Aug 4, 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. Nick Yulico - UBS Securities LLC Richard Allen Hightower - Evercore ISI Juan Sanabria - Bank of America Merrill Lynch Andrew T.
Babin - Robert W. Baird & Co., Inc.
Austin Wurschmidt - KeyBanc Capital Markets, Inc. Dennis Patrick McGill - Zelman & Associates Wes Golladay - RBC Capital Markets LLC Alexander Goldfarb - Sandler O'Neill & Partners LP Vincent Chao - Deutsche Bank Conor Wagner - Green Street Advisors, LLC Richard Hill - Morgan Stanley & Co.
LLC Robert Stevenson - Janney Montgomery Scott LLC
Operator
Good morning, ladies and gentlemen, and welcome to AvalonBay Communities Second 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, Melinda, and welcome to AvalonBay Communities' second 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.
Well, thanks, Jason, and welcome to our Q2 call. With me today are Kevin O'Shea, Sean Breslin, and Matt Birenbaum.
I have a few minutes of comments on the slides we posted last night, and all of us will be available for Q&A afterward. My comments will focus on providing a summary of Q2 results, an update to our outlook for the full year.
And lastly, I'll touch briefly on how we're positioning the balance sheet at this stage of the cycle. Starting now on slide 4, results for the quarter include core FFO per share growth of 3%.
Same-store revenues grow 2.5% or 2.6% including redevelopment. We completed $400 million in new developments at an initial projected yield of 7%, representing net value creation of close to $200 million.
We paid off $1.2 billion of secured debt this quarter that carried an average GAAP interest rate of 4.5% and an average cash rate of 6%. And we refinanced that debt primarily with new long-term unsecured debt of 10 and 30-year maturities.
Turning to slide 5 and our updated outlook for the year, we now expect core FFO growth of 5%, which is down 50 bps from our original outlook of 5.5%. Same-store NOI is forecasted to be a little bit lower at 25 basis points at the midpoint – 25 basis points lower, I'm sorry, based upon on higher operating expenses.
NOI from development and other stabilized communities is expected to be off by roughly $7 million from our original outlook driven by schedule delays at a few developments. Development starts are expected to be about $100 million less than expected.
And external funding is expected to be up by about $200 million from our initial outlook, driven mainly by the opportunistic payoff of a $550 million Freddie pool that was schedule to mature in 2019. Slide 6 shows how these changes are contributing to the revision in our outlook to core FFO growth.
The same-store and redevelopment portfolios are expected to be off by $0.02 per share as a result of a higher OpEx I mentioned earlier. Expenses are being driven by a number of factors, but most notably, from uninsured losses and maintenance cost in connection with West Coast storms occurring in Q1 and higher-than-expected bad debt.
As mentioned earlier, the development bucket is expected to be down by $7 million, which equates to $0.05 per share. Our revised capital plan is contributing $0.04 per share of core FFO this year.
And finally, overhead is projected to be up $0.01, primarily due to higher professional fees and a true up of long-term compensation metric. Turning now to slide 7, same-store revenue growth is still expected to be in the mid 2% range for the year with modest revisions across regions.
In Northern California, our revised estimate is largely attributable to a new rent control measure recently passed on a retroactive basis in Mountain View, California, where we have three communities that are subject to the new ordinance. Other regions are within 30 basis points plus or minus of our original outlook.
Turning now to slide 8, as mentioned earlier, a delay in deliveries across a few projects is impacting lease-up related NOI in our development bucket for the year. We expect a shortfall of roughly 270 units per quarter on average, with most of the shortfall occurring in the peak leasing seasons of Q2 and Q3, as you can see on the chart there at the left or the graph at the left.
This equates to the $0.05 shortfall in the development NOI for the year. The table at the right is really just provides an illustration as to how delivery delays impact earnings growth for the year.
Turning now to slide 9, importantly, lower development NOI this year is not being driven by slower absorption or declining rates. Rather, we continue to see healthy lease-up performance with occupancies running at 34 units per month per community in Q2 and average effective rental rate of 4.5% above pro forma on the $1.5 billion of communities currently in lease-up.
This slide shows two communities that are performing well above expectations. Avalon West Hollywood in LA on the left and AVA NoMa in D.C.
on the right, both of which are seeing effective rental rates of around $300 per month above pro forma. The average yield of the $1.5 billion communities in lease-up is currently 6.5%, which is roughly 200 basis points above prevailing cap rates for these assets on average.
So, while we may be experiencing some schedule delays that impact current year earnings, we continue to generate strong NAV growth through the development platform. Now to slide 10, as mentioned earlier, we've been very active in the capital markets in the first half of the year.
So far this year, we've raised $1.5 billion of external capital, most of what we had planned for the full year, much of it in connection with the refinancing of maturing debt. We do expect to raise another $400 million or so for the balance of the year.
Lastly, I want to touch on the balance sheet for a minute, turning first to slide 11. The capital activity this past quarter significantly improved our debt profile.
Duration is increased with average years to maturity above 10%, an increase of a couple years versus the average so far this cycle. And the average interest rate on total debt has fallen by 150 basis points since the beginning of the cycle and now stands at 3.6%.
And lastly, we have little exposure to debt maturities over the next two and a half years, as you can see in the bottom chart, with just over $200 million coming due before 2020. Turning now to slide 12, in addition to reduced liquidity needs related to rolling debt over the next two to three years, the strength of our credit metrics provides us with plenty of financial flexibility.
Debt to EBITDA remains at 5 times, which is the low end of the target range that we've discussed with you in the past. Fixed charge coverage stands at 4.7 times.
