quarters.
It's not our intention to change our reporting. We think it, as I've mentioned before, we do think it's meaningful to separate out redevelopment to give visibility into the same-store portfolio performance and overall portfolio performance.
But we will provide the information in a footnote for cross comparability purposes as we did this quarter. Now I'll touch -- moving to Slide 13, I want to touch on development and funding activities so far this cycle.
So far, we've started about $4.5 billion in new developments, about $1.4 billion that's been completed to date at an initial stabilized yield of 7.4%. And we have another $1 billion in lease-up that is currently projected to yield around 7.3%.
So about $2.5 billion, or a little more than 1/2 of what has been started so far this cycle earning yields that are projected to be in the mid-7% range. Against funding of about $5 billion or almost $5 billion so far this cycle that has been raised at an average initial cost of 4.3% or spreads of about 300 basis points of development so far and it's been -- where we have lease-up visibility on, at least leasing visibility on relative to the cost of capital that we've raised so far this cycle.
At current spreads, $1 billion in annual completions we'd about 300 to 400 basis points to annual FFO growth. Which by the way is consistent with and explains much of our outperformance over the long term versus the sector.
From an NAV perspective, $4.5 billion started so far this cycle is projected to translate into total asset value north of $6 billion or roughly the value of BRE upon the sale of Essex, which represents just 4 years worth of starts. Obviously, this growth platform's a powerful growth engine, both in terms of company scale, as well as earnings and NAV growth.
Turning to Slide 14, it's certainly the case this year, as we're projected to deliver over 5,000 apartments throughout the course of the year. This will help fuel earnings growth for the balance of the year.
In fact in the second half of the year, lease-up community NOI, net of incremental capital costs, will contribute about as much growth to FFO as the stabilized portfolio compared to the first half the year. So development's contributing meaningfully to -- our lease-up communities are contributing meaningfully to FFO growth in 2014, particularly, based upon the kind of spreads that I was talking about earlier.
Shifting to Slide 15, we continue to match-fund this pipeline. In fact about 80% of all development and redevelopment underway is already capitalized with permanent capital, leaving only about $600 million left to be funded.
And when you look at -- turning to Slide 16, in addition to locking in attractive investment spreads, match funding results in improved credit metrics as development stabilizes, even if 100% of unfunded commitments is financed with debt. The $3 billion pipeline currently underway, about $2 billion of which is incurred, is generating very little current cash flow, but is projected to deliver ultimately about $220 million in incremental EBITDA versus an incremental capital need of about $600 million.
So even if that $600 million was funded entirely with debt, on an incremental basis, you're talking about debt-to-EBITDA of only about 3x, which would -- which actually would enhance overall metrics bringing down debt-to-EBITDA from 5.7x to a projected level of 5.3x, which is based upon hypothetical case, where you know it's in essence you would use to spend new starts, but complete the existing pipeline with 100% debt. But I think this gives a bit of an insight into some of the additional benefits of match funding the pipeline as we go along, in addition, to locking in attractive spreads.
So in summary, we're off to a good start in 2014. Healthy apartment fundamentals continue and we believe markets are poised to enter a prolonged period of equilibrium similar to what we experienced in the 1990s.
Operating performance remains strong and we believe has been near or top of the sector so far the cycle. The development platform is providing a meaningful source of earnings and NAV accretion that will further differentiate our performance as the cycle matures.
And is being supported by a strong balance sheet with a very conservative funding strategy that insulates us from capital market volatility and locks in attractive investment spreads. So with that, operator, we'll open it up for questions, and we're ready to hear questions.
Thank you.
Operator
[Operator Instructions] We'll first go to David Toti with Cantor Fitzgerald.
David Toti - Cantor Fitzgerald & Co., Research Division
Tom, first of all, thank you for the pleasure of working with you all these years. We'll miss you and we wish you well.
Thomas J. Sargeant
Thank you, David.
David Toti - Cantor Fitzgerald & Co., Research Division
And I guess my first question, I've got a couple of detail questions. The first one has to do with the notation that you're looking at moving a little bit more towards suburban markets in some of your development strategies.
And I guess, I wonder, number one, is there -- do you think there'll be a materially impact to the portfolio metrics in terms of rent growth and aggregate price points? And number two on that is, doesn't that kind of buck the trend of an increased urbanization among younger demographics today?
Timothy J. Naughton
Well, maybe I'll start with the second part, and Matt, maybe, if you fill out in terms of the impact and how it's impacting our portfolio metrics? In terms of bucking the trends, David, from a demand standpoint, we agree that there continues to be some urbanization, we don't think it's -- we don't think people exclusively want to live downtown.
There's still demand in the suburbs. I think, you're even starting to see employment and office space start to absorb reasonably well in some of the suburban markets.
But what's undeniable is supply has shifted in response to that demand. And if you look just within our market footprint, projected supply over the next couple of years is significantly outweighs what we're seeing and what we expect to see in the suburbs in the urban submarkets.
And so we think there's some urban submarkets that will continue to outperform, but we think there are many suburban submarkets that will outperform just based upon what's happening at the margin from a demand and supply standpoint. And the other thing, I'd say is, just where we've seeing better values has been in the suburbs over the last -- probably over the last 12 to 18 months from a Development Rights perspective, as capital has really been chasing, in some cases, exclusively urban opportunities.
