Q3 2021 Avalonbay Communities Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Avalonbay communities third quarter 2021 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. You may enter the question and answer queue at any time during this call by pressing star one.
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Your host for today's conference call is Mr. Jason Reilley, Vice President of Investor Relations. Mr. Riley you may begin your conference.
Thank you Cathy and welcome to Avalonbay communities third quarter 2021 earnings Conference call before we begin. Please note that forward looking statements may be made during this discussion.
Heidi of risks and uncertainties associated with forward looking statements and actual results may differ materially there is a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10-K, and Form 10-Q filed with the SEC.
As usual. This press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available on our website at www Dot Avalon Bay Dotcom Ford Slash earnings.
We encourage you to refer to this information during the review of our operating results and financial performance and with that I will turn the call over to Tim Naughton, Chairman and CEO of Avalonbay communities for his remarks Tim.
Yeah, Thanks, Jason and welcome.
Thanks, sure, Kevin O'shea, Matt Berenbaum and Sean Breslin.
For our prepared comments today, Ben will will provide a summary of third quarter, our results and update on Q4 and the food and.
And full year guidance.
Provide some thoughts on why we believe ABB is well positioned to outperform.
Sean will then elaborate on operating trends in the portfolio, where we continue to see strong momentum and healthy fundamentals should support robust growth as we move into 2022.
And then we will conclude with an overview of development activity.
And the economics remain compelling.
And then offer a brief look at our new expansion markets, including our rationale behind our decision to enter them earlier this year.
And then we will all be available for Q&A after our prepared remarks.
But before turning the call over to Ben I did want to take a minute.
To acknowledge that I expect that this will be my last earnings call as I plan to step down at year end as CEO when I will assume the role of executive Chairman.
We've previously announced last December.
The last 32 years at Avalonbay and its predecessors.
Over the last 20, plus years or so I've had the opportunity to interact with many of you on this call on a regular basis.
When I say that I appreciate your support for an engagement with the company and me over that time.
And for the investors on the call I simply want to thank you for trusting us as a steward of your capital over the years.
Alright, it's something we've never taken for granted and I know that we will continue to be the case in the future under the leadership of Ben.
This executive team.
Look forward to being able to touch base with many of you more directly and hopefully in a little more personal way over the next couple of months and with that I'd like to turn the call over in place in the very capable hands.
Sure and the rest of these active here today.
Thank you Tim.
We wanted to start the call today as a team and an organization by expressing our gratitude and acknowledging Tim for his contributions to the company and the industry over the last 32 years.
<unk> would not be the company. It is today without Tim strategic leadership, which is deeply intertwined with the companys history and evolution and so one of the preeminent real estate companies in the U S. It's exceptional track record of value creation, and it's inclusive culture focused on continuous improvement.
In addition to overseeing Avalon Bay is tremendous growth and positioning us as an industry leader. Tim has also had a major influence on the evolution of the multifamily industry and the broader REIT sector during his career.
And throughout all of these accomplishments and successes.
And what is one of Tim's most admirable attributes as a leader and a person Tim never made it about him. His focus has always been on others. The positive impact he could have on people the impact that Avalon Bay could have in our communities and how he could lead by fostering and reinforcing our evergreen culture and strong organizational values.
Half of all of those that have been part of Avalon Bay and all of US at the company today. Thank you Tim.
You bet.
As the next section and before turning to the presentation. We wanted to emphasize upfront a number of factors that we believe position Avalon Bay for outsized performance over the coming quarters and as we look towards 2022.
Our operating fundamentals continue to show very strong momentum with rents now above pre COVID-19 levels and five of our six large coastal regions with the strongest performance in our suburban communities, which comprise over two thirds of the portfolio.
Our resident base with concentrations employed in knowledge based industries are in high demand in today's labor market setting the table for future rent growth as wages continue to rise.
And for the segment of our resident base, who would typically be seeking to purchase a home. After a period of time with US. This alternative is challenging given the general lack of availability further supporting our retention rates and demand fundamentals.
We also expect our portfolio and market allocation to generate strong growth over the coming quarters.
Looking back over the last 18 months, while we've experienced an unprecedented trough and then an equally unprecedented recovery. Our rents today are only 7% above October 2019 levels equating roughly to three 5% growth per year.
With an economy in growth mode limited availability low turnover significant loss to lease and with a third of our portfolio in urban areas that are recovering, but still held back by the pandemic. We expect strong operating tailwind as we head into 2022.
