Apr 27, 2017
Executives
Jason Reilley - AvalonBay Communities, Inc. Timothy J.
Naughton - AvalonBay Communities, Inc. Sean J.
Breslin - AvalonBay Communities, Inc. Matthew H.
Birenbaum - AvalonBay Communities, Inc. Kevin P.
O'Shea - AvalonBay Communities, Inc.
Analysts
Nicholas Joseph - Citigroup Global Markets, Inc. Richard Allen Hightower - Evercore ISI Dennis Patrick McGill - Zelman Partners LLC Jeffrey A.
Spector - Bank of America Merrill Lynch Austin Wurschmidt - KeyBanc Capital Markets, Inc. Wes Golladay - RBC Capital Markets LLC Vincent Chao - Deutsche Bank Securities, Inc.
Gaurav Mehta - Cantor Fitzgerald Securities Omotayo Tejumade Okusanya - Jefferies LLC Richard Anderson - Mizuho Securities USA, Inc. Daniel Santos - Sandler O'Neill & Partners LP Conor Wagner - Green Street Advisors, LLC
Operator
Good morning, ladies and gentlemen, and welcome to AvalonBay Communities' first quarter 2017 earnings conference call. At this time, all participants are in a listen-only mode.
Following remarks by the company, we will conduct a question and answer session. Your host for today's conference call is Mr.
Jason Reilley, Senior Director of Investor Relations. Mr.
Reilley, you may begin your conference.
Jason Reilley - AvalonBay Communities, Inc.
Thank you, Cynthia, and welcome to AvalonBay Communities' first quarter 2017 earnings conference call. Before we begin, please note that forward-looking statements may be made during this discussion.
There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release, as well as in the company's Form 10-K and Form 10-Q filed with the SEC.
As usual, this press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available in 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 - AvalonBay Communities, Inc.
Yeah. Thanks, Jason, and welcome to our Q1 call.
With me today are Kevin O'Shea, Sean Breslin, and Matt Birenbaum. I'll provide management commentary on the slides that we posted last night, and all of us will be available for Q&A afterwards.
My comments will focus on providing a summary of the Q1 results, review of important macro trends impacting our business, an overview of market and portfolio performance, and finally some color on our approached development at this point in the cycle. Starting now on slide 4.
Highlights for the quarter include: core FFO growth of just over 6%; we saw same-store revenues grow at 3.2% or 3.4% including redevelopment. This was a little better than expected, driven by higher than expected occupancy in January and February.
We had $650 million of development completions at an initial projected yield of 5.6% with about 70% of those attributable to the completion of Avalon Willoughby and the AVA DoBro combination community in Brooklyn. And lastly, we raised $460 million of capital including dispositions at an average initial cost of 3.7%.
Turning to slide 5 and some of the key trends we've been following. Given that the economy is essentially at full employment, and we're now roughly seven years into the current expansion, wage growth will be a key driver in sustaining apartment sector performance for the balance of this cycle.
Over the last several quarters, workers have made solid gains in wages, as the labor market has tightened almost a 100 basis points of improvement in hourly wages as you can see on the chart on the left. And the trend is even stronger for younger workers who are those under 55 on the chart on the right.
They're seeing gains closer to 150 basis points and are now enjoying year-over-year gains in hourly wages, up almost 4%. Turning to slide 6, another trend we're tracking is the health and attitudes of the business sector, which can be a leading indicator of job and wage growth, as well as new capital investment.
As you can see on the chart on left, corporate profits are now up in the three of the last four quarters and on the right, business confidence continues to rebound since the election late last year. So, it looks like the business sector is positioned to support continued economic growth over the near-term.
Slide 7, a third factor we're watching is the trend in the rate of homeownership as the for-sale recovery continues to take hold. Obviously, the apartment sector has benefited tremendously this cycle, as homeownership rates dropped roughly 500 basis points in the aftermath of the housing correction.
But over the last two years or so, it appears that the homeownership rate has settled into the 63% to 64% range, consistent with the longer-term trend we saw before the housing market run up with the 2000s. As we stated last quarter for a variety of reasons, we do expect housing demand to be more balanced going forward, between for sale and rental as well as single and multifamily.
Moving to slide 8, given the outlook for balance housing demand, we continue to keep an eye on the supply side of the equation. Based on recent trends and housing starts, the housing industry has responded in a very rational way to shifts in demand.
Single family starts have risen significantly over the last two years on the order of 25% to 30% to roughly 800,000 units per year, while multifamily starts have essentially leveled off in the 400,000 unit range over that same period of time. This two-thirds, one-third ratio was roughly consistent with homeownership rates over the last couple of years and the 1.2 million in annual housing starts, less units lost to obsolescence or destruction is roughly in line with net household formation.
So overall at the macro level, the housing market appears to be in good shape, a period of rough equilibrium. Of course, there are some imbalances in certain markets and sub-markets, but for now, the market in total remains healthy.
Now turning to slide 9 and taking a look specifically at our markets. Rent growth in AVB's markets has been roughly stable over the last couple of quarters in the low single digit range.
As you can see in this chart, rent growth effectively peaked in mid-2015 in the 5% range and has decelerated to the 1% to 2% range since then. In our portfolio, we're seeing similar trends with blended like term rent change averaging 1.7% in Q1, and at 2.3% so far in April.