And so part of it's been opportunistic on our end and part of it's been, frankly, an intentional effort to be a bit diversified in terms of how we are penetrating our markets. But, Matt, maybe you can just talk a little bit about how it's impacting the overall portfolio composition?
Matthew H. Birenbaum
Yes, I don't think -- it's a pretty big portfolio. So I think -- it actually takes a lot to move the needle one way or the other on that question.
And we don't -- it is -- as Tim said, it is much more bottom-up than top-down, it really starts with local teams on the ground in each of our regions, identifying the best risk-adjusted return opportunities for them to invest the capital in new development opportunities. If you look at what we currently have under construction, it's probably a little -- currently under construction today, it's actually, probably, a little bit more heavily urban in the portfolio as a whole.
The Development Rights are more suburban than the current construction. So as that pulls through, it -- they tend to kind of wash each other out, so you'll see us get perhaps a little bit more urban concentration over the next year or so, as very large urban deals like 55 Ninth in San Francisco or West Chelsea and AVA High Line and Willoughby AVA Dobro [ph] in New York and Brooklyn get completed.
But it is true certainly that the starts we anticipate, you've seen this quarter and in the next year or so, we'll probably swing that pendulum back a little bit. So if you look out 3 or 4 years, it will probably be very similar to what we are today in terms of the overall balance.
David Toti - Cantor Fitzgerald & Co., Research Division
Okay. That's helpful.
And I just want to have one follow-up question on that topic. When you think about the nature of the suburban assets over time, slightly higher CapEx requirements, lower barriers to entry, more increase -- sort of more likely increases in competition.
Do you view those assets as less defensible over time? And potentially, do you measure those assets with potentially a shorter holding period from an investment criteria perspective?
Timothy J. Naughton
David, I'll start it and, Matt, jump in. First of all, I'll address your comment about lower barriers to entry, which is in our markets absolutely is untrue.
It's actually the opposite. Our suburban submarkets are much tougher to build in than our urban submarkets.
It's usually the constraint in the urban submarkets tend to be bad of economics. There's no shortage of opportunity, even in places like New York and Boston, which I think, historically, people have considered to be tough to penetrate, it's been largely because the economics just haven't made sense.
When you go to the suburbs, particularly, where you look at our portfolio, it tends be pretty infill more employment center and not bedroom community type locations, often transit oriented, those are very difficult places to get entitlements, often taking 3, 4, 5 years. And it's an expensive way to play and honestly the nimbyism is much more rampant in those kind of locations.
So that's part of what we like about the suburbs at least in our markets. It may be different, as you look at other -- other parts of the country.
But I don't know, Sean, maybe you want to address the issue, just CapEx in some of our suburban versus urban, which I think may be a little different than what your assumption might be, David, on that.
Sean J. Breslin
Yes, David, this is Sean. I think, one thing to keep in mind, just from a CapEx perspective and I'll make one another comment.
But from a CapEx perspective, the high-rise assets, you do have other components that you don't have in suburban assets that do drive up CapEx, so you've got an interior corridor that's typically heated and cooled, you've got paint and carpet in the hallways, you've got typically more expensive mechanical systems, things of that sort you've got to deal with. So we take that all into account in terms of the underwriting of new development opportunities, but the generic statement that the newer suburban assets are more CapEx intensive than a new urban assets isn't necessarily true.
And one of your initial questions was just about suburban assets and maybe slower rent growth, and things of that sort. I think one thing just to keep in mind for us is in some of the suburban locations like take Central or Northern New Jersey, you may see slower rent growth, but to the extent that the development yields going in are substantially higher, 7%-plus as an example, the total return on that opportunity will be quite attractive, even though the ongoing rent growth that you might publish in same-store is lower, and that's okay.
Operator
Next we'll go to Nick Joseph with Citigroup.
Michael Bilerman - Citigroup Inc, Research Division
Michael Bilerman here with Nick. Just Tim, as I think about the $600 million of -- that's left to fund, you talked in your letter about $230 million of wholly-owned assets and then, obviously, Christie Place, which I think, they generate the company, well over $100 million of cash from your promote.
That takes care of well over half of that funding. How should we think about the remaining?
Should we just assume it's debt funded? Or is there any desire to issue any equity?
Timothy J. Naughton
Okay, I'll let Kevin jump in. The only thing I'd say, Michael, we are taking on, we do expect to take on new commitments as the year continues, as we continue to start the balance of the $1.3 billion or $1.4 billion that was in our initial guidance.
So we'll continue to have additional commitments that we'll need to continue to be funded. But, Kevin, you might just talk a little bit about overall funding strategy.
Kevin P. O'Shea
Sure. Well, Michael, as you'll recall from our first quarter call, what we announced was an expectation to source about $1.5 billion of external capital throughout 2014.
As you pointed out, we've raised some capital in the first quarter, we raised about $300 million overall, when you take into account the unsecured term loan and the asset that was sold in Connecticut. As we -- and we've got some assets that are under contract for sale in the second quarter here.