And unencumbered NOI is up materially to 88% of total NOI. Our balance sheet and credit profile then leave us very well positioned eight years into the current expansion.
So, summary, our outlook for the full year really hasn't changed much. We still expect modest deceleration of fundamentals in the second half of the year with same-store revenue growth in the mid 2% range for the full year.
While construction related delays are expected to reduce lease-up NOI somewhat in 2017, we continue to generate healthy NAV growth through development. And our balance sheet and liquidity give us ample flexibility to support continued growth through new development, while also providing a healthy margin of safety as we move into the latter years of this cycle.
And with that, Melinda, we'd be happy to open up the call for Q&A.
Operator
Thank you. And we'll go to Nick Joseph, Citi.
Nicholas Joseph - Citigroup Global Markets, Inc.
Thanks. Just around the same-store revenue, I'm just curious how things are trending relative to the midpoint just given that we're in early August now and you have some visibility in terms of renewals for August and September?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah, Nick, it's Sean. Just a couple comments on that; generally speaking, things are trending as we expected.
They've kind of been playing out that way for the most part through the first half of the year and now into July and August. So, I'd say we feel pretty confident as to the guidance we provided.
Nicholas Joseph - Citigroup Global Markets, Inc.
And when you think about – you narrowed the range, when you think about what the potential drivers could be of either reaching the high-end or low-end of guidance, what are the key variables there, at least where we stand today?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah, Nick, at this point, it's probably going to really move around occupancy. If you think about where we are in terms of the leasing season and lease expirations, the fourth quarter, not a lot of activity.
We kind of know where we are for August. We have pretty good insight for September.
So, where we sit today, if you look at it, current occupancy in August is running 95.5%, 95.6%, that's up about 25 basis points compared to last year. And when you look at availability in terms of what we have available to lease 30 and 60 days out, that's down between 30 and 40 basis points relative to last year.
So, our expectation is we're going to pick up a little bit of occupancy on a year-over-year basis in Q3. In Q4 it probably flattens out a little bit.
So, for the most part, given where we are with rent offers that are out there, what's being committed and then the expirations that are left as you move into Q4, for the most part, any deviation is going to be around occupancy absent some material acceleration or deceleration in demand which is unforeseen.
Nicholas Joseph - Citigroup Global Markets, Inc.
Thanks. And just finally, on supply, obviously, in your portfolio you've experienced some delays; feels like across markets those delays are pretty common.
So just curious what you're seeing in terms of expected deliveries in the back half of this year in 2018 and any shifts that you've seen in any specific markets that you'd like to call out?
Sean J. Breslin - AvalonBay Communities, Inc.
Sure, it's Sean again. Happy to address that; and then Tim or others may have comments as well.
But, at the beginning of the year, our expectation across our footprint is that supply would be just over 2% of inventory, about 2.1%. As we massaged it mid-year, both on a sort of bottoms-up basis and a top-down basis with our teams and third-party data sources, the expectation right now, based on what people are telling us, is that 2.1% is still generally intact, but what's happened is, it shifted pretty dramatically.
There's probably – out of the roughly 85,000 units that are expected across our footprint for 2017, about 7,000 units have been shifted from the first half to the second half. So the way that plays out is, if you look at the first half of the year, we're running around 44 to 45 basis points in each of the first two quarters, that's going to tick up close to about 60 basis points in terms of supply of stock in each of Q3 and Q4.
So, it's basically been back-end weighted, particularly, as you get to Q4, which is north of 60 basis points. I think what that tells us is, based on what we're experiencing and others, that the number is probably not going to come in at 2.1% for this year, it's probably going to come in shy, because everything that was pushed to the fourth quarter, not all of it's going to make.
So, our expectation is it probably will come off of that 2.1%, maybe into the high 1% range, 1.9%, 1.8%, who knows. And some of that inventory will get pushed into 2018.
So, the peak for supply probably will be in the back half of 2017, first half of 2018 before you start to see any moderation.
Nicholas Joseph - Citigroup Global Markets, Inc.
Thanks.
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah.
Operator
We'll next go to Nick Yulico, UBS.
Nick Yulico - UBS Securities LLC
Oh, thanks. Just a couple of questions on New York; I guess, first, it looks like your same-store pool got a little bit bigger in New York City.
There was an asset added to it or...?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah. We had a couple that came out of development, one of which was a two-phased community.
The second phase came into same-store this year, correct. And then, in addition to that, there was a change in the basket between Q1 and Q2; there was one asset that was being considered for disposition in the first quarter that was not in the same-store pool.
That came into the same-store pool when we pulled it from the disposition list in the second quarter.
Nick Yulico - UBS Securities LLC
Okay. I guess, I'm just wondering, as I look at the reported revenue growth of 1.4% this quarter New York City versus first quarter 2.4%, year-over-year numbers, was there any impact for that delta on the change in the same circle?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah. The one asset that did come in is trending weaker than some of the other assets in New York City.
So it's certainly pulled down the growth rate for the city specifically if that's what you're referring to.
Nick Yulico - UBS Securities LLC
Okay. That's helpful.
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah.
Nick Yulico - UBS Securities LLC
And then within – just one other question is, Long Island City, your waterfront assets there. What percentage of your New York City revenue are those assets and how you're thinking about the supply impact still to come, recognizing it's not right in that sub-market in Long Island City, but it's nearby and at rents that are much cheaper than your assets.
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah, what I can tell you is – I can get back to you on the specific percentage of revenue from those two assets. I don't have that off of my head.
What I can tell you is most of the supply in Long Island City is now coming into more of the central business district, portion of Long Island City as opposed to the waterfront. There's still some activity on the waterfront, but if you think of it relative to the supply that's been delivered on the waterfront over the last decade, it's relatively immaterial.