Rent growth in suburban submarkets continues to outperform urban by more than 300 basis points across our footprint, which is consistent with the trend over the last couple of years, as the urban supply has been roughly double that delivered in the suburbs. Turning to slide 10, the discrepancy between urban and suburban rent performance is evident in most of our markets, where we have a diversified presence across the region.
This slide that depicts rent growth performance for three of our larger regions: Northern California, Metro New York/New Jersey and Boston. As you can see on this chart, in these regions, urban rent growth is underperforming by about 200 bps to 400 bps.
A trend that is consistent with our portfolio for these regions where roughly 40% of our portfolio by value is urban, and rent growth has been more than 200 basis points, so lower for communities in urban submarkets. Turning to slide 11, so given some of these macro and operating trends, how are we thinking about new development?
While we continue to pursue new development, although in a more risk measured way than early in the cycle, the last few slides speak to some of the actions we're taking to manage risk in the development platform. First, as you see here, overall volume has peaked and is projected to decline by roughly 30% or so over the next year from Q4's level of $4 billion.
In addition, the composition of what is underway is projected to change, skewing more toward infill, mid-rise, and away from downtown high-rise product where market conditions as we just discussed have softened more significantly. Turning to slide 12.
In addition, we remain disciplined about managing land inventory. We talked about this last quarter as well.
We currently have about $100 million in land inventory, almost a record low as a percentage of enterprise value. The seven parcels that we own for new development represent only a quarter of our development rights, with the other three-quarters being controlled through purchase contracts.
In addition, five of those seven parcels are scheduled to start construction over the next couple of quarters. So we don't have much land exposure currently, and it's our intention to maintain this land-light posture for the balance of the cycle.
Now to slide 13, we're also managing development risk with the right hand side of the balance sheet through our funding strategy. At quarter end, we're almost 90% match funded, with only about $0.5 billion in additional permanent capital needed to fully fund the $4 billion in production.
And lastly, on slide 14, spot liquidity remains very healthy. In fact before considering the impact of any free cash flow, we have plenty of current liquidity to build out and complete the $4 billion pipeline under construction.
So in summary, Q1 played out more or less as expected. We believe that the apartment market has entered into a period of equilibrium, down-shifting a bit from exceptionally strong performance we experienced in the first few years of the cycle to something closer to longer-term trend.
Many key macro trends continue to support this thesis but do bear watching as the cycle matures. And we continue to pursue growth primarily through new developments, but given where we are in the current cycle with moderating rent growth, an improving for-sale market and construction costs still on the rise, we are taking a more risk measured approach than in recent years.
And with that, Cynthia, we'd be happy to open up the call for questions.
Operator
Thank you. We'll take our first question from Nick Joseph with Citi.
Nicholas Joseph - Citigroup Global Markets, Inc.
Thanks. When you provided the mid-quarter update in early March, you indicated that you're running about 25 basis points ahead of initial expectations in terms of same-store revenue growth.
Is that still the case today, I guess through almost the end of April?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah, Nick, this is Sean. It's a fair statement as it relates to Q1.
Q2, obviously, we're just getting into the leasing season now. So, I'd say it's probably closer to par at this point when we look at what's happening in April and what we might anticipate through the balance of the quarter.
But there's still a lot of transactions left to go here in the next 60 days. And occupancy is a little below where we were for the first quarter, about 10 basis points or so.
So I'd call it probably closer to neutral than slightly up.
Nicholas Joseph - Citigroup Global Markets, Inc.
Thanks. And just in terms of individual markets, are there any markets that are either materially outperforming or underperforming what you initially expected in guidance?
Sean J. Breslin - AvalonBay Communities, Inc.
Material being the keyword there, Nick. I wouldn't say any of them are material at this point.
Think about the volume of transactions in Q1, it's just not that heavy. The markets I'd point to that maybe are slightly below our expectations, right now, first probably is LA, the San Fernando Valley specifically.
As you may recall, there was a sizable gas leak there last year and we achieved some pretty nice rents in that market. We're not achieving as much growth on top of those slightly higher rents than we would have hoped for.
And I'd say it's a little bit weaker operating environment in Northern California as well, combination of job growth and the supply that we expected with more supply on the way. So those are probably the two that I'd point to that are maybe slightly below, and then on the other side slightly above, Pacific Northwest continues to perform quite well.
Job growth has been healthy and then job growth in Boston has also been pretty healthy, pretty consistent with last year at this point, at least through March. And supply is relatively level and starting to moderate a bit in the urban core.
So those two, probably slightly ahead and then the other two slightly behind.
Nicholas Joseph - Citigroup Global Markets, Inc.
Thanks.
Sean J. Breslin - AvalonBay Communities, Inc.
Yep.
Operator
And we'll hear next from Rich Hightower with Evercore.
Richard Allen Hightower - Evercore ISI
Hey, good afternoon, guys. I want to go back to the Bay Area for a second there to follow up on Nick's question.
When you look at Avalon's performance versus a couple of peers that have reported already this quarter as well, there was just a little bit of underperformance in your Bay Area revenue growth numbers versus what those companies reported. I'm wondering if there's anything peculiar to your geographic setup there relative to peers or something else about the portfolio that we should be aware of for the first quarter?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah, Rich, good question. Not necessarily.
I mean, one thing to keep in mind as you compare across the peers is there are some, I'll call it, geographical differences in terms of how we account for different things. So if you think about rent change is an example of revenue growth.