So as we step forward here and take on new commitments, with respect to development, we're applying to continue to match fund as we go along with long-term capital. Currently, our most attractive sources of external capital continue to be unsecured debt and asset sales.
And so we would expect as we step through the year and make new commitments and more or less, ratably source capital that we continue to primarily source that capital from asset sales and unsecured debt.
Nicholas Joseph - Citigroup Inc, Research Division
And then, this is Nick. Just wanted to touch on the Archstone portfolio rolling into the same store.
So it looks like the occupancy for Archstone right now is about 50 bps below the overall portfolio. So what are you underwriting in terms of occupancy gains for Archstone for the remainder of this year?
Sean J. Breslin
Yes, Nick, this is Sean. Let me give you a little bit of insight into that.
First, just to set the table in terms of where we're trending right now to give you some perspective. The Archstone bucket is trending around 95.6% in terms of economic occupancy, just sort of where we are for April versus last year it was around 95.2%.
But when you blend that with the AvalonBay bucket, the AvalonBay bucket has come down in occupancy last year at this time, we were pushing occupancy up in the mid-96 range that's trending at 95.9% right now. So if you blend the 2 buckets together, they're trending around 95.8% economic versus last year being around 96.2%.
And we talked about -- this is a little bit, I think, on our second, third quarter call last year that occupancy actually drifted up in the second quarter beyond where we had targeted, and so we were pushing rents a little bit harder as we got into the third quarter. So we're going to have that burden from a comp prospective on a year-over-year basis in the second quarter giving back that occupancy.
But our expectation right now in terms of the Archstone bucket is that trending at 95.6% to 95.8% economic for the balance of the year would be a reasonable range in terms of our expectation overall.
Nicholas Joseph - Citigroup Inc, Research Division
Great. And just one other quick question on concessions.
And I recognize it's not a large number overall, but it seems like the year-over-year growth rate increased considerably. So could you talk about where you're offering concessions and kind of the plan overall with them?
Sean J. Breslin
Sure. I think concessions were not used a lot, but it does vary from market to market as you pointed out.
Generally speaking, we run on an effective rent pricing basis, that's our strategy, which has worked very consistently. I think most of REITs are that way, but there are select markets, where the idea of a "special" is in vogue and that's a market like Seattle as an example.
The other place where we look to consider using concessions is in some of the rent regulated markets and submarkets, where you'd like to have the sort of the face rent on the lease be higher and if you give a concession, that's okay. You typically see that in New York and some places in San Francisco as an example.
And a little bit, as the Archstone bucket bleeds in, you'll see a little bit of that in the D.C. area with couple of rent-controlled assets as well.
So I'd say, it's more of the rent regulated stuff, where you see concessions, but there are certain markets at certain times a year like Seattle in Q4 or Q1. We might see an elevated level of concession just given the nature of that particular submarket.
Operator
And now we'll go to Nick Yulico with UBS.
Nicholas Yulico - UBS Investment Bank, Research Division
Just a couple of questions. Appreciate all this talk about the development yields and the management letter.
And what I'm wondering is, when you talk about the rents now being higher, it looks like, we calculate the rents are about 10% higher for the 12 communities where you raised rents, and despite those assets now being 80 basis points above expectations on yield. What I'm wondering is, how do we think about the other $2 billion that's in the pipeline, as far as how the sort of current yield on that versus how that could possibly get above 7%, since you're listing 6.5%, I think, is the overall yield in the development page?
Timothy J. Naughton
Nick, Tim here. Just one thing to point out.
So, of the $3 billion that's under construction, we mentioned about $1 billion that's in lease-up, that's yielding about 7.3%, the entire bucket is yielding about -- is projected to yield about 6.5%. So 2/3 that we haven't marked yet to market.
Some of it is at market as we just started this quarter. But the thing I'd point out is, of that $2 billion, about $1.2 billion is actually California and New York City, so very low sort of cap rate type markets and certainly from a value creation perspective, we actually don't see that basket of assets being materially different than that's in lease-up or what we already completed.
But the other thing to put in perspective, the $1 billion that's in lease-up, that's increased by about 10%. If you just looked at it from a market standpoint in the submarkets area, I think, the rent growth, since the time that we started on a weighted average basis, has been about 5%.
So we've outperformed kind of our expectations, if you will, as adjusted for rent inflation by about 5% so far that lease-up. But one way to think about it is what is your projection for market inflation over the next 12 to 24 months as we build out that bucket of assets.
Nicholas Yulico - UBS Investment Bank, Research Division
Okay. And then, one of the assets that was in, where the rents didn't go up was West Chelsea.
Could you just talk a little bit about how leasing is going there? And whether that's just hasn't reached a high enough leased rate, whereby there -- you would be raising the rent on that asset?
Matthew H. Birenbaum
Yes, this is Matt. That is one that we will probably be able to mark-to-market in next quarter's release.
It's a little bit of a unique animal in that. It is about 20%, 25% leased.
But there's really 2 pieces, there's the AVA piece, and the Avalon piece. And the -- we have not started leasing the Avalon piece yet.
And so we didn't feel comfortable, kind of, putting a number on where rents are today there given that the Avalon piece -- those are the higher rent apartments, so it's a very significant part of the rent roll and frankly the affordables are more heavily concentrated in the AVA piece. And so that also affects kind of what's leased to date.