The Riverview assets that we own there still are the best performing assets that we have within the New York City footprint at the moment in terms of revenue performance.
Timothy J. Naughton - AvalonBay Communities, Inc.
Hey, Nick. This is Tim Naughton here.
I think it represents about 1,000 units of roughly 3,000 units. I don't know what in terms of percentage, but I suspect, Sean, a little bit lower.
Sean J. Breslin - AvalonBay Communities, Inc.
It would be a little bit lower rather than that, yeah. Yeah, maybe 20%, something like that, 20%, 25%.
Nick Yulico - UBS Securities LLC
Okay. And so, I guess, so you're saying the assets are still performing very well, but is that a function of – that some of the supply impact still has to come in the back half of the year?
I understand they're good assets, very good location, but I'm just trying to understand how they're outperforming within New York City? Is it just a function of the supply impact having not come yet in that market?
Sean J. Breslin - AvalonBay Communities, Inc.
Not necessarily. The two assets that we have there are pretty well positioned if you think about it.
Really, few things going on; one from a macro standpoint is that specific area on the waterfront in Long Island City has really become a neighborhood over the last decade. We were bit of a pioneer there early on when we built our first asset and then we built our second asset.
A lot of newer, higher price point assets have been delivered into that submarket, sort of buoying the whole environment. And our assets there being a little more value oriented continued to perform pretty well as the supply has abated, in particular along the waterfront, and shifted more to the business district, I would say.
So, there's more of supply to come, more in the business district than on the waterfront, but what comes in the waterfront really is coming at much higher price points than where we are, which just enhances the entire neighborhood.
Nick Yulico - UBS Securities LLC
Okay. Thanks, everyone.
Operator
And Richard Hightower, Evercore.
Richard Allen Hightower - Evercore ISI
Hi. Good afternoon, guys.
So, Sean, really quickly, it hasn't been asked yet, so I'll ask it just to see if you can run through new and renewals across the major markets for the quarter and then maybe where we are in July and August as well.
Sean J. Breslin - AvalonBay Communities, Inc.
Sure, happy to run through some of that for you. So, in terms of the Q2 data, blended rent change was 2.6% for the quarter, which is 4% on our renewals, which has been remarkably pretty flat all year and then move-ins at 1%.
It did trend up through the quarter. So, April was 2.2%, May was 2.6%, and then June trended up to 2.9%.
And the range is sort of mid-to-high 1% range in New York/New Jersey, the Mid-Atlantic, and Northern California. And then it moves up to sort of the low 3% range in New England, high 3s to 4% in Southern Cal, and then sort of mid-6s up to high 7% in Seattle.
And then, if you look at July, July is trending sort of in the high 2% range as well. And offers, if you're looking out for August and September, they're running in the mid 5% range, which is down 30, 40 basis points from where they were in May and June.
Richard Allen Hightower - Evercore ISI
Okay, great. Thanks for the color there.
And then, my second question. I know you guys have been doing development for quite a long time and are very, very good at it.
I'm just curious, as you kind of look at the development schedule every quarter, how much cushion is baked in, in terms of the delivery cadence just for the reasons that we saw last quarter, where you see some delays, it impacts numbers to some extent. Just how much cushion do you put into those numbers every quarter?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Hey, Rich. This is Matt.
We do monthly updates on all of our development projects and what we put out there and what we share is essentially what we expect. So, I'd say that's the expected case just like it is on the capital cost side, on the budget side.
So we feel like, based on everything we know now, that's our best guess. I will say there's probably more risk in the first turn than in subsequent turns on these projects.
So the hardest thing to peg is always when you're going to get that first certificate of occupancy. That's when the inspections and some of the processes around the local jurisdictions is a little more uncertain.
Usually, once you get beyond that first CO, you have very good visibility into when your subsequent turns are going to happen. You know how your subs are performing then.
So, when you look at how many communities we first opened for occupancy in the last couple of months, those, I would say, there's not that much risk in the subsequent turns. If there's risk, it's probably in the communities that haven't yet opened the doors.
Timothy J. Naughton - AvalonBay Communities, Inc.
Hey, Rich. This is Tim.
Maybe just to follow up on that a little bit. I think, historically, we've actually had a little bit better success as it relates to schedule.
I think we've always had deals where you have some struggles as Matt was saying, but they've generally been offset by projects that have been able to deliver early. I'd say there's a couple other things happening.
Some that you probably – those of you who have (22:04) or whatever, probably been hearing just in terms of just labor shortages, subcontractors getting stretched, not necessarily performing, holding up work. We've actually had some subcontractor failures that have cost us some time.
But a big piece of it, Matt mentioned inspections, the inspectors are stretched as well, and so we're not getting the kind of response that we have maybe earlier in the cycle that you get from them. And the other thing is, when they get out there, they've been more stringent around phased occupancies and, subsequently, on these high-density wood frame buildings where we may have been able to get phases of occupancy in smaller batches, they tended to be in larger batches which have contributed to pushing back that first delivery that Matt talked about.
So it's really kind of a confluence of a few things, I think, that are kind of combining here to create more of an issue than we've seen in years pass.
Richard Allen Hightower - Evercore ISI
All right. Thank you, guys.
Operator
And we'll go to Juan Sanabria, Bank of America.
Juan Sanabria - Bank of America Merrill Lynch
Hi. Good morning.
Just on the supply again, could you talk to when you expect peak deliveries in each of your major markets and has that shifted at all as the year's progressed?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah, Juan. This is Sean.