Our execution on our operating model initiatives also continue to pay dividends with our investments in technology and innovation offering enhanced value to prospects and residents, while also allowing us to improve operating efficiencies.
Through these initiatives, we expect to improve margins roughly 200 basis points with $10 million of this improvement already captured and with an additional $25 million to $35 million to be captured over the next couple of years.
Finally, we're also creating outsize value creation and earnings growth from our development platform with returns trending above pro forma leading us to ramp development activity with very attractive spreads between our development yields and market cap rates. We are definitely in growth mode, which is further supported by our access to historically low cost of capital.
Given the strength of the capital and transaction markets.
All of which sets up for a strong end of this year and meaningful growth in 2022.
Turning to the presentation and starting on slide four the rapid pace of recovery continued in the third quarter with core <unk> coming in at 10 cents above the midpoint of our prior Q3 guidance and flat on a year over year basis.
The outperformance relative to guidance was driven primarily by same store revenue, which produced a 4% sequential increase in revenue on a cash basis.
Our growth orientation as reflected in our ramp in development starts with just under $1 billion of starts through the end of Q3, we.
We've also completed $1 1 billion of projects, so far this year and an attractive yield of five 9%.
In addition to development, we are growing through acquisitions and Q3 marked our first acquisitions in our new expansion markets of Texas, and North Carolina totaling $275 million and.
Subsequent to quarter end, we closed on an additional acquisition in Fort Lauderdale, Florida for $150 million.
Funding our growth with low cost capital, primarily from asset sales and incremental debt proceeds, including a recent $700 million 10 year unsecured bond at a fixed rate of 2.5% the lowest coupon in lowest spread and Avalon Bay history, and also our first green bond.
Turning to slide five and given these strong operating trends, we have raised our guidance for Q4 and for the full year 2021.
Q4, <unk> guidance has been raised to a range of $2 19 to $2 29 per share an 11% increase over our previous Q4 guidance at the midpoint.
This improved outlook is driven by our improved revenue expectations with residential revenue now projected to increase in Q4 by 5% on a year over year basis.
In addition, occupancy and rate trends the same store revenue outlook assumes approximately $12 million of additional rent relief payments in Q4 relatively consistent with what we received during Q3.
Other activity incorporated into our updated Q4 guidance includes $250 million to $300 million of dispositions from our northeastern markets at an expected cap rate of sub three 5%.
And $300 million to $350 million of acquisitions in our expansion markets, one of which is the Fort Lauderdale community and with the others under agreement.
Slide six slide six shows the components of rental revenue change on a year over year basis residential revenue growth being driven primarily by higher occupancy and rent relief recognized during Q3, leading to a 1% increase on a GAAP basis, and a four 3% increase on a cash basis.
On a sequential basis as shown on slide seven the rental revenue increase was driven by our momentum on lease rates as well as the recognition of rent relief payments, leading to a residential rental revenue increase of three 3% on a GAAP basis and 4% on a cash basis.
With that positive backdrop, I'll turn it to Shawn to discuss our operating performance more fully.
Alright, Thanks Pat.
Sure a few slides on the portfolio rent trends for the quarter and into October.
Same store level and across different markets and Submarkets.
<unk>, we have continued to experience a significant rebound in the business.
If you look at slide eight like term effective rent change churn positive in June has accelerated materially over the last few months and is now running at roughly 11%.
If you turn to slide nine you can see what's supporting the improvement in our rent change, which is the growth we've experienced an average move in rent value.
Our average move in value has grown by roughly 24% since the beginning of the year, including a 9% increase since the end of Q2 and is now about 7% above the level, we achieved in the fall of 2019.
Moving to slide 10 improved performance has been broad based with every region experienced an increase in average move in rent over the past quarter as noted in the chart. The recent flattening of move in values reflected normal seasonal pattern, although the seasonal adjustment that has only been about one third the amount we typically see.
Moving from the summer into the fall.
Rents are now equal to or greater than 2019 levels in every region, except northern California, which has seen roughly 20% growth in move in rents this year, but still remains roughly 7% below the level, we achieved in 2019.
The timeline for a full recovery in northern California has been delayed in large part by major tech employers extending their return to office dates into early 2022.
At the other end of the spectrum, the Southern California region has experienced strong growth in move in values supported by very healthy job growth, including significant growth in the content producing segment of the media industry.
Limited supply and a very tight for sale market.