So I guess, the short answer is, presumably next quarter, we'll be able to mark that to market and see where those rents are. And I don't know, Sean, if you have anything to add?
Sean J. Breslin
Yes, just on the velocity question that you had. We leased at a pace of 36 a month in the first quarter for the AVA component of that property, which is open.
The West Chelsea, Avalon component is not yet opened and leasing. So just that's the AVA High Line component at that velocity.
Nicholas Yulico - UBS Investment Bank, Research Division
Okay. And then, just lastly, I mean, can you just talk a little bit about how the competition is over there with, whether it's Gotham West or some of the other assets, as far as how those buildings are filling up and whether you are being forced to think about offering more concessions?
Sean J. Breslin
Sure. The -- we haven't seen a huge impact on AVA High Line from those assets, but there's 2, or 3 assets that have been in lease-up that have had some impact on the Midtown West and Clinton deals that we own.
And the Gotham deal is probably the least furthest along, I think, it's around 50% leased right now. Mercedes House, which is a [indiscernible] deal is about to leased up.
And there is one other asset that's about to leased up. So it has some impact on some of the existing assets, but we'd have not had much overlap with AVA High Line in terms of specific competition from the deals you referenced.
Operator
We now go to Ryan Bennett with Zelman & Associates.
Ryan H. Bennett - Zelman & Associates, LLC
Just staying on New York for one second. In terms of the better than expected results that you cited in your management letter.
Was that largely driven by Long Island City getting better from what it had been, I guess, in the third into the fourth quarter?
Sean J. Breslin
Ryan, this is Sean. In terms of New York City, Long Island City is underperforming our portfolio average.
Where we're getting the best growth out of New York right now in terms of the city product is what's happening basically at Morningside Heights. We're pushing mid-6s.
One of the Bowery deals is pushing mid-5s as opposed to Long Island City has been underperforming, and the other place where we're again pretty good growth is out of Brooklyn, [indiscernible] we're pushing mid-5s as compared to the Riverview assets on a blended basis are more like 3, 3.5 on a year-over-year basis for revenue growth.
Ryan H. Bennett - Zelman & Associates, LLC
Got it. And then just one more question on Boston.
Just curious if could you provide some incremental color there in terms of starting to see that market come back. Now that the weather conditions have improved and whether or not -- are there any specific trends between your urban and suburban assets in that market?
Sean J. Breslin
Sure. This is Sean again.
So in terms of Boston, yes, it was a tough winter. We did see turnover move up in Boston as compared to the first quarter of '13.
It was up about 5%, which is roughly about a 13% increase in move-outs. If you were still buying homes, it was one of the few markets.
If you looked at the home sales data yesterday, it is actually up on a year-over-year basis as compared to many other markets that are down. Still little bit of pressure from that.
And certainly the weather wasn't helpful from a traffic perspective. In terms of the different submarkets that you mentioned, the closer-in locations actually did relatively well in the first quarter.
So the Metro Boston stuff like Newton Highlands, Chestnut Hill, all did pretty well producing total rents or revenue growth between call it 6%, 7% range, 95, 93 North was putting out good numbers, north of 4. MetroWest was relatively weak though and I think that's some of the more distant assets where we did see some home buying pressure.
And in the South Shore, it was doing okay, it was in the 3% to 4% range. So I say that more infill markets were doing generally well, as well as 95, 93 North, but the more distant suburban stuff was a little bit weaker.
Operator
Now we'll take a question from Alexander Goldfarb with Sandler O'Neill.
Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division
Yes, Tom, we'll miss you. So best in your next phase.
Just a few questions here. In your -- in the letter, this morning, you said that ex the winter costs, your same-store expenses were up 3.9, and your guidance for the year is 2 to 3.
So can you just walk us through what some of the areas where you expect to save on expenses to get the expense within the -- within your full-year guidance range?
Sean J. Breslin
Yes, Alex, this is Sean. So you did quote the correct number.
If you excluded the excess utility and snow removal costs, Opex year-over-year would have been 3.9, and NOI growth would have been 3.7 as opposed to the 2.6 that was reported. In terms of the outlook for the year, in terms of what we're seeing, basically, if we just trended pretty close to what our budget was, we'd be at the high end of the guidance range that we provided.
We are seeing a little bit of relief in a few areas like property taxes, as an example, that may come in a little bit below budget based on our forecast. So based on what I'd say right now is we still expect the first half of the year expenses to be elevated for a number of different reasons, and we mentioned that when we provided the outlook.
But based on where we see the second half coming in with budget and a few adjustments based on things we know right now, we still expect to be within the guidance we provided for OpEx, but certainly trending towards the high end of the range.
Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division
Okay, and then the second question is, on Slide 9 where you showed the ramp-up -- your expected ramp up for rents this year versus the last year where it's flat in the first and then stepped up in the second. Given the economy is basically the same this year as last year, why are you expecting a different ramp up in rents versus last year?
Timothy J. Naughton
Yes, Alex, it's Tim. I think you may be misreading the chart.
This is actually monthly, not quarterly data, just to be clear. So these are actuals.