Everything that we have in terms of discounts, concessions, et cetera is in a contra revenue account, so it's really a net number. And if there's not anything flowing through the expense side of the house, that creates some differences.
Whether you include redev or not, that creates some differences, things of that sort. So you just have to sort of keep those things in mind.
As it relates to the portfolio, there are some differences, probably too many to mention as it relates to this particular call, but I wouldn't say they are material enough at this point that you would point to, say, San Jose and say, what's the mix there that's creating significant variation. It is not dramatic in a market like San Jose.
Some of us are more urban concentrated versus suburban, but you really have to dissect it in pretty good detail to get down to where those differences are.
Richard Allen Hightower - Evercore ISI
All right. That's helpful color.
Second question here is on development. I appreciate the color in the presentation, as to the composition of the pipeline in terms of mid-rise versus high-rise and so forth.
I just want to confirm that that is more a function of where you're building, that it's mostly suburban in the pipeline today, and could you confirm sort of the number or the portion of the pipeline that is suburban versus urban at this point?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Sure. This is Matt.
Yeah, I think it is normally high-rises are in urban markets, and mid-rise and gardens are in suburban markets, there are some exceptions to that. But when you look at our development rights pipeline of the $3.4 billion, about two-thirds of it is mid-rise product and only about 25% of it is high-rise.
The difference being an 8% garden, and when you look at it kind of on a location basis, about 35% of it's urban, and 65% of it's suburban, and when you look at our starts, this year they're all suburban.
Richard Allen Hightower - Evercore ISI
That's great. Thank you.
Operator
We'll take our next question from Dennis McGill with Zelman & Associates.
Dennis Patrick McGill - Zelman Partners LLC
Hi, good afternoon and thanks for taking my question guys. Just carrying on that, the last answer there, if you were to look at the market and do your market intelligence around where you're developing or could develop, do you see a similar shift in the market towards suburban and mid-rise away from urban?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
This is Matt, again. I guess, certainly in terms of the supply being delivered in the next couple of years, no, we're seeing supply in our markets over the next couple of years roughly 2% of stock, and it's about 3% in the urban submarkets as compared to maybe 1.5% in the suburbs.
If you look out beyond that, the stuff, it might start this year. You might start to see a shift a little bit, but one of the reasons we like the suburbs, the suburban submarkets and why we think it really plays to our strength as a developer is that they are more supply constrained.
And generally speaking, the entitlements process is more challenging, it's a longer more expensive process, where in a lot of the urban submarkets, the jurisdictions want the business, they want the growth, they want the tax revenues and if it works economic – the barriers in the urban submarkets tend to be more economic than regulatory. So, I wouldn't be surprised to see the composition of mix change a bit, but it is inherently a little more difficult to get those starts going in the suburbs.
Dennis Patrick McGill - Zelman Partners LLC
And then last quarter, you had a slight sort of detail in your thoughts on how revenue growth would progress through the year and had a little bit of an uptick in the fourth quarter, not sure if that was intended or not, but when you think about the outlook today, is that a similar way to first to think about how the year might phase?
Sean J. Breslin - AvalonBay Communities, Inc.
Yes, Dennis. This is Sean.
We don't have any reason to believe it'd be any different than what we anticipated as part of our outlook when we talked about it on the last quarter call.
Dennis Patrick McGill - Zelman Partners LLC
Perfect. And then just last question for 1Q, did you give the new and renewal numbers for the quarter?
Sean J. Breslin - AvalonBay Communities, Inc.
I think Tim gave it on a blended basis in his prepared remarks, but in terms of the Q1 detail, Tim indicated the blended were unchanged for the quarter was 1.7%. Renewals were 4.2% and new move-ins were down 1%.
Dennis Patrick McGill - Zelman Partners LLC
All right. Thanks, guys.
Good luck.
Operator
And our next question will come from Jeff Spector with Bank of America.
Jeffrey A. Spector - Bank of America Merrill Lynch
Good afternoon. Thanks.
First question is just on supply. Can you just talk about what you saw happen in the first quarter, is supply in your markets or any particular markets slipping into second, third quarter?
And then I guess what are your latest thoughts on 2018?
Sean J. Breslin - AvalonBay Communities, Inc.
Yes, Jeff. This is Sean.
I can comment and then either Matt or Tim can jump in as well. But, I mean in terms of the supply that's being delivered in our markets and throughout the different quarters of the year, from a portfolio perspective, it's pretty even throughout the year.
If you look at it in terms of market by market performance, it's a little bit different to give you some perspective as an example. The markets that we're projected to see an increase in deliveries as we move through the year includes San Francisco, the Pacific Northwest and Orange County, those that are going to come down a little bit as you might have imagined given where we are in the cycle aren't many, but it's little bit San Jose, a little bit Northern Virginia.
And then as you move into 2018, it's pretty level until you get to the back half of the year where you start to see things fall off in markets like New York City and San Francisco in the back half of 2018, but our experience would tell us based on what we've seen in the last several years and particularly given that the biggest concentration of supply is urban, which is product is more challenging to get delivered. We probably expect a relatively flat pipeline between the deliveries in 2017 and 2018 across the footprint with some minor deviations from market-to-market.
Kevin P. O'Shea - AvalonBay Communities, Inc.
Hey, Jeff. It's Kevin here.