Each of the major markets going across that's about 16 of them for us, so that might be a better topic to handle offline. I can say it maybe across the larger regions maybe to kind of run through it.
We're expecting pretty much flat supply when you look at New York/New Jersey, and Mid-Atlantic and Pacific Northwest between 2017 and 2018. Like I said in my earlier comments, some of the 2017 deliveries might get delayed, but net-net probably pretty similar levels; a slight increase in both Northern California and Southern California when we get into the 2018 relative to 2017.
And then in New England, we're expecting it to thin out a little bit and come down maybe 50 basis points or so. So there is a lot of deviations at the market level when you run through all those regions, but hopefully, that provides kind of a high level overview for you.
Juan Sanabria - Bank of America Merrill Lynch
Thanks. That's great.
And then, I was just hoping you could talk to expenses. They kicked up in D.C.
and Boston. Kind of what's driving that?
Is it more discounting going on or anything unusual in those two markets that drove the higher same-store expense growth?
Sean J. Breslin - AvalonBay Communities, Inc.
Not necessarily. The things that are really driving our revision to guidance are really three components; two pretty easily identifiable.
About the third of its bad debt, about 40% of its uninsured losses associated with the storms we had in the West Coast earlier this year, and then the balance is a whole mix of things. Some of it is maintenance-related cost from the storms, timing of government licenses and fees, a little bit of unusual carpet replacement in some markets, things of that sort.
It's not necessarily just one thing either across the portfolio or in the markets you specified that's driving the differences.
Timothy J. Naughton - AvalonBay Communities, Inc.
And Sean, maybe one thing. Juan did ask about customer discounts, so to be clear, that doesn't run through expenses, it runs through revenue in our case as it relates...
Sean J. Breslin - AvalonBay Communities, Inc.
In the case of concessions for new move-ins, that's a contra revenue account for us. The only customer incentives that would be expensed would be for apartments that are not habitable for some related issue.
If it's a storm related events or something like that that they can't really occupy their home, then we give them customer service discount for a hotel or a thing of that sort to make sure that they're covered during the duration of the time that their home is not habitable.
Juan Sanabria - Bank of America Merrill Lynch
Okay. And then any color on that bad debt increase?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah. Bad debt is kind of mix bag of things to be honest.
Some of it relates to an increase in identity fraud across the markets. Particularly, it's most concentrated in LA I would say and other parts of Southern California.
It's also related to issues we've had in the court system in the Greater New York Region, particularly, the suburban market where it's not been as easy to get judgments as it's been in the past, where judges have been pivoting on us more. So there's not necessarily one specific factor, but sort of a confluence of factors that are impacting bad debt this year.
Juan Sanabria - Bank of America Merrill Lynch
Thank you.
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah.
Operator
And we'll go to Drew Babin, Robert W. Baird.
Andrew T. Babin - Robert W. Baird & Co., Inc.
Hey, good afternoon. A quick question on D.C.; some of the other companies have reported there's been some variability of performance between Northern Virginia, Maryland, et cetera, within the District.
I was hoping you could kind of give a breakdown of how that's shaking out, especially as it pertains to leasing in the last few months.
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah, happy to chat about it. It's Sean.
In general, what we've seen is that performance in suburban Maryland has been leading mainly a function of mix of assets. We've got some value-oriented assets there that are performing well.
And then that's followed by Northern Virginia and then after that, the District, which has been quite choppy, given the amount of supply that's been delivered. To give you some sense of indicators, from a rent change basis in Q2, suburban Maryland trended in the 2.5% range, Northern Virginia kind of 1.7% and D.C.
has basically been flat. It was positive 20 basis points.
So that's somewhat indicative of what we've been seeing and would expect that to continue as you look at the second half in the year and supply is expected to increase pretty meaningfully in the District. So, still expect D.C.
to be the softest of the three markets within the Mid-Atlantic.
Andrew T. Babin - Robert W. Baird & Co., Inc.
It's helpful. And then a quick question on New York Metro.
How has New York Metro kind of shaken out by submarket this year versus expectations? Has the city itself been a little more resilient than you might have expected.
And I did note that from 1Q to 2Q, there was a bit of deceleration in suburban New York. Was hoping you could talk some about that and the dynamics going on there.
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah, sure. When you look across New York/New Jersey for us, I think it is a fair statement that the city has performed a little bit better than we might have expected to be honest.
And the markets that have been a little bit stronger include New York City, Long Island's been performing well, and then Central New Jersey. Those are the three that are leading in terms of performance in the greater region.
In terms of the issue you identified in New York suburban, one thing you got to keep in mind there is that 1,200 apartment homes in that market. So, if you have a little bit of sneeze at one (29:16), it does affect the basket.
And we had couple of assets that normally have nice short-term activity during the summer period that, as you lead up to it in Q2, they kind of kick in late-April, May, and then go through the summer. Just not quite as much demand this year for that short-term activity, which prices at a premium and, therefore, impacted couple of assets in Westchester.
So I wouldn't read too much into that when you're talking about a basket of 1,200 units.
Andrew T. Babin - Robert W. Baird & Co., Inc.
All right, very helpful. Thank you.
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah.
Operator
And Austin Wurschmidt, KeyBanc Capital Markets.
Austin Wurschmidt - KeyBanc Capital Markets, Inc.
Thanks. Good afternoon.
Was just curious, you mentioned increases in supply in Northern California and Southern California next year. Any particular submarkets that are seeing outsize increases?
Sean J. Breslin - AvalonBay Communities, Inc.
For this year versus next year?
Austin Wurschmidt - KeyBanc Capital Markets, Inc.
Correct.
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah. It's typically the usual places.