So it's -- the fourth bar there is actually April through -- I think, the footnote says sort of like April 22. So it's not the full month yet.
But these are blended rents. So it's a mix of new move-ins and renewals that we know today or that we have experienced, January through March.
So it's not far off of what we expected, to be honest, but this is actuals, it's not projections.
Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division
Okay, then, sorry about misreading that. Then if I can just ask sort of replacement question then.
In Seattle, your occupancy slipped a little, but you guys pushed rent a lot. Was that just a concerted effort to focus more on rent?
Or was there some unexpected tenants leaving because they didn't want to pay or something like that?
Sean J. Breslin
No, not necessarily one specific strategy. I mean, we basically, as you know, Alex, use LRO to try to optimize for both rent and occupancy.
They are certain markets where you forecast things might happen -- or submarkets, I am sorry, submarkets, I was referring to and they don't come to us. For example, we had an impact on Redmond in the fourth quarter that bled through to the first quarter for us, where some of the corporate activity just changed, as compared to the seasonal history, mainly due to Microsoft, so that had some impact that we had not anticipated.
So the things like that, but nothing intentional that we were trying to push it one direction or another. You generally, to be honest, try to protect occupancy a little bit more in Seattle in the fourth quarter.
Operator
Our next question comes from David Bragg with Green Street Advisors.
David Bragg - Zelman & Associates, LLC
In your management letter, you say that starts in D.C. or starting to taper off.
But the permit trends show that they continue to increase. So can you talk us through the disconnects that might be developing between starts and permits in D.C, if that is the case?
Timothy J. Naughton
Dave, its Tim. I don't know that we can, to be honest, so we've been -- obviously we've been tracking starts in projected delivery.
It's not unusual where they might -- particularly in the market where people have been spending a lot of capital to get their deals permit ready. It's not uncommon where it might pull the permit, and in our case we pulled the permit at AVA 55 M [ph] in part to lock in a tax abatement, several million dollars of value.
We may or may not start that over the next 12 months. So, I think, there's probably some cases like that, but I can tell you what -- I don't have a theory for you as to why maybe the permit and the start data might be diverging.
David Bragg - Zelman & Associates, LLC
Okay, do you expect D.C. starts to be lower in '14 than '13?
Timothy J. Naughton
That's our projection. Yes.
David Bragg - Zelman & Associates, LLC
Okay, that's helpful. And then as it relates to the weather the disclosure on expenses was quite helpful, but can you explain what the impact could be on the revenue side?
It looks like you're trending a little bit below plan in the Northeast in New York and with some occupancy to make up in the Northeast. So, over the course of the year, how impactful will the weather from the first quarter be on revenue growth?
Sean J. Breslin
Dave, this is Sean, I'm not sure I could answer your question precisely. We still expect to be within the guidance range that we provided.
The only comment I could say really is that as you pointed out, New England started off a bit slower as than we anticipated in terms of not only the typical occupancy gains. But as a result of that, the rent growth that we were able to push through in that region in the first quarter.
That being said, it has picked up traction in the last 3 or 4 weeks as the weather turned. I'll give you a couple of statistics just availability has come down about 50 basis points over the last 3 weeks.
Occupancy has trended up. So we're seeing some movement there.
So it's hard to quantify exactly what the difference might be, and the impact on revenue. But on the other side of the coin Northern California is outperforming.
So I'm not prepared to give you a precise answer other than we expect to be within the range we provided in terms of revenue growth for the year.
Timothy J. Naughton
And, Dave, its Tim. Just to follow up, we are basically on plan in Q1, as Sean said, in some of the areas that we missed, we had some offsets, particularly in place like -- particularly in Northern California.
It's ultimately going to turn on that one chart that you saw, I think, that showed a bit of a ramp up in terms of same unit rent. Rents that we're seeing and whether or not that holds we're running around 4% in April for -- that's for the AvalonBay legacy portfolio.
At this point, but to the extent it holds in that range throughout the year, obviously that's pretty good, relative to the outlook that we gave.
David Bragg - Zelman & Associates, LLC
Got it. And the last question relates to -- for the same-store pool, what were your renewal and new move in gains in 1Q?
Sean J. Breslin
Sure, Dave, it's Sean. I can provide you that.
So for the same-store bucket in the first quarter as we quoted the blend was 2.7%, it was basically 5% on renewals and essentially flat on move ins and where we had downward pressure in New England, a little bit in New York and considering the mid-Atlantic, but was offset by gains in Pacific Northwest, Northern California and Southern California.
Operator
Now we'll go to Derek Bower with ISI Group.
Derek Bower - ISI Group Inc., Research Division
Can you just provide more clarity on the assumptions driving your 2Q guidance? Specifically what is expected a level of dispositions for the quarter?
And what are the $0.02 of non-routine items attributed to?
Kevin P. O'Shea
Sure, Derek, this is Kevin. In terms of sort of a roadmap from an OFFO perspective from 1Q to the second quarter and then touching on some of the adjustments.
We had $1.63 in OFFO for the first quarter and our outlook for the second quarter in terms of OFFO is $1.66. So essentially kind of a roadmap from the first quarter to the second quarter.