Turning to slide 11 to address suburban and urban performance trends. The average October move into rented for our suburban portfolio was roughly 12% above the rent we achieved in October 2019.
And our urban portfolio, while demand has returned in a meaningful way and rents have recovered significantly moving rents are still slightly below what we achieved in October 2019.
To provide a few examples in Boston and New York City Urban move in rents are now 1% above what we achieved in 2019.
But the district of Columbia, and San Francisco are lagging with move at rents that are 3% and 13% respectively below what we achieved in 2019.
Given the continuing adoption of vaccine requirements and steady climb of vaccination rates, we expect urban office occupancy rates will continue to rise as we move into 2022, which is one of the opportunities we expect to benefit from next year.
In fact, moving to slide 12, the macro environment should support healthy fundamentals in our markets over the next several quarters.
Starting at the top left of slide 12, while the labor market continues to improve we're still almost 5 million jobs short of where we started.
The demand for labor continues to be robust, which is putting material upward pressure on wages, a key driver of rent growth.
Chart, one shows job wage in total personal income growth for the professional services sector of the economy, which is where most of our residents are employed as noted in the chart. We've only experienced positive year over year growth across all three categories. Since Q2 of this year and as many businesses are finding as they attempt to recruit and retain them.
<unk> services employees the market has only strengthened since Q2.
In chart two office usage hit a trough in Q2 2020 at the onset of the pandemic.
Since that time, while we've seen steady improvement the game the gains have been modest.
As we look forward into 2022 gains in office usage should support additional rent growth, particularly in our urban and job centers suburban submarkets.
And touching on chart three in four regarding the housing market price depreciation in the for sale single family market and relatively stable multifamily supply both support a healthy near term outlook for rental rate growth.
With that favorable macro outlook as context, turning to slide 13, we also see terrific tailwind in our portfolio as we move into next year.
Beginning in the upper left of the Slide the chart number one we're starting from a position of strength with turnover trending lower and strong stable occupancy, which brings with it unusually strong pricing power.
Turnover has declined this year it was down about 1000 basis points or 15% in Q3 relative to what we would experience in a more normal year like 2019 and.
And occupancy has been running above 96% for several months now appointed which we continue to push rents.
In chart two given the very healthy rent change we've experienced the last few months will be starting in 2022 with built in revenue growth of roughly 3%.
<unk> point that we did benefit from in any year during the last cycle. The strongest starting point in the last cycle was roughly 2.25% at the beginning of 2012.
In addition to the baked in revenue growth and chart to our loss to lease is currently running at roughly 14% and as depicted in chart number three.
Providing plenty of opportunity to benefit from moving existing leases to market when they expire.
Moving to the bottom of slide 13, there are three other somewhat unusual tailwind. So should also benefit revenue growth as we move into 2022 and.
In short for the amortization of concessions associated with previously signed leases, which should burn off as you move through the next several quarters.
Chart, five a reduction in bad debt, which will reverse quickly to the pre pandemic average, but should begin to abate as eviction moratoria expire and our legal remedies become more widely available to us.
And then finally in chart six continuing to receive from the emergency rental assistance program.
For our same store portfolio receipt, we receive we have received $14 million from the program with $11 million of it coming in the last quarter.
Since less than one quarter of the roughly $47 billion authorized by the federal government had been distributed as of September 30, we expect to receive additional funds in Q4 this year and in 2022.
So with that summary, I will turn it back to Ben to address development in our new expansion markets.
Thanks, Sean as shown on slide 14. These strong operating trends are also translating into outperformance for our six development projects currently in lease up with lease rates up $180 per unit and with projected yields up 30 basis points to 6% driving further value and earnings.
Turning to slide 15, our total Corona current development portfolio is poised to deliver meaningful incremental NOI and NAV growth over the coming quarters, specifically and these projects are projected to generate $145 million of NOI upon stabilization of which only $26 million is in place today on an annualized basis.
These communities are slated to generate $1 2 billion of net value above our costs are close to $9 per share of NAV.
And meaningful earnings growth.
As further highlighted on slide 16, our industry, leading development platform has created significant value throughout various cycles with consistently strong spreads between development yields and market cap rates, which today sits at a spread of roughly 210 basis points.
As we look forward over the coming years, our existing development rights pipeline totaled $3 billion of potential projects lining us up well for a strong pace of continued profitable development.
Turning to slide 17, our four new expansion markets. In addition to our continued growth in southeast, Florida, and Denver provide us with meaningful additional growth opportunities as well as the ability to optimize our overall portfolio over time.