Just to put in perspective. I think we've talked about somewhere between high 1% range to 2% range that we expect to be delivered in 2017 and 2018.
And it's going to jump around quarter-to-quarter, but based upon our best estimate, it's somewhere between 40 bps a quarter to 55 bps a quarter, so it's pretty low. I know some out there is positive that they might expect to see it coming down more significantly later in the year, that's not our expectation.
Jeffrey A. Spector - Bank of America Merrill Lynch
And then is that even a change from your thoughts from let's say a month or two ago? For some reason, I thought you guys are -
Kevin P. O'Shea - AvalonBay Communities, Inc.
No.
Jeffrey A. Spector - Bank of America Merrill Lynch
No. Okay.
And then just specifically Columbus Circle, can you just talk about that project and your comfort on expected returns?
Timothy J. Naughton - AvalonBay Communities, Inc.
Well, Jeff, I know we talked a lot about it last quarter, so not really any update from last quarter in terms of expected returns in rent. So I guess I'd just refer you back to the script there, but it's under construction.
Retail, we are starting to gear up from a marketing standpoint, which I think Matt spoke to last quarter and there is really no update in terms of how we are thinking about the economics from what we laid out last quarter where I think we gave a fair bit of detail between retail and residential and the implied cost on each of the product types.
Jeffrey A. Spector - Bank of America Merrill Lynch
Okay, great. Thank you.
Timothy J. Naughton - AvalonBay Communities, Inc.
You bet.
Operator
And we'll next hear from Austin Wurschmidt with KeyBanc Capital Markets.
Austin Wurschmidt - KeyBanc Capital Markets, Inc.
Hi, good morning. Thanks for taking the questions.
You mentioned that you saw acceleration in like-term rent change into April. I was just curious how the metrics for like-term rent change in the first quarter and April stacked up relative to last year and whether or not that you would expect the current year to, I guess, turn positive relative to last year's like-term rent change at any point this year?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah. Sure.
Austin, good question. If you look at it in Q1, rent change on a blended basis was down about 220 basis points compared to Q1 of 2016.
We still need to expect to see some acceleration of rent change as we move through the leasing season here, particularly as you get into sort of the May through July portion of the year. But we are not expecting a rent change to exceed what we achieved last year given the outlook for both the demand and supply in our market, so I don't think.
It would be a positive surprise to the extent that occurred and we may see an uplift later this year to the extent we see better job growth through the second quarter, but we're not expecting that as part of our original outlook. We did not expect that and we don't expect that today.
Austin Wurschmidt - KeyBanc Capital Markets, Inc.
No, that's helpful color. And then, just would love to hear you guys' thoughts on the revised 421a plan or the affordable New York plan.
In terms of just the economics and what it could mean for potential pickup in permitting activity?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Sure Austin, this is Matt, I guess I can speak to that one. I think it's been expected for some time that there would be a new program.
In fact, I think the betting was it would have happened a little sooner than it did happen. So, it's not hugely different than the prior program.
There are some subtle differences. So I think you may see some deals that we're waiting on the program to pull their permits, so they could avail themselves of it.
There has been very little rental product started in New York City really over the last three, four quarters I think. So, you might see a little bit of an uptick there, but we're certainly not expecting any dramatic surge, because the economics of starting new rental deals are still pretty challenging there with where construction costs and land values are.
Austin Wurschmidt - KeyBanc Capital Markets, Inc.
Great. That's helpful.
And then just one last one. I was just curious in the release you guys mentioned that there was a change in the composition of your dispositions for the year.
Could you just provide a little bit of additional detail as to what exactly that comment was related to?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Sure. This is Matt again.
There are changes to that disposition pool typically throughout the year basically based on kind of market dynamics and market sentiment. So in this particular case, we thought we were going to sell one asset that was going to have a very large GAAP gain that was affecting EPS which is why it's called out there.
And basically, we've replaced that asset in the plan with a different asset, which we believe will be met by a little bit deeper kind of buyer pool market, which has a different GAAP gain to it.
Austin Wurschmidt - KeyBanc Capital Markets, Inc.
Is there any change in the volume of dispositions that you expect in terms of dollar value?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Not materially, no.
Austin Wurschmidt - KeyBanc Capital Markets, Inc.
Great. Thanks for taking the questions.
Operator
And our next question will come from Wes Golladay with RBC Capital Markets.
Wes Golladay - RBC Capital Markets LLC
Hi, guys. You mentioned the supply for your portfolio is starting to move to the suburban markets.
Are you seeing demographic shifts favoring the suburban markets from the demand side, people looking for more space, looking to be next to the schools?
Timothy J. Naughton - AvalonBay Communities, Inc.
Hey, Wes, Tim here. I think you may have misheard us.
Actually, for 2017 and 2018 we're still expecting deliveries to be about twice what we – in the urban submarkets than the suburban submarkets. So we may have misstated it, but to just be clear.
I think there was question as to beyond 2018, in terms of land deals that people are starting to see here today that might start over 2017, 2018, and deliver 2019 or 2020, might we see a bit of a shift to suburban? And the answer is yes.
We might see a little bit of a shift there, but as Matt mentioned, we are seeing – the entitlements are more challenging there, so we don't necessarily expect to see a dramatic pickup in suburban supply as a result.
Wes Golladay - RBC Capital Markets LLC
Okay. What about from the demand side?