There's probably about $0.05 pickup in community NOI of which about $0.03 relates to the same-store NOI combined basket. And then about $0.02 from development NOI.
And probably with an offset of about $0.02 in terms of interest expense and overhead combined to create $0.02 drag on that to get to a net change of $0.03 from -- in terms of OFFO sequential change. In terms of the $0.02 for next quarter, it's largely prepayment penalties, and continuing loss on the parking lot joint venture that we have, combine to produced the $0.02 in OFFO adjustments for the second quarter.
And the prepayment penalties relate to some fund dispositions that are scheduled to take place in the second quarter.
Derek Bower - ISI Group Inc., Research Division
So the $230 million that's currently under contract that would be a 2Q event, correct?
Kevin P. O'Shea
The $230 million that was under contract would be a 2Q event. That was fully on communities.
There were some additional fund dispositions that are scheduled for the quarter that are in addition to that amount, and actually a couple of them have some prepayment penalties associated with them that would have a flow-through effect on our financials.
Derek Bower - ISI Group Inc., Research Division
Okay, and any promote from a JV disposition is not included in the guidance, right?
Kevin P. O'Shea
That is correct.
Derek Bower - ISI Group Inc., Research Division
Okay, got it. And then just touching on the Bay Area and obviously there was some strength there.
Can you talk about how much of a contribution the increase in non-same-store pull was, and would you say the better growth has been driven by you fixing some of the turnover issues you had, late last year, or is it just the market overall is performing better than expected?
Sean J. Breslin
Yes, Derek, this is Sean in terms of general commentary about Northern California, I'd offer few things. First, as you could tell from what we reported.
The East Bay remains particularly strong. And the contribution from our ease [ph] communities there is very strong.
So East Bay generally speaking strong, lower price point communities probably stronger, and we have a fairly good allocation of lower price point communities in the East Bay. San Jose has held pretty steady, and actually I'd say as we look through the year, San Jose may surprise to the upside just because the impact from supply that we're seeing there is not as much maybe as we expected I am hearing similar comments from our peers, in terms of the supplies there seems to be absorbed without an issue.
Rents are starting to get pushed a little bit harder so San Jose feels good. And then San Francisco portfolio is performing well.
Certainly, we have sort of the flagship asset at Mission Bay. But our -- frankly our lower price point assets in communities at Sunset Towers, Diamond Heights, Daly City, Pacifica et cetera are doing quite well.
Some of those lower price point communities are putting up 9s and 10s, as an example, in terms of year-over-year growth. So I say the price point communities in San Francisco and the East Bay are doing particularly well, and San Jose seems to be on, I'd say, a positive momentum trend as we look through the rest of the year.
Derek Bower - ISI Group Inc., Research Division
Okay, and then just in D.C. where are your new rents today and what are renewals looking like for June and July?
Sean J. Breslin
Sure, D.C. specifically just to give you some sense, so in the first quarter renewals were up about 3% and move-ins were down somewhere around 4%.
Looking out to May and June in terms of the renewal offers, they're out sort of in the low- to mid-4s, they'll probably settle in the 3 to 3.5 range would be my expectation based on what I know today. To give you some sense, for example, April is trending the 3.9%, 4% range for the mid-Atlantic portfolio.
Derek Bower - ISI Group Inc., Research Division
And are new leases today worse than 4% or are they in line?
Sean J. Breslin
In line. April is actually trending a little bit better, it's trending at around 3%.
Derek Bower - ISI Group Inc., Research Division
So for the whole quarter it was negative 4 and April it was negative 3?
Sean J. Breslin
Correct. April to date.
Correct.
Operator
Now we will take a question from Vincent Chao with Deutsche Bank.
Vincent Chao - Deutsche Bank AG, Research Division
Just, I know, we spent a lot of time talking about the OpEx impact from the weather. Just curious if you could comment on the impact on just construction activity, in general, in those weather-impacted markets, and whether or not that may have helped or hurt leasing activity given the potential delays in construction that kind of thing?
Matthew H. Birenbaum
Sure, Vincent, this is Matt. I can try and answer that one.
As relates to leasing activity, surprisingly, it's been pretty strong in our new lease-ups in the Northeast. We averaged 21, 22 leases a month.
22 leases a month across all of our lease-ups. But the Northeast lease-ups and certainly the mid-Atlantic lease-ups were at or above our initial projections.
So we -- people were anxious to lease our brand new apartment homes in these markets even through the winter. As it relates to construction, I have not heard of any material delays at this point, due to the weather.
I mean, there is a certain amount of weather days built into the schedule. In general, we have more weather days, certainly we did in the first quarter in the Northeast.
But generally speaking, these are mostly jobs that take on average 2 years to build, and if you are on a 4 or 5 more weather days in January or February, they will find a way to make that up.
Operator
And now, we'll take a question from Karin Ford with KeyBanc Capital Markets.
Karin A. Ford - KeyBanc Capital Markets Inc., Research Division
I wanted to ask you about condo conversions sounded like there might have been a trade of a rental building to condo converter in New York recently. I just wanted to get an update on what you're hearing there in New York and in other markets, and are any of your asset sales to a condo bid?
Sean J. Breslin
Yes, Karin, it's Sean. I'll answer your second question first.