This slide provides the high level framework, we utilize to evaluate markets and that drive portfolio allocation decisions across our existing markets and our expansion markets.
At the top of the list our focus remains on being a best in class developer and operator in markets that over index to knowledge based employment, which we expect to experience outsized job and wage growth.
We also continue to believe that markets with a high cost of home ownership create an attractive rent versus own backdrop for our product offering.
While our expansion markets generally have lower home prices than our existing markets. The rise in home prices, particularly in certain sub markets. In these areas create similar positive dynamics for future rental growth.
We remain closely attuned to the regulatory environment in each of our markets with local land use restrictions, creating certain favorable favorable barriers to new supply in our existing markets providing opportunities for our development teams to leverage our long standing relationships to unlock development opportunities.
These coastal markets have however, seen an increase in landlord tenant regulations and our expansion into new markets is partially driven by our desire to diversify our regulatory exposure.
In the fourth factor highlighted here public infrastructure and cultural amenities as our proxy for the overall quality of life that large knowledge based employers and our type of customers will continue to seek out.
This thematic framework is in turn supported by our proprietary market research, which shapes, our market and sub market capital allocation decisions as we drive long term value.
Slide 18 highlights the characteristics supporting growth in our recently announced expansion markets and what we believe positions these markets well in the long term.
As we enter these markets our focus is on creating long term value by exporting our development and operational acumen as well as our culture to an expanded set of opportunities.
And to wrap up we believe that we are well positioned to outperform as we head into 2022.
A favorable macro backdrop, including continued job and wage growth declining afford affordability of for sale housing a fuller return to offices, particularly benefiting the third of our portfolio in urban environments, and a relatively stable supply forecast and overall AVB markets should provide a strong tailwind.
Our embedded growth and loss to lease along with the benefit of concessions and bad debt normalizing over time should be key drivers of revenue next year.
Our operating initiatives are on track to deliver significant margin expansion and serve as one of our drivers of earnings growth over the coming two to three years.
Our development platform is also poised to deliver meaningful value and earnings growth with the development rights pipeline of $3 billion and with development yields substantially above stabilized cap rates and our cost of capital finally, our expansion markets provide a broader set of opportunities to leverage our platform for growth.
We're excited for the growth opportunities ahead of us and with that I'll turn it to the operator to open the line for questions.
Thank you.
Sir your mind or if you would like to ask a question. Please press star one.
We will take our first question from Rich Hill with Morgan Stanley.
Hey, guys first of all congrats on a really good quarter it looks like you.
You are showing some real inflection here I wanted to maybe take a step back and think about 'twenty, two and 'twenty three.
In the context that that loss to lease maybe you can help us frame.
Can you get all of that loss to lease back in 'twenty, two or is it some of that kind of move back into 'twenty. Three we've heard some different commentary from some of your peers. So I'm wondering how you guys think about it.
Hey, rich it's Sean.
Yes, good question of course.
But I would say on the loss to lease is.
In a normal year so to speak.
Thus part of what you can say is that this is probably anywhere between 15% to 20% of our portfolio that is somewhat constrained and capturing that loss to lease or the delta between the existing rents in the market rent based on the regulatory environment. That's in place and the typical examples are the rent regs in New York.
Great control in DC, we have an asset in San Francisco, La et cetera, et cetera in the current environment given the call it the COVID-19 overlay.
Of that total percentage of the portfolio that is somebody comfort at least for the short run it's probably closer to about a third of the portfolio, where there are some rent caps in place and various other jurisdictions that limit the ability to capture that the question is when some of those additional or incremental restriction is extreme.
Restrictions expire.
Which is TBD at this point in time is the one that's probably the most significant is the state of emergency cap in California.
Which is constraining probably for the most part renewals in places like San Diego and Orange County.
Which have experienced pretty robust growth. So the way I would think about it is you have the.
The incremental piece that I talked about so call it totally a third.
That is probably constraint at least in the near term.
Sort of burn off from a third back to 15% to 20%. During 2022 is a TBD and then also just factoring in the distribution of lease explorations.
Other factors that you have to consider as you kind of run through your model.
Got it.
I think I understand that math and maybe this is a question for Ben.
I wanted to maybe understand a little bit better.
How you are considering development in the past development.
Early in the cycle has been it has been a big.
Driver.
Of your growth how are you thinking about that this time.
Any different than past cycles.