I guess that's what I was trying to get at. So sorry if misheard you earlier.
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah.
Wes Golladay - RBC Capital Markets LLC
But do you see demand shifting to the suburbs with the aging demographic, people are saying, well, maybe it's now time to live in the suburbs, a lot more space, want to be next to (27:22). Any of that?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah, no, it's a good question. I think you have two trends that are occurring that maybe take a little bit longer to play out.
That's the leading edge of the millennials in the late 30s now, but the bulk of millennials are still 23 to 28. That's sort of the pig going through the python, if you will, and there's still a preference for that age cohort we think in the urban submarkets as we've seen in the last couple years.
But combined with that you have kind of the potential of the downsizing boomers. And we think there's a good probability that that's going to create more demand in infill suburban kind of locations, that they're both kind of migrating to the same kind of geography, if you will, looking for the same kind of amenities, still kind of walkable lifestyle, but maybe more space in the case of an aging millennial and maybe a little less space and more walkability in the case of a downsizing boomer.
Wes Golladay - RBC Capital Markets LLC
Okay. That makes sense.
And then I guess if you would have to pinpoint when you – I mean there's a 300 basis point gap right now in effective rent growth between the suburban and urban. When do you see that I guess being close to each other?
Will it be more of a late 2018 event, maybe 2019 event when you look at all these trends?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah. Just speaking for myself.
I mean, again with supply being 2x in the urban markets – suburban markets and demand is not 2x, it's something significantly less than that. Maybe it's higher in the urban submarkets, but it's not twice what we're seeing in suburban markets.
It's hard to see that those lines converge over the next couple years.
Wes Golladay - RBC Capital Markets LLC
Okay. Fantastic.
Thanks for taking the questions.
Operator
And our next question will come from Vincent Chao with Deutsche Bank.
Vincent Chao - Deutsche Bank Securities, Inc.
Hey, everyone. Just wanted to go back to the discussion around the composition change.
I thought I heard that one of the assets was switched – you're switching to a different asset that has a deeper buyer pool. Can you maybe comment on what you're seeing in terms of investor trends across the different buckets of your portfolio?
Which are sort of seeing the weakest demand? And have you started to see cap rates expand in some of those weaker-demand parts of the portfolio?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Sure, Vin. This is Matt.
There hasn't been a lot of transaction volume in the market, particularly in our markets. In the first quarter I think transaction volume was down something like 35% or 40% year over year.
So there's not a lot of data to go on yet. But it is an interesting market out there in the sense that some assets are meeting with incredibly deep demand, multiple rounds of offers.
We're selling an asset right now in the Pacific Northwest where we had to go to three rounds, which we weren't expecting. So if you have the right asset in the right location with the right story, there's still a lot of capital looking to be placed.
Then there are other assets where if that story isn't there and doesn't line up with kind of the dry-powder capital that's on the sidelines, it can be a little more challenging. And we're just trying to respond to that.
To tell you the truth, it's a little unpredictable. We've been a little bit surprised sometimes at which assets draw that deep pool and which don't, and we have a very large portfolio and so we had the opportunity to kind of trade on that.
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah, Vin, it's Tim here. I think one of the challenges is probably a lot of market participants are behaving like we are to the extent they're seeing some softness in a particular kind of asset.
They're just pulling the asset rather than accepting a lower price. So there's just not visibility to, whether on a composite basis cap rates have really moved, their valuations have moved at least at this point in the cycle.
Vincent Chao - Deutsche Bank Securities, Inc.
Okay. But is there is any geographic trends that you can draw?
So it sounds like it's maybe more asset specific, but are there any regions that are seeing weakness?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Certainly New York City is – because of all the stuff that's been discussed on this and prior calls, there's probably some of that kind of trophy money is little bit sidelined right now.
Vincent Chao - Deutsche Bank Securities, Inc.
Got it. Okay, thanks.
And then just maybe moving back to some comments in terms of markets that you expect supply to accelerate or decelerate. I didn't hear you comment on LA.
And I think EQR said that they saw some peak deliveries here in the first quarter. Would you agree with that assessment, or do you think it's more ratable in LA from your perspective?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah. This is Sean.
Are you talking about 2017 specifically?
Vincent Chao - Deutsche Bank Securities, Inc.
Yes, 2017.
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah. Based on the data that we have in terms of how we track it, which as you may know is a little bit of bottoms-up from the field teams that we have there working deals every day as well as top-down from a market research group.
It's relatively flat in LA. It actually increases a little bit according to the data that we have around 20 basis points, 25 basis points of inventory in Q1 up to around 35 basis points, 40 basis points of inventory by the time you get to Q4 in terms of LA proper.
Little bit lower than that when you get into Ventura County, but we don't see it leveling off per se based on the data that we have.
Vincent Chao - Deutsche Bank Securities, Inc.
Got it. And do you think, just looking at the leasing progress at Hollywood, only 15% leased, next stabilization is 2Q of 2018.
Do you think that stabilization period is at risk given the supply that doesn't really come down in from your data's perspective and then obviously job growth there has been a little bit soft?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah. In terms of our West Hollywood deal, as opposed to AVA Hollywood, which start construction not too long ago, we delivered the first building.
We're getting ready to deliver the second building. Demand has been very healthy for that community.
Rents are coming in substantially above what we expected. So it's a pretty unique building, a great location.