At this point, no, none of the dispositions that we either have under contract or are contemplating, we're expecting to go to a condo converter that certainly change, but that's not the expectation right at the moment. I've heard some chatter about the one deal that did convert in New York, I don't know the details, to be honest, can't tell you anything about it.
There has been some chatter about condo conversions in New York and in San Francisco given the level of inventory that's currently available for sale in those markets, but I've not been close to any specific transactions to be able to give you much insight into that trend.
Karin A. Ford - KeyBanc Capital Markets Inc., Research Division
That's helpful. And then just second question is do you still expect Archstone to be neutral to the same-store growth expectations for the balance of the year after it rolls in?
Sean M. Clark
Neutral to the same-store growth expectations? We don't expect to provide -- we're not doing anything different in terms of providing different guidance than we already provided as it relates to the revenue growth from the portfolio.
And we provided that in the Q1 information, so nothing has changed from our initial guidance.
Karin A. Ford - KeyBanc Capital Markets Inc., Research Division
Is it roughly -- is the same-store growth guidance roughly the same for the 2 different portfolios, though?
Sean M. Clark
We provided initial guidance that was -- the midpoint was 3.625 overall for the AvalonBay portfolio.
Timothy J. Naughton
And we provided the Q2 to Q4 guidance.
Sean M. Clark
Q2 to Q4 for the combined, yes, I don't have that outlook right in front of me. But nothing's changed from what we've provided in terms of guidance at this point.
Operator
[Operator Instructions] . Next we will go to Tayo Okusanya with Jefferies.
George Hoglund - Jefferies LLC, Research Division
This is George Hugland on for Tayo. Just a couple of questions on the Boston market.
First one, on the Assembly Road project, can you just give an update there? It looks like it was pushed back a quarter.
And also just curious on how our rents are trending there?
Matthew H. Birenbaum
Yes, this is Matt, George. We did actually get our first [indiscernible] at Assembly Road, earlier this week or late last week.
So that was one we definitely did suffer some delays. Some of it may have been weather-related, but, I think, a lot of it was related to -- just it's very complex mixed-use construction.
It's a joint venture or partnership with Federal Realty. So we have actually a backlog of leasing activity, folks that have been waiting to move-in for us to get those [indiscernible].
We should be off to the races now on the lease-up, but we're only about 10% leased there, so again, we don't really mark the rents to market until we can get up to about 20%. And particularly in a situation like that where people haven't even been able -- the 10% they leased, they haven't actually walked the apartments.
It's all been off of plans. So again, I would anticipate by the next quarter's release, we'll have more on that.
George Hoglund - Jefferies LLC, Research Division
Okay, and then also can you just comment on how new rental rates are trending in Downtown Boston?
Sean J. Breslin
Sure, George, this is Sean. I don't know if I have those specific communities with me to be able to quote you that.
But I can give you the region overall if that helps. I can tell you that Downtown Boston, right now, is actually holding up a little bit better than we anticipated, in terms of expected rent change.
I mentioned earlier in my comments, that the infill markets, Mid Highlands, as an example, Chestnut Hill, a couple of phases of the Bruce Center have actually been doing pretty well. Keep in mind, our sample in the core of Boston if you really looking urban high-rise, is essentially the Prudential Center.
Sorry, I don't have the [indiscernible] numbers right in front of me, but we can get back to you on that, if you'd like, that information.
George Hoglund - Jefferies LLC, Research Division
Okay, that would be great. And also just on the Stuart Street construction project.
How big of an impact was there? There was, I guess, a partial collapse at that structure?
Matthew H. Birenbaum
Yes, George, this is Matt again. Obviously a very unfortunate incident there where some steel was apparently perhaps overloaded on an upper floor and fell through temporary decking that had been put in place.
The way these buildings gets built its a concrete core, that goes up first, and then you basically you put the lightweight steel up. And that's up multiple stories above where the concrete permanent floor is.
So, the temporary decking got collapsed and lost on about 5 or 6 stories there at that structure. But there's a recovery plan in place, and there is -- the team has worked very well with the city of Boston and all the inspectors involved.
So they are now well into the recovery plan, and we do not expect any material impact there on the economics of that deal.
Operator
Now we'll go to Michael Salinsky with RBC Capital Markets.
Michael J. Salinsky - RBC Capital Markets, LLC, Research Division
Tom, we're definitely going to miss you. And, Kevin, you've got big shoes to fill here.
Tim, first question you talked previously about '14 being the peak in deliveries given what we're seeing in permitting, I know, you talked about D.C., but is that still the expectation in '14 is the peak, and then you see a drop down or do you expect '15 to be comparable at this point, from what you're seeing?
Timothy J. Naughton
Yes, Mike in our markets, it is. I can't speak for the U.S.
overall, but in our markets, we are expecting still deliveries to peak. Just under 2% of inventory in 2014 and to come down both in '15 and '16 from those levels based upon starts that have already occurred and starts that we're projecting here over the next 6 to 9 months.
Michael J. Salinsky - RBC Capital Markets, LLC, Research Division
Okay, that's helpful. Second of all, in your presentation, you provided an interesting chart on replacement costs there.