Our approach is similar rich and you've seen that with our ramp of activity over the last six months, we definitely see it as a differentiator for us definitely see it as a driver of alpha.
And maybe talk some more about our pipeline of activity, but our.
Our track record and our development franchises in our existing markets. We have full confidence, we'll be able to continue to unlock value.
Now we have the expanded set of opportunities and the growth markets.
Widen our widen our.
Total opportunity set.
So Matt you want to talk some more on the development pipeline.
Sure.
Yes, just to give a little more color on the development pipeline. So we.
We started close to $1 billion. So far this year, we are on track to start probably another $350 million here in the fourth quarter.
And when we kind of look at the breakdown of that.
Most recent starts this year, it's a nice mix geographically.
About three quarters suburban one quarter urban.
And maybe 25% of our starts this year and actually in our expansion markets in Florida and Denver.
And then maybe a little less than a third in the northeast and the rest almost half on the west coast as we look out to next year, we'd like to be able to start somewhere in the same range in that 1 billion to billion and a half range, depending on how things shape up.
As Ben mentioned in his remarks, we have a $3 billion.
The development rights pipeline and there is a lot working its way through the system now, we really started putting our foot back on the gas for new business development.
Or two ago and.
We've got probably over $1 billion worth of New development rights. In addition to that $3 billion is working its way through the system now.
We will start some in this fourth quarter, but.
I'm, hoping that at the end of the year the development rights pipeline will actually grow to somewhere at or north of $3 5 billion that we have a lot of opportunity in front of us.
Thanks, guys I'll jump back into queue.
We will take our next question from Nick Joseph with Citi.
First of all congratulations Tim.
Maybe just following up on.
Hello.
I'm curious what sort of inflationary pressures, you're seeing I guess, obviously, it's coming through on the rate side, but also I would imagine on the construction side for the new starts how you think about.
Looking at those yields forces.
Yeah.
Sure Hey, Nick it's Matt.
There is definitely inflation like you said it helps on the rent side and it hurts on the cost side. What we've seen is the deals that we are starting this year.
Total development cost is probably 10 to maybe even as much in some cases, it's 15% higher than where it would have been a couple of years ago.
If NOI are trending up.
You do get some leverage on that and then the third part of the equation as asset values, which of course has been trending up.
More than 10, or 15% cost have been going up so when you combine the higher NOI with the lower cap rates the value creation.
That is probably wider than it was before.
Yields probably pre Covid, our development rights pipeline yields where maybe in the low sixes now they're in the high fives. If you look at the stuff. We're starting this year its pro forming to around a $5 705, eight and Thats, where kind of the new business. We are signing up or the stuff. We might start next year based on today's economics looks to be as well.
Thanks, so much.
You mentioned the regulatory side of the equation when youre looking at different markets.
Do you think about regulatory risk in some of these expansion markets. Obviously, it's more favorable right now some of the coastal markets.
How do you try to handicap any churn.
Going forward in the future there.
Yeah, Nick it's Sean good question.
And I think when you talk about the regulatory environment.
Yes, there are pros and cons to it. So if you maybe start with sort of our coastal market footprint that we've had for a long period of time part of the reason we have been so successful in creating value through the development pipeline as there is a very difficult regulatory environments of work it's to work your way through to actually get development entitled and deliver.
Into those submarkets, so it's been to our benefit historically, obviously the.
Our active.
Jurisdictions become as it relates to landlord tenant rent oriented things become slightly more risky for us of course in terms of the expansion markets.
There are not as many constraints on development. Although there are places within those regions that are a little more sensitive to development and have somewhat more constraints, but in general a slightly.
We're favorable in terms of development of course and in terms of evaluating the risk on sort of the landlord tenant side on the rent side.
As a jurisdiction by jurisdiction assessment.
For example, if you think of our legacy markets, we feel pretty good about Washington State overall, not so good about the city of Seattle.
So when you go through some of these markets for example in Texas.
If you look at Dallas Fort worth overall feel pretty good generally speaking about that environment, often there are some more regular regulatory constraints in the suburban environment as it relates to land use and the watershed and things like that so overall, we think the regulatory environment certainly is to our benefit in those markets, but there are places where you have.
Silver.
Yes.
The landlord tenant the rent control side, we think the risk is definitely lower than our.
Our legacy markets, but it's not without any risk as the way I would describe it.
Thank you.
We will take our next question from rich Hightower with Evercore.
Hey, good afternoon guys.