So, what I can tell you in Southern California, where you typically see it is Downtown LA, and then, if you move down into a – there's a little bit in the Marina. And then if you move down into Orange County, it's Anaheim and Irvine.
You typically see a tick up there. And then if you move down into San Diego, I believe its Mira Mesa and Downtown, you see a little bit of an uptick.
And then in terms of Northern California for 2017 versus 2018, you do see an uptick in the city and there's a few different places where it comes into play. Some of it is not the core part of the city, but you are seeing an increase in – the Financial District more than doubles as you move into 2018 is an example.
There's more in South San Francisco. But then there's also pockets like Burlingame that there's not any deliveries expected this year, but they're expecting about 500 units next year.
So it's kind of spread around, and one thing you do need to keep in mind, as I mentioned, is some of the deliveries that have been pushed into Q4 this year probably will slip into next year. So, it's a little early to make a final call on what 2018 is going to look like.
Austin Wurschmidt - KeyBanc Capital Markets, Inc.
Great. Thanks for the detail there.
And then, I was just curious if you had the detail on what rent growth would be if you were to include short-term leases in that number?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah. I don't have that right in front of me.
It's a relatively small percentage. And you have to realize that it's a pretty volatile number.
It spiked in Q2 and Q3 in terms of pulling up total rent change for all terms, but it's softens materially in Q4 and Q1 and pulls everything down. So, I can – Jason and I can address that with you offline if you like to.
Austin Wurschmidt - KeyBanc Capital Markets, Inc.
Yeah, that would be great. Thanks.
And then just last one, was curious, when you look at the capital plan through the balance of the year, I'm just curious what the most attractive sources are and how we should be thinking about funding plans for the back half of the year.
Kevin P. O'Shea - AvalonBay Communities, Inc.
Sure, Austin. This is Kevin.
It's really not much change from where it's been over the past six months to a year or so. Obviously, as you're aware, there are three principal markets that we look to tap on the business: unsecured debt, asset sale and common equity.
To varying degrees, all are reasonably attractive at a minimum, though among them, unsecured debt ranks as most attractive followed by asset sales.
Austin Wurschmidt - KeyBanc Capital Markets, Inc.
Great. Thank you.
Operator
And Dennis McGill, Zelman & Associates.
Dennis Patrick McGill - Zelman & Associates
Afternoon. Thank you.
Just wanted to hear a couple of thoughts relating to the supply delay and then how you think about the year progressing relative to initial expectation. When you look at your own delays and then seeing that in the market as well and still seeing deceleration in the first half of the year, do you look at that as though the risk has just shifted within the year, so the year looks as though you would've thought it would look, but the back half is more decelerated than the front half because of the timing or is the quarterly progression playing out as you would've thought as well?
Sean J. Breslin - AvalonBay Communities, Inc.
Dennis, this is Sean. I think, generally, it's playing out – if you think of the trajectory or slope of what's happening with market rents and, therefore, rent change in our portfolio, it's playing out about as we expected.
I would agree that the risk has probably shifted a little bit more to the back half of the year. But the way I looked at is when I see those 6,000 or 7,000 units that have been delayed and pretty much everybody said they're still going to make it this year, I don't think that's likely to occur in that way.
So we had certainly done some things to try and protect the downside going a little bit further out on renewal offers, trying to lockup some people in certain markets where we see an increase in supply in specific submarkets in the third and fourth quarter relative to what we experienced in the first half and things like that that are kind of tactical. So I think we've done a good job of trying to shore it up if you want to think about that way.
As I mentioned already in August, which is sort of the last of the peak leasing months, we're starting out the month about 25 basis points higher on occupancy and about 30 basis points lower in availability that is intentional to try and make sure that we have a slightly more defensive cost share as we encounter more supply and kind of late Q3 and Q4 in some of these places where present some risk. So, I think your comment about the risk being more in the back half is probably a fair statement if you're addressing it from a supply perspective.
And then also the fact that job growth has been a little bit weaker across the footprint in the first half of the year; it's only running about two thirds of the pace of last year. And that would likely manifest itself in demand in late Q3 and Q4, so we're just trying to be thoughtful about how we position the portfolio for those periods of time.
Dennis Patrick McGill - Zelman & Associates
That's really helpful. Thanks.
And when you think about pricing power by month when would you typically see the peak seasonally?
Sean J. Breslin - AvalonBay Communities, Inc.
Typically, the peak is in July or August depending on the year. Probably would have been July this year.
Dennis Patrick McGill - Zelman & Associates
Okay. And then last question, just on Northern California, when you think more broadly about how that market might recover from early strong increases to moderating, going negative and even probably bouncing back faster in the last quarter or so than we would have expected at least.
As you look forward, is that a market where you would be comfortable if it just got back to stability relative to long-term averages or do you think that it can reaccelerate even beyond that just given the demand?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah, happy to comment about that and then Tim or others can. I'd say where you could most likely see reacceleration that would be meaningful at some point would likely be in the city just because the nature of the product site that you're building there, which is type one concrete high-rise.
There's a pretty long gestation period. So to the extent that we see supply falling off, say, in the back half of 2018 as an example, going into 2019, that next round of communities that would be built is likely some kind of gap in there, and those have been stressing the system in terms of funding the right kind of land opportunities, blending it with where construction costs are, a constrained financing environment that there is certainly pressure on starts, generally across the country and that is something we've talked about.
But, particularly in San Francisco, with that kind of product type, it might be a little more meaningful than you'd see on wood frame job in San Jose or the East Bay as an example. So, you probably would see the acceleration in that market potentially.