Can you talk about the growth you've seen in replacement costs year-over-year? And then, as you go forward, given the activity, we've seen in some of the other sectors picking up on the construction side.
Is it your expectation that rents can keep pace with the growth in replacement costs over the next couple of years?
Timothy J. Naughton
Well it's interesting, I mean, if you look at these 2 charts side by side, they're important to consider together, right, it's the relationship between rents and replacement costs that ultimately drive whether there ought to be new supply. Both of these actually indexed about 3% inflation over 15-year period.
So again sort of supports the notion that you're roughly at equilibrium. But we're at levels where the economics do still support new supply.
We are still pursuing new deals as are many of our peers not as many made sense as they did in 2009 and '10 and '11, that is just the nature of cycles. But we are still seeing plenty of stuff that we think underwrites and makes sense in terms of the basis we've been at, as well as the projected economics.
I think this -- I think the chart on the right captures our experience of the replacement costs pretty well. If you just look back at our total cost per unit, we just went over the $300,000 per unit mark really for the first time since like 2007, recently.
With a more concentrated portfolio in the urban markets, and so, I think, this is pretty accurate. This is an index that we -- is a proprietary that we put together based upon both construction costs and land cost trends, but it actually matches our intuition and our own experience.
So we feel pretty good about the -- about what it's telling us. It sort of matches -- it matches our experience at least at the moment.
So I don't know if that answers your question, but there have been some markets where construction costs, particularly on the West Coast have still moved up 8% to 10% over the last year. But on the East Coast it's been much more -- we see much more normalized levels in the 3%, 4%, 5% range on a year-over-year basis.
Michael J. Salinsky - RBC Capital Markets, LLC, Research Division
Just in light of that last comment, is there any markets then today where that equilibrium has gotten out of whack to where it doesn't make sense to be putting new construction today? Or where you think there is a significant catch up potential?
Timothy J. Naughton
Yes, well certainly parts of D.C. don't make sense, but you still might be surprised, which -- how many do still make sense if you just look at where assets are continuing to trade in this market.
But there's still some that are just -- one, it's current -- in some cases, it's current economics but in more cases it's about where we think the market might be going over the next year or 2. So plenty of submarkets in D.C.
that we wouldn't consider at this point, in the cycle. There are -- when you look at some of the urban costs and construction costs in the Northeast, that's giving challenging.
I would say to -- you take the deal like National Street, it makes sense in part because of our are our land basis, is actually very, very attractive relative to what you could secure land today at. So there's some for sure that where the risk-adjusted economics don't make sense based upon where the assets might trade.
Michael J. Salinsky - RBC Capital Markets, LLC, Research Division
And just a final question then in terms of same-store composition change going into second quarter, obviously with Archstone quite a bit of Southern California, as well as D.C. Just can you give us a sense of what D.C.
and Los Angeles increased to as a percentage of the overall same-store bucket versus currently?
Sean M. Clark
Yes, Matt's looking it up here, Mike, this is Sean. My recollection is that the D.C.
portfolio becomes about 16%, 17% on a combined basis. Give us just a second we can take a peek at it for you.
We'll send you a note with that, Mike, with precise numbers.
Operator
We'll take our next question from Paula Poskon with Robert W. Baird.
Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division
Just a question on the suburban focus on development. Are you thinking more -- should we be thinking more in terms of your traditional Avalon-type garden style community or are you thinking more of a high-rise footprint in transit hubs, such as may be a rest [ph] in town center versus the Center City?
Timothy J. Naughton
Yes, Paula, that's a great question. Actually it's been -- if you look at just our Development Right pipeline versus currently under construction, the amount of garden is about the same.
But really the shift has been from high rise to what we think of as mid-rise, which is a combination of wood-frame wrap or wood-frame podium. And those are often in either -- on transit TOD-type locations or certainly employment, and retail center-type locations.
So that's really probably been the bigger shift, is really been from central core to kind of ex-urban infill-type sites where the economics are still dramatically different. If you just looked at the cost basis, call it as Stuart Street, or an Exeter, or an Nasser street in downtown Boston versus Assembly Row, which is only 3 miles away in Summerville.
You're talking 50%, 60% of the basis in some cases. So that's been probably more the focus of the shift over the last 12 to 24 months in reality.
Matthew H. Birenbaum
This is Matt. Couple of numbers on that.
What we currently have under construction is about 25% garden and the balance is evenly split between mid and high rise, 38% mid, 38% high. In our Development Rights -- Development Rights pipeline, the future starts, the garden percentage doesn't really change that's 25%.
The high-rise drops from 38% to 15% and the mid rise is what moves to about 60% of the pipeline. Is that -- the bulk of what we're going to be starting is the wrap and podium deals in the infill suburban locations.
Operator
At this time, we have no further questions, so I'd like to turn it back over to Mr. Tim Naughton for any additional or closing remarks.
Timothy J. Naughton
Well, thank you, operator. And Tom, I think you got off pretty easy this quarter.
Just a lot of thank you's. But anyway, thanks for being on the call today, and we look forward to seeing many of you, unfortunately without Tom, at the [indiscernible] conference in early June in New York.
So look forward to seeing you there. Thanks.
Take care.
Operator
And that does conclude today's call. We thank everyone again for their participation.