And likewise, all the best to Tim and the next phase of his tenure with Avalon Bay and beyond.
So I just wanted to follow up on Nick's question there.
I guess look if you bake it all together in terms of your outlook for job growth supply growth regulatory impact one way or the other I mean, if you had to sort of gauge which group of markets is going to have superior rent growth over the next three to five years again, taking all of those factors kind of in hand, we're.
Or do you sort of peg your core coastal.
Markets versus those expansion markets in that regard.
Yeah rich good question.
Im not sure were prepared ill call the lead horse just yet.
The.
The way I think about it as kind of the way you described in terms of looking at job growth supply growth all the macro factors.
We all consider and I think.
The reason, we're going into these markets as well.
While we certainly see more supply growth in these markets say in the 3% range for you to talk about it.
Denver Southeast, Florida, They also produce.
A lot more jobs.
We have benefited from much more significant in migration as opposed to the coastal markets, which is typically a benefit historically from immigration.
So I think when we look through it I mean at the end of the day when we look at our portfolio. We still expect a very significant portion of our portfolio to be in our sort of legacy coastal markets.
But for all the reasons that Ben talked about in his prepared remarks related to.
Where we see kind of knowledge based work is growing it's growing in our legacy markets. It's also growing in some of these mid cap knowledge markets, there's more supply for sure, but you definitely see the demand that more of the consumes that so I think the question is really to supply get maybe its too much in front of that and some of these sunbelt markets, where we've seen.
Significant robot significant growth.
10 months or has that come back in the check I think that will dictate how the rent growth equation comes out the cross expansion markets versus our coastal markets, but we believe in both and they may not grow at the same pace at the same time, we put over the long run we feel good about the rent growth that we'll see across the entire footprint.
Okay. That's helpful. And then maybe just a different twist on the.
The development question, but this isn't so much a question on inflation as it is.
The impact of labor and supply chain constraints on the timing of new deliveries, whether we're talking Avalon base projects or even competitive supply what what led.
What trends are you seeing in those factors.
Yeah, Hey, rich it's Matt.
<unk>.
It is I mean.
We have not yet seen.
Lack of availability.
Supply chain interfere with our ability to deliver.
Apartments, we haven't we've had spot issues here and there where right now we're struggling to get appliances in one asset and so it might delay deliveries by a month or so.
But we haven't seen seen it in a more widespread way, but there.
There is that potential I mean, there are certain commodities drywall is on allocation right now in some markets. So I think it has impacted the for sale.
Inventory and ability to deliver some I think for us, it's a place where we benefit a little bit by being our own general contractor and having.
Relationships with our subcontractors.
So I honestly the bigger constraint right now on getting units turned and delivered has been the local jurisdictions and their staff a lot of these jurisdictions are still remote and theyre down inspectors and you can't get people at Citi holiday print out the documents you need so.
I wouldn't be surprised if some of the stuff. That's in the pipeline takes a little longer to deliver for deals that you thought you might do.
<unk> eight.
<unk> eight quarters might take nine quarters, instead, so there could be a little bit of delay.
Delay over time on that.
And it might extend the supply some just more broadly.
Alright helpful. Thank you Matt.
And we will take our next question from Brad Heffern with RBC capital markets.
Hey, everyone.
Looking at slide nine it doesn't seem like you've seen some of the seasonal falloff that the other coastal names have the same chart for other people kind of peaks in August and it goes down in September and October I am curious if there is an underlying reason you can point to as to why that would be the case.
Yes, Brad good question.
I mean, it is correct.
We have seen a more modest seasonal adjustments.
We typically would experience historically, if you go back.
Two or three years kind of pre pandemic and kind of look at where September rents are relative to the peak ramp during the summer in the various regions, which each one piece at a slightly different time, but just call. It the middle of the summer.
And kind of where it comes out of September relative to this year historically, we see about a two 5% decline from peak to.
September averages this year, it's only about 90 basis points in terms of what we've seen in terms of that softness and asking rents, which ultimately impacts move them around so its about a third of what's normal.
And it's.
It's pretty widespread across our markets as it relates to the.
The seasonality being less than historical averages.
Hard to speak to the portfolio of our peers, specifically what may be impacting them, but certainly as we look at our portfolio. We feel good about the fact that.
The rate of decline has been far less than historical norms. So we'll see how it plays out as we get through the end of the year. It could be just timing differences among the different companies and it's really a submarket by Submarket issue that you have to look at so it's hard to decide for the others in terms of what their real conclusion is.