We're not expecting any weakness for that specific asset whatsoever.
Vincent Chao - Deutsche Bank Securities, Inc.
Okay, great. Thanks.
Thanks, guys.
Operator
And our next question will come from Gaurav Mehta with Cantor Fitzgerald.
Gaurav Mehta - Cantor Fitzgerald Securities
Yeah, great. Thanks.
So I want to go back to your prepared remarks about taking a risk measured approach on development and one of the reasons you mentioned was improvement in for-sale market. So I was wondering if do you have a view that you may actually start seeing an uptick in residents moving to buy homes, especially in the suburban markets where you are developing?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah. Gaurav, this is Sean.
I'm happy to answer that and Tim could comment if he likes. But we've not seen that happen in the portfolio at this point.
It's still well below long-term averages. We're running around 11% of move-outs, which is call it 700 basis points below sort of long-term trends.
I think it's a fair expectation that over a period of time we'll start to see that pick up some. Very different in terms of the market composition of that when you think about places like San Francisco and New York in terms of what that housing looks like, price point, et cetera, as compared to, say, suburban towns up at Boston or in the Mid-Atlantic as an example.
So you might start to see it move some, but we're not expecting it to accelerate dramatically just given the very high cost nature of the housing in our markets combined with what's happening in the financial markets in terms of mortgage availability and qualifying.
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah, Gaurav, just to add to that. I mean right now, for-sale housing is appreciating faster than rents and then when you lay on top of that, I think as Sean was implying at the end, just higher potential interest cost, I mean the cost of housing is going up at a faster rate than rental housing.
I think it will be interesting to see whether that for-sale demand, first-time buyer really materializes this cycle. Much likely, we're talking about young adults who've been living with their parents and we expect that to be a pretty big source of pent-up demand and that really has not materialized this cycle for the rental housing sector.
So we're still seeing kind of record level on a percentage basis kind of that millennial segment that haven't formed households yet and haven't decoupled with roommates and you kind of wonder where you might see some of the same behavior as it relates to that first-time homebuyer, but it's an open question for sure.
Gaurav Mehta - Cantor Fitzgerald Securities
Great. And I guess as a follow-up, I was wondering if you could comment on the sale of land parcel in 1Q that was not included in previous outlook?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
This is Matt. I think you're referring to a land parcel that was impaired.
I don't think it's been sold yet, but that's actually a property in Tysons Corner that we've owned for a long time that was brought in the last cycle. There is an existing warehouse on it, and we thought that that was a long-term play on that submarket with metro coming and new master plan coming in.
And after holding it for a long time, we concluded that the costs to develop it, the proffers that were going to be required, and the margin environment there wasn't as attractive as we had hoped it might have been. So we're going to move forward in selling that parcel and basically recognize the current market value.
Gaurav Mehta - Cantor Fitzgerald Securities
Okay.
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Just on that, just maybe as a follow-up. That was a piece of property that we held for investment and not for development.
Beyond that parcel, we have I think $13 million of sort of seven or eight smaller parcels that we're still holding for investment in addition to the $100 million of land inventory that we're holding for development. So there is not much left beyond that.
We really were trying to sort of get that cleared before the end of cycle. And honestly it's a bit of stark reminders to why we don't to be holding land going into the next downturn?
Gaurav Mehta - Cantor Fitzgerald Securities
Great. Thank you.
Operator
And our next question will come from Omotayo Okusanya from Jefferies.
Omotayo Tejumade Okusanya - Jefferies LLC
Yes. Good afternoon.
I just wanted to talk about guidance for a little bit. So first quarter you were $209 million, second quarter midpoint at $210 million, so you're kind of around $420 million for the first half of the year and guidance was $844 million to $884 million.
So it seems like you're trending towards the low-end as of this point. How do we kind of think about where you could end up at the end of the year given you're kind of tracking towards the lower end currently?
Kevin P. O'Shea - AvalonBay Communities, Inc.
Hi, Tayo. This is Kevin.
I guess just a couple points. First, as you may be aware, we don't update guidance on our first quarter calls just kind of as a matter of practice for a number of reasons, including factors that Sean mentioned.
There is just not a lot of transaction activity that's occurred year-to-date that allows us a very reliable basis on which to sort of reforecast for the year and come up with guidance. So what we do instead is we give a mid-year reforecast in connection with our second quarter call.
So that's when we'll be able to speak in a more detailed way about how we see the year laying out from a quarterly core FFO perspective, if you will. The second comment I'd say is when you think about our business model and how development contributes to year-over-year growth and how the lease-up activity from development plays out across the quarters, it's typically the case that our core FFO growth is typically backend weighted.
And when we gave guidance at the beginning of this year for development NOIs, you may recall in the attachment that we had during the fourth quarter release where we did provide our outlook for the year, I think we had development NOI of around $65 million. And if you look at sort of how that paces out over the year, that tends to sort of double each quarter.
So a lot of our sequential quarterly core FFO growth tends to come from lease-up NOI, and you'll typically see a pattern where a lot of our growth is back-end weighted. So the mechanic of simply taking the first quarter and then the guidance for the second quarter and doubling it will never really work for us because you'll always kind of come up with a much lower number than what we've typically had for the year.
Omotayo Tejumade Okusanya - Jefferies LLC
All right. That's helpful color.
Thank you.
Timothy J. Naughton - AvalonBay Communities, Inc.