It's the core is where people like to live and then it kind of reverberates out from there down to peninsula and then over to the East Bay. So, Tim, you want to add something to that?
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah. Dennis, certainly, we've seen it in the past.
We saw it 2000, 2001, where you had a pretty meaningful reacceleration after a bit of a slowdown in the late 1990s. And obviously, that was on the backs of what was going on in Nasdaq.
This is a market that where hiring is a function to a large degree what's happening in the equity markets and it's been a nice run, obviously, in the equity market. I don't think it's as dependant as it's been in the past.
But I think that would be sort of the argument or the case in which we might see a more meaningful reacceleration than just sort of getting back to equilibrium.
Dennis Patrick McGill - Zelman & Associates
Thank you, guys. Good luck.
Operator
And we go to Wes Golladay, RBC Capital Markets.
Wes Golladay - RBC Capital Markets LLC
Hey, good afternoon, everyone. Looking at the development pipeline for next year, I think Matt mentioned that the initial occupancies are where you see the most risk.
And how do you see the projects at Avalon Maplewood and AVA North Point kind of going right now? And if there was anything behind at this stage, is there just something you can do to mitigate risk for those projects?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Sure, Wes. This is Matt.
North Point is going great. In fact, it's making strong progress.
And Cambridge is not perhaps as overwhelmed with supply relative to its history and its context at the moment. So, I don't expect there to be any risk there.
There might even be an opportunity, we'll see, to pull forward a little bit. And Maplewood, that's obviously the rebuild from the fire that we had early in the year and that's also actually gone, if anything, probably a little better than expected.
So, I think we're feeling very good about the possibility. That's another one, I guess, the current schedule shows us, opening the doors for occupancy.
First quarter of 2018, I would – we may even be able to get that pulled into the end of this year, but certainly, we feel good about opening the doors there beginning of next year.
Wes Golladay - RBC Capital Markets LLC
Okay. So, I guess, would it be fair to characterize what happened this year as more of a transitory issue?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Well, those are just the two you asked about. There are a couple where there is probably a little bit more challenges.
But I think it's a reflection of – every job has its own unique circumstances, but it's a reflection of where we are in the cycle. As Tim was saying, it is an industry that is at kind of full capacity.
So we have seen some subcontractors fail that we had to replace. We have had some challenges in some of the jurisdictions.
So, in years past, we had – the two you mentioned are two where we might actually have good surprises that might potentially offset if we have slipped somewhere else.
Timothy J. Naughton - AvalonBay Communities, Inc.
Yeah. Wes, maybe just add to that, to the extent we can see it coming like months in advance, we're generally able to put together or often able to put together a recovery plan to make up some of the time.
It's really in those instances where you don't see it coming like Matt mentioned where it's a failed subcontractor or just an inspection issue, which you just – there is really no time in which to recover. And that's generally where we run into the biggest schedule issues.
Wes Golladay - RBC Capital Markets LLC
Okay. Thanks a lot.
Operator
We will go to Alexander Goldfarb, Sandler O'Neill.
Alexander Goldfarb - Sandler O'Neill & Partners LP
Oh, good afternoon. Two questions here.
First, Kevin, just on the balance sheet, noticed that you have some 1031 proceeds. I'm guessing that's from the Seattle sale.
So, two-part; one, do you expect to acquire another asset or is there a potential for special dividend? And two, are there any other Seattle type student housing-oriented assets in your portfolio that you may seek to sell?
Kevin P. O'Shea - AvalonBay Communities, Inc.
Well, Alex, this is Kevin. I may start and Matt may want to add here.
The 1031 proceeds you see in our balance sheet relate to a sale that was accomplished earlier this year at Avalon Pines in Eastern Long Island. And so, whether or not we're able to use that will be ascertained in the third quarter here.
And if we can match with something we will, if we can't, we will retain the proceeds because, based on our current estimate, we can absorb the capital gains that would flow from that prior sale.
Alexander Goldfarb - Sandler O'Neill & Partners LP
Okay. And then, Matt, on the opportunity for other student-oriented buildings to harvest?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Yeah. There maybe one or two others in our portfolio that have a heavy student population.
We do have other assets in the market right now for disposition that don't happen to meet that criteria. But that particular one was a little bit unique and a combination of things.
So, we'll obviously continue to be selling assets. I don't know that any of the next kind of three, four, five assets we sell probably not likely to be ones that we'd sell to a student housing operator.
That was a little bit of (42:29) there.
Alexander Goldfarb - Sandler O'Neill & Partners LP
Okay. And then the second question is, on the rent control out in Mountain View, I assume this is the standard where there is vacancy decontrol, so you can bring it to market on turn.
So, one, just want to verify that and, two, are there any other markets that you think could have this that you'd expect communities to be impacted by further rent control?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah, Alex. This is Sean.
Your first point is correct in that there is vacancy decontrol associated with the Mountain View ordinance. Really, what was somewhat punitive about that one, as Tim alluded to, is there was a rent rollback.
The rents were rolled back from current levels to October 2015 levels, and no rent increases were allowed for people that were under leases that remain in their home until September of 2017. So that's pretty unusual and that impacted our outlook for this year.
But, ultimately, as you have turnover activity, you'll get it; the question is what's the duration. So we'll see on that.
And then, in terms of other challenges, there has been chatter in Northern California, primarily from other jurisdictions. There's only a couple of locations where it's actually passed, Mountain View being one of those.
And so we continue to keep an eye on it. Typically, at this point in the cycle, last couple of cycles included, there is a lot of this chatter in Northern California and then it slowly abates.
So, we'll see how it plays out, but it's right now, sort of addressed at the jurisdictional level in terms of whether it's Mountain View or Richmond or Santa Rosa, et cetera, that pop up from time to time.