Okay got it thanks.
And then on the Opex Guide I was noticing that the third quarter was in line with the guide then and then the fourth or the fourth quarter Opex guidance is really quite low but the overall guidance went up I was curious if you could reconcile that was the original fourth quarter expectation that opex will be will be down and then theres just been pressures on top of that or any help there. Thanks.
Yes, I mean, there's a number of different factors kind of driving the timing from quarter to quarter.
Which is.
Kind of detailed roadmap.
Why don't I ask Jason to follow up with you on that one offline as opposed to getting into that gives me a lot of its timing of different projects and when they had.
What we expect turnover to be and various things like that to sort of come through leasing activities impact on bonuses as a lot of different things.
That number.
In terms of the quarter to quarter cadence.
Brian This is Kevin just to sort of reiterate we do expect same store opex to decline materially sequentially into the fourth quarter.
Okay. Thanks.
We will take our next question from John Neil Mehta with Goldman Sachs.
Hi, Good afternoon, everyone and Tim Let me extend my congratulations to you unemployment cardio and good luck on the next chapter.
So this is for the team.
We kind of think about potential interest rate hike or CE system.
Going into 2022.
Or do you think about the spread that you laid out in later slides between projected stabilized yields and total cost of capital I think you guys noted that it's about 210 bps and it's fairly wide.
How should we think about that spread in the event of a.
Higher cost of capital.
Matt I can start and others can chime in I'd say first and foremost, we try and lock in that spread by match funding.
So we're generally raising in sourcing the capital when we start jobs.
So that if there is a big change to the cost of capital.
You really need to think about the development yields are putting up relative to the capital that we funded those with.
And so that's why you see.
We're generally anywhere between 70% to 80% match funded when you look at kind of the remaining to spend and our development book against our cash on hand, and short term free cash flow.
So I think it probably starts there and then beyond that I guess you'd have to ask yourself why are rates rising and if rates are rising because it's an inflationary environment and NOI are also rising.
And then hopefully you can preserve most of that spread.
Anyway, if rates are rising because its a increase in real rates as opposed to nominal rates then that does put downward pressure on the margin.
John.
Of Chandni this Kevin just to maybe add to Matt's point I mean the largest.
Most relevant point with respect to the activities. We're doing is what Matt outlined which is we are substantially match funded against our investment commitments. When we start those developments. So at the moment. If you look at our current way of development, we are nearly 80% match funded.
But also importantly, you have to look at this look at from a holistic balance sheet perspective, when we are considering incremental investment opportunities and in that regard we are in terrific financial shape and have tremendous.
Financial Flex.
You seem to be substantially match funded on investment commitments that we've made from a liquidity point of view as you can tell from our <unk> three.
$300 million of it.
Cash on hand, and nothing drawn on our $1 $75 billion line of credit and then from a leverage point of view, we're five times against our targeted range for net debt to EBITDA of five to six times and our EBITDA is rising and so we have.
Increasing leverage capacity as well so when you kind of put that all together to the extent, we get into a moment, where there's a little bit of volatility in the capital markets.
We do have a lot of financial flexibility to choose a time in which we enter a market and try to choose when we source capital to those moments, where it's mostly practice up.
Altogether were terrific financial shape with respect to existing commitments and.
And we have a lot of flexibility to think about how we might finance, our future investment opportunities in a volatile and potentially rising rate environment.
And the last piece that I would add is just at the macro level, obviously interest rates can have an impact on asset values.
But also it will be very mindful of fund flows right, which you think about the correlation of asset values over time tend to be more correlated to asset values and so as we look out.
What we're seeing today and look out over the over the coming years, we expect fund flows into into the real asset space and particularly in the multifamily space to remain strong.
Thank you for that color mix makes a lot of sense.
Since.
My second question is slightly more housekeeping in nature.
Could you all provide an update on what percent of leases are receiving good session today.
And what that average concession is technology is looking like.
Sure happy to answer that as it relates to.
The third quarter about 10% of the new move in leases that we signed received a concession.
And the average concession was about two thirds of a month's rent for that 10% population of movement pieces.
Great. Thank you so much.
We will take our next question from John Pawlowski with Green Street.
Thanks, Sean I'm not sure. If you can glean this from your leasing data, but just curious about one aspect of renter behavior. So as the impacts of the pandemic fade or are you seeing any structural shift in the propensity to have roommates.
Good question John.
At the portfolio level, it has not changed materially.