Yes.
Operator
And our next question will come from Rich Anderson with Mizuho Securities.
Richard Anderson - Mizuho Securities USA, Inc.
Hey. Thanks and good afternoon.
Just quick first question, you have $0.08 of a debt gain in the second quarter, I know you are not talking about the full year guidance, but has there been a change to the capital program, because that compares to the $0.04 full year number that you had in February, just wanted to make sure I had my model right?
Kevin P. O'Shea - AvalonBay Communities, Inc.
Yeah. Rich, this is Kevin, again.
No, that number you see for the second quarter was part of our original budget. It relates to essentially a contemplated payoff of Fannie Mae Pool 2, which is something we picked up in the Archstone transaction.
It's a November maturity. It opens for prior repayment on April 30.
It's about $700 million in size, and so, that's an event that we expect to happen in the second quarter, and so there has been no change in that respect. Overall, in terms of our capital plan, don't have an awful lot to say, we're still early in the year.
The outlook at the beginning of the year, we contemplated about just under $1.7 billion of external capital, that's probably roughly where we're at, maybe we're a little bit tacking a bit low, but we raised $460 million in the first quarter and kind of our overall plan is still, while we don't announce with specificity what we expected to raise in the capital markets in advance, generally speaking, what we said then is probably in terms of our current plan is still true today, which is we expect most of that external capital to come in the form of debt, with the preference for unsecured debt. We may do some piece of our debt activity in the form of secured debt to support ongoing tax protection, that we picked up in the Archstone transaction, but most of our overall net capital, we expect will still be debt, and of that, most of that hopefully will be unsecured debt, so not a significant change there.
Richard Anderson - Mizuho Securities USA, Inc.
So then there could be some debt extinguishment losses later in the year, to get to that $0.04 net number?
Kevin P. O'Shea - AvalonBay Communities, Inc.
Well, there is a number of different moving pieces and sort of the core – and adjustments between NAREIT FFO and core FFO, obviously in the first quarter you saw a couple here we had a promote from Fund 2 of about $7 million, that is within our NAREIT FFO, but it's carved out from -
Richard Anderson - Mizuho Securities USA, Inc.
I got you.
Kevin P. O'Shea - AvalonBay Communities, Inc.
Then so, we had sort of the impairment that was added back to NAREIT FFO. If you look out through the balance of the year, we have additional promotes from Fund 2, so we're wrapping that up.
Our intention is to sell the remaining two assets. And I think, we probably have in total a fair bit of promote activity coming through the transom over the balance of the year, that will be items that we carve out of NAREIT FFO and then we have – so I think for the full year, we have something on the order of about $23 million of promote income that is for the full year in our budget for the NAREIT FFO that'll be carved out for core FFO purposes and then we have some deferred financing cost write-offs for Pool 2.
Richard Anderson - Mizuho Securities USA, Inc.
Okay. I'll wait on that then for next quarter.
Question more on the portfolio. On this kind of suburban shift that you guys have been undertaking for a little while now.
I mean, how much is that a permanent condition? Are you willing to muscle your way through what will inevitably be a relatively negative environment for that strategy?
Or is there some means by which you can alter the portfolio with some level of velocity to move with the punches? I'm just curious, how committed you are long-term to suburban real estate.
Timothy J. Naughton - AvalonBay Communities, Inc.
Well, Rich, I think as we said is we're actually agnostic. We're believers in our markets.
And if you look over on a longer period of time, the reality is that suburban and urban rent growth more or less have been pretty equal. But there are differences at different parts of the cycle and across cycles at times.
So currently our portfolio is probably 30% urban by market value and 70% suburban, but of that suburban, I'd say at least half of it, we think of it is really kind of infill, more kind of midrise suburban. And we're -
Richard Anderson - Mizuho Securities USA, Inc.
Right.
Timothy J. Naughton - AvalonBay Communities, Inc.
– as a developer and someone that leads with the development investment platform, we're looking for value. And so, our focus from a development perspective is where there's greater value, and it's been clear from a land standpoint over the last probably four years there's been greater value on the suburban side, and that will inevitably change.
And at that point, we'll look more at urban opportunities. And I guess lastly, it sort of plays into maybe at the margin how you're thinking about dispositions where you think maybe some assets are out of sync with underlying intrinsic value, and you got to be willing to pull the trigger on some of those opportunistic plays as well.
Richard Anderson - Mizuho Securities USA, Inc.
Same question on the quote-unquote "land light strategy."
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah.
Richard Anderson - Mizuho Securities USA, Inc.
Also even though it might go up in time, and it's kind of you said near record lows right now, but is that also kind of a permanent condition in the sense that maybe this is a vestige of some sort of lessons learned from the past downcycle when some impairments were taken and the like?
Timothy J. Naughton - AvalonBay Communities, Inc.
Well, I think our bias as always is try to tie things up with an option contract, a purchase contract, and try to close on the land as close to the time which it gets put into production as possible. But there will be times in the cycle if there's distress or dislocation that we can potentially take land down and put it on the balance sheet.
We've got plenty of capacity to do that. If we think that makes sense, we'll consider that.
We're not at that point, though, anywhere near that point at this point in the cycle. So really the comment was really about how we intend to behave through the balance of cycle until we do see some dislocation and disruption.
Richard Anderson - Mizuho Securities USA, Inc.
Got it. Thanks for the color.