Alexander Goldfarb - Sandler O'Neill & Partners LP
Okay. Thank you.
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah.
Operator
And we'll go to Vincent Chao, Deutsche Bank.
Vincent Chao - Deutsche Bank
Hey. Good afternoon, everyone.
Just – I think we probably touched on it already, but just as you look at the changes – slight changes in the same-store revenue outlook by region, we just talked about Mountain View, but are the other changes that we're seeing here largely driven by the shifts in supply and also, at a broad level, say that job growth has been little softer. I was just curious sort of what are the deltas to what your original outlook was driving some of the change here?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah, this is Sean, happy to address that. There's really three regions or markets that are underperforming the original expectation.
The first is LA, which is projected to be off about 50 basis points from what we expected, coming in closer to 4% instead of 4.5%. There's really two factors there.
One is job growth in LA in the first half of the year is only running about half the pace of last year. So there has been softness on the demand side.
And then, for us, we had a headwind in the San Fernando Valley in terms of some unusual rent premiums we achieved last year that presented a difficult comp for this year. So LA is the first sort of market.
And then in terms of two other regions, Northern California is expected to be off about 40 basis points from our original expectation. About half of that relates to the Mountain View ordinance that I mentioned.
The other half relates to performance in the East Bay, which has been a little bit softer than anticipated. And then, thirdly, in the Mid-Atlantic, the Mid-Atlantic is projected to be off about 20 basis points from what we expected.
Just general softness, both the combination of demand where job growth is running about two-thirds of the pace of last year as well as just (45:58) lot of things moving around. So, fortunately, the other markets, New England, New York/New Jersey, Seattle, San Diego as an example, are somewhere between 20, 30 basis points ahead of plan, kind of offsetting that.
So net-net, we kind of sum it all up and we come out about even.
Vincent Chao - Deutsche Bank
Great. [Technical Difficulty] (46:19-46:24) is it just the demand side coming in better or is there some supply?
Sean J. Breslin - AvalonBay Communities, Inc.
I'm sorry. Could you repeat the question?
You kind of muffled a little bit.
Vincent Chao - Deutsche Bank
Yeah. Sorry.
Just on the markets that are doing a little bit better than expected, the Pacific Northwest being the biggest positive delta, is that more demand driven, just better demand than you thought?
Sean J. Breslin - AvalonBay Communities, Inc.
Not really. Pacific Northwest is, to be totally honest, a bit of an enigma to us.
Job growth across all the West Coast markets has fallen off pretty materially this year, Seattle included, and Seattle is delivering kind of 4% of inventory in terms of supply. So what it has had is it's had very solid wage growth and it's a very difficult, very tight single-family market.
So we're getting disproportionate share there in terms of kind of marginal propensity. And so, we would've expected a little bit more easing off this year in Seattle.
I think us and our peers though have been saying that for three straight years. So there's probably a little more risk in the second half of the year in Seattle, I would say, just given what's happened with job growth in the first half, but it's a little difficult to put your finger on it precisely for Seattle to be honest.
Vincent Chao - Deutsche Bank
Okay. Thank you.
Sean J. Breslin - AvalonBay Communities, Inc.
Yep.
Operator
We'll go to Conor Wagner, Green Street Advisors.
Conor Wagner - Green Street Advisors, LLC
Good afternoon. Could you comment or give us some color on the land parcels that you bought in the quarter?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Sure, Conor. This is Matt.
I think it was two parcels and both of them were suburban Boston. One is in Sudbury, which is a job which will be a start here in the next quarter or two, which is a development that we partnered with a retail group there that's actually developing a Whole Foods-anchored shopping center, and then we're doing, I think, about 250 apartments as part of that same master development.
And the second one is the former Hilltop Steakhouse in Saugus on Route 1, north of Boston, where actually there's also a small retail component to that project as well about, I think, close to 300 units, maybe 280 units that should start here before the end of the year.
Conor Wagner - Green Street Advisors, LLC
And have you seen any changes in land market in the last year?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Well, it's definitely been more challenging for us to continue to find development rights to backfill. Both of those are deals we've been working on for probably 18 to 24 months at least.
So, it's definitely getting harder. I think less land deals are getting struck right now probably, just as a reflection of the fact as we've been saying for a while that construction costs are growing faster than rent.
So, it is putting some stress on development underwriting on future deals.
Conor Wagner - Green Street Advisors, LLC
And given that where you develop these markets are generally perceived to be higher barrier, more difficult to build, that's obviously good from a long-term rent growth perspective, but it can make it challenging for you to replenish your development pipeline. As you look forward to the next couple of years, do you have any thoughts to expanding your market footprint to give yourself more opportunity to develop if you can't make a pencil in the Bay Area, Southern California, et cetera?
Timothy J. Naughton - AvalonBay Communities, Inc.
Conor, this is Tim. We've talked about this in the past certainly, but we're always looking at whether it makes sense to enter new markets.
I think, as we've shared with you and others, we're looking for – to the extent we do that, we're looking for markets that share a lot of the same attributes in terms of high-value added jobs, just kind of just over-indexing to those parts of the economy, and generally looking for highly educated work forces, attributes that would support new development, and would have pricing that would allow new development to be economic. So, it is something that we are evaluating, but it's – I wouldn't say it's not a lot different than – frankly than we've been evaluating in the past.
And then, as it relates to our existing markets, interestingly, the two sites that Matt mentioned, those are both repurposed real estate. And I think that is where the opportunities are going to continue to be in our markets, whether it's repurposing suburban office, which is the case on one of those sites or retail that perhaps is obsolete at this point or not healthy for you in the case of the Hilltop Steakhouse.