Operator
We'll take our next question from Daniel Santos with Sandler O'Neill.
Daniel Santos - Sandler O'Neill & Partners LP
Hey, guys. Thanks for taking my question.
Just a quick one from me, just following up on developments. And apologies if you covered this earlier.
Just given the rising cost of developments have driven a lot of development at the high end, wondering if you could talk a little bit more about ways that you might be able to sort of value engineer new development to develop at a lower price point for a broader audience?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
This is Matt. I guess I can take that one.
It's an interesting question and one that we constantly are looking at. Are there opportunities to push building technologies that might create opportunities to develop at a lower price point?
I will say as long as I've been in this business, and my background is in development for a long time. The development always comes in at the top of the price pyramid.
I mean, that's just kind of the way the kind of the housing stock gets refreshed, and as the existing market tends to age into the more affordable price point. This cycle, given how much high-rise construction has been, and given how expensive high-rise is to build, maybe that's a little bit more so than in past cycles.
So some of it is location. There's people talking about in the future with autonomous vehicles and Uber and everything else, as there's a need for less parking, that will tend to bring costs down some, and we have looked at cases where, can we push the envelope a little bit on parking and maybe not build as much as we would have built 10 years ago.
So that's a way, particularly if the parking is underground, where in a structure you can start to bring the costs down. And we're looking at pushing, whether it's modular or tall timber or other building technologies – we haven't tried anything really out of the box yet, but I think it's as an industry something that there's a lot of talk about.
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah. Maybe just to add to that, Daniel.
I think location of product is probably the biggest impactful thing that you can do. And if you look on – as Patrick said, now that we've broken out between high-rise, mid-rise and garden.
If you take Columbus Circle out of it, the high-rise rents are kind of in the $3,000 to $3,500 range, mid-rise are roughly kind of in the $2,500 to $3,000 range, and the garden is more in the $2,000 and $2,500 range. And you look at the mid-rise and the garden piece, that's pretty close to what our same-store basket is running for today.
I mean, the average rent, I think, is around $2,450. And so that's probably the most impactful thing that we can do.
And then always looking to take advantage of new technologies, as Matt had mentioned as well.
Daniel Santos - Sandler O'Neill & Partners LP
That's helpful. Just one quick follow-up on the land.
Just wanted to clarify, you guys said that strategy as we understand it, is to take the options on the land versus buying it and just clarifying that was not the case with this land that you took a impairment on?
Timothy J. Naughton - AvalonBay Communities, Inc.
Correct. We own the lands in that case.
And as Matt had mentioned, we bought it back in the 2000s and it was an existing use, it's basically industrial, light R&D and it was in a part of Tysons Corner that was going to be going through a master plan change that would allow for an up zone to residential and ultimately we just decided that it didn't make as much economic sense as we had hoped when we made that back in the 2000s.
Daniel Santos - Sandler O'Neill & Partners LP
Perfect. Thanks.
Operator
And our next question will come from Conor Wagner with Green Street Advisors.
Conor Wagner - Green Street Advisors, LLC
Good afternoon. Sean, where are renewals achieved for April and where are they going out for May?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah. For April, renewals achieved basically are still in the low 4's, consistent with Q1, which is at 4.2%.
And then, in terms of what's going out for May and June, they're in the high 5's, that's up about 40 basis points from where we initially sent out offer letters for April.
Conor Wagner - Green Street Advisors, LLC
And then you typically see 100 basis points bleed, 100 basis points to 150 basis points between what you're sending out and what you're achieving?
Sean J. Breslin - AvalonBay Communities, Inc.
Typically, yeah, it was a little wider. In the first quarter it was a little bit weaker, it was closer to 200 basis points, but that would be more average as you described, yes.
Conor Wagner - Green Street Advisors, LLC
Great. Thank you.
And then, Tim or Matt, on the development pipeline that you lay out and as far as for 2018, longer term, how does that fit in, how do we think about that with the East 96th Street deal, I know there's been increased media on it lately and I've seen it listed as potentially $1 billion development. What's the expected start time on that, and how does that fit in, in terms of the commentary of the development pipeline coming down and doing less high rise?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Yeah, Conor, this is Matt. We have been making progress.
There's still a lot of entitlement work in front of us as well as design work there. So, we think that's likely a 2019 start.
And when I mentioned that, 25% of our $3.4 billion in development rights is high rise, that's the vast majority of it that one deal right there. So, we do think, as we talked about a couple of quarters ago, that's a public-private partnership.
The timing on that might actually be pretty good, when you think about kind of the macroeconomics, if we wind up starting that in 2019, delivering it in 2021 and 2022. And it really plays to our strengths.
We still think that's a great deal, it's not $1 billion deal. There is a ground lease involved.
So, there's an implied land value, I think our investment in that deal is roughly in the $600 million to $650 million range.
Conor Wagner - Green Street Advisors, LLC
Great, thank you.
Operator
And that concludes today's question-and-answer session. Mr.
Naughton, at this time, I will turn the conference back to you for any additional or closing remarks.
Timothy J. Naughton - AvalonBay Communities, Inc.
Okay. Well, thank you Cynthia, and thanks to all for being on.
I know it's a busy season right now for earnings, and we look forward to seeing you all in June at NAREIT New York. Have a good day.
Operator
That concludes today's conference. Thank you for your participation.
You may now disconnect.