But I think that's going to be probably a theme over the next few years. But, as Matt said, I think it is getting a bit more challenged just to make the hurdles work, to clear the hurdles, if you will, just given where construction costs have gone and where rents are today.
So I think it's really going to be a combination of things; not meeting underwriting parameters, perhaps getting late in the cycle, and just not a lot of vacant land.
Conor Wagner - Green Street Advisors, LLC
And have you had any conversations or anything move forward on retail. Again, this opportunity, it's a thought on many people's minds, but have you started to act on that beyond these smaller deals or looking at other retail players or bigger sites?
Timothy J. Naughton - AvalonBay Communities, Inc.
Sure. And we have been, actually, in the last couple of years.
We've done a number of deals, whether it's Hunt Valley, which was one of the completions this quarter up in Baltimore. Mosaic was certainly an example of that.
Assembly Row is an example of that. But, as you know, there is a lot of whether its office or retail guys out there thinking about their portfolios from an asset management standpoint perhaps even more aggressively than they have in years' past and we just like that there'll be more opportunities to work with them to help repurpose some real estate.
Conor Wagner - Green Street Advisors, LLC
Great. Thank you very much.
Timothy J. Naughton - AvalonBay Communities, Inc.
Sure.
Operator
And we'll next move to Rich Hill, Morgan Stanley.
Richard Hill - Morgan Stanley & Co. LLC
Hey, guys. Thanks for taking the call.
Just want to maybe take a step back. You talked about a lot of various different markets, but I want to get your perspective holistically, maybe what markets were surprising to the upside and downside as it relates to demand?
Sean J. Breslin - AvalonBay Communities, Inc.
Yeah, Rich. This is Sean.
I kind of ran through the market that we expected to see some outperformance as compared to underperformance this year. It's kind of a function of several different factors.
If you look at it purely from a demand perspective and one thing you have to remember is that there's typically some lag, but in terms of where we've seen better job growth, it should lead to better demand in the short run, being the next quarter or two. Job growth in New England is up on a year-over-year basis, which has been fine and our New York/New Jersey relatively flat.
And number of the other markets, we have seen – our markets at least, we have seen softening trends recently in terms of job growth, which gives us a little bit of concern about demand in the second half of the year. So, as I mentioned, we position the portfolio slightly more defensively for the back half when you consider that demand outlook, which is potentially a little bit of softening with the fact that a number of markets are going to see an increase in supply in Q3 and Q4.
So that's probably the most crude way to look at demand in terms of what you expect in the next quarter or two.
Richard Hill - Morgan Stanley & Co. LLC
Okay, great. That's helpful.
That's it from me. Thanks.
Operator
And we'll next go to Rob Stevenson, Janney.
Robert Stevenson - Janney Montgomery Scott LLC
Good afternoon, guys. Tim, Fund II is winding down here.
I think you can only have like one asset in there now. What's your thought about doing sort of similar type of structures going forward?
Is there a situation where you're happy to do it and you see value there? Or given your size and scale and ability to deploy capital at this point, you're going to basically hold all of the best deals which you see on an acquisition side for yourself?
Timothy J. Naughton - AvalonBay Communities, Inc.
Rob, I guess I'd answer that in a couple of ways. One, as we mentioned in the past, let me – by being in the fund business, it does create some issues as it relates to being able to be active portfolio managers and we have tried to be more aggressive in that area in terms of repositioning the portfolio.
Just given the number of deals that we have in development in the Northeast for instance, we're just going to need to be able to recycle capital there and redeploy that into some other markets at times. And being in the fund business, when it's an exclusive acquisition vehicle, impacts your ability to do that.
So that's one issue. And I guess the other thing I'd say is, when we did the first couple of funds, it really came off of a long extensive period where we were trading at a meaningful discount (56:02) and it was really an opportunity to activate that lever, if you will.
And we're able to do so, generally successfully, as it relates to the performance of those two funds combined, but I think, just given some of the other strategic priorities, it's just not likely that we would do it in the near term.
Robert Stevenson - Janney Montgomery Scott LLC
Okay. The multi-family partners unconsolidated deals, do those have fund set provisions or are they coming up on sort of end of their life?
What's the remaining JV stuff that you have, what's the sort of light at the end of the tunnel there?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
So, with respect to – I think you're referring to the fund that we picked from Archstone, I believe the termination date on that fund is 2021.
Robert Stevenson - Janney Montgomery Scott LLC
On both of those? There's like one with seven and one with three in it?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Yeah. So, the seat fund is more of a straight up joint venture.
That doesn't have a fixed termination date, whereas the U.S. multi-family fund with seven assets has a termination date of 2021.
Robert Stevenson - Janney Montgomery Scott LLC
And do you have the ability to, if the market conditions are robust, to sell assets out of there sooner or is it until then?
Matthew H. Birenbaum - AvalonBay Communities, Inc.
Sure. We're in constant consultation with the partners in those vehicles and have been actively, from time to time, selling assets out of one of those vehicles in the past year or so and currently.
Robert Stevenson - Janney Montgomery Scott LLC
Okay, all right. Thanks, guys.
Appreciate it.
Operator
And it appears there are no further questions. I will now turn the call back over to Tim Naughton for any additional or closing remarks.
Timothy J. Naughton - AvalonBay Communities, Inc.
Thank you, Melinda, and thanks, everyone, for being on the call. Enjoy the rest of your summer and I look forward to seeing you at some upcoming conferences in the fall.
Take care.
Operator
And that does conclude today's conference call. We thank you all for your participation.
Have a great day.