Going through a covet has dipped a little bit which is something you might expect in terms of sort of recent quarter leasing activity.
Roommate that wanted to ask a follow up with you on I don't have that.
I'll stop my head.
But.
The overall percentage of the population with a roommate as of the third quarter I think it was down maybe 150 basis points from historical averages.
So not a material move but that doesn't mean that it hasnt changed in certain submarkets we have.
Heard about that a little bit, particularly in the context of major urban cities.
That our homes as significant University.
Where they've tried to sort of de densify dorms so to speak.
So there's not as many roommates in pushing people off the sort of market rate housing, which is helping to support demand in these markets.
But.
The specific nuances of last couple of quarters that have to circle back to you.
Okay.
I appreciate the details.
And the last question from me is a little bit longer term in nature about what's the right or whats the needed capital expenditure low to operate an apartment portfolio. So in the near term obviously had supply issues.
A little bit longer term regulatory issues.
Balcony inspections in California Green emission you go down the list, but the direct question is do you think there is a step change coming in the capital expenditures need that needed to operate an apartment portfolio.
Yeah. Good question I can take some of that and then there is some ESG things that Matt can talk about the.
Essentially out there on the horizon.
In the context of the regulatory environment there are definitely some.
Some issues I wouldn't call it really.
Broad based John that are sort of getting into how we operate buildings that have always been issues about.
Checking things in New York City as an example.
In terms of the facade inspections and stuff like that that's ongoing.
The balcony issue in California has come at some expense, but mainly it's an inspection issue.
That was originally pushed by the unions.
So yes people are spending a little bit of money on inspections, but it's not clear that there is a mandate that you have to do X y or Z repairs within a very short timeframe. So over a longer period of time. It may move the needle a little bit but at least based on what's out there today.
As it relates to physical inspections and ongoing.
Remediation I wouldn't expect it to be a big driver probably the bigger issues are more on the construction side as it relates to some of the green things that may come through.
ESG efforts that are sort of a broader envelope of other things that are coming through our various jurisdictions.
Yes, John it's Matt I'll, just add to that.
I think thats right.
Honestly, if you look back over the last five or 10 years, probably the thing that's driving up Capex more is just that we're putting more into these buildings. The amenities are a lot more.
And when it comes time to redo those it's a little more expensive.
Going forward, it's an interesting question.
You could make an argument that.
As the regulatory load increases it may be an advantage for institutional owners like ourselves, who have better capacity to manage that and deal with it and some of the smaller private owners. So over time it might contribute to more consolidation in our space, which is incredibly fragmented.
We certainly are trying to manage on an asset by asset basis.
Our capex exposure and it's one of the thing that informs our kind of asset trading strategy.
All the things we've been really pleased by our ability to sell assets that are 30 years old that have.
Definitely significantly more capex liability embedded in them.
Likely the same cap rates is buying almost brand new assets.
That definitely informs our strategy on margin John.
John last quarter, we spent time talking to R&D, our new concept called Konzo right, which is targeted to a customer segment, who we don't believe places a lot of value right on those additional amenities, but theres definitely aspects there in terms of go forward.
Front end go forward operating expenses right that provide benefits from the <unk>.
Growth opportunity with that brand.
Okay.
So all the comments.
We will take our next question from John Kim with BMO.
Hi, Thanks for taking my question.
<unk> clients and John Kim.
Just a question on dispositions like Randy relocated this quarter.
And then just moving forward.
Are you looking at kind of trimmed exploration.
Sure This is Matt.
I can't speak to that a little bit. So we didn't actually close anything this past quarter, we closed a number of dispositions in the second quarter, but as Ben mentioned, we have.
About $300 million that we expect to close here in the fourth quarter all of that is in the northeast.
Which is where we have been heavily over indexed in terms of our disposition activity.
Years ago.
We sold a significant chunk in New York City into a joint venture and then we've been balancing that out the last couple of years with more dispositions in the New York suburbs and a lot of that is just driven by our overall portfolio allocation given that we have a pretty deep development pipeline and in many of those kind of suburban New York areas as well so as we look forward.
We're going to look to continue to rotate capital out of our coastal regions into these expansion markets.
And it will probably continue to be a little bit disproportionately in New York other parts of the northeast.
And maybe over time in the mid Atlantic and a little bit in California as well.
Okay. Thanks, I appreciate the time.
And kind of moving to southern California.
It doesn't appear to be sophomore seasonal kind of like your other markets are and how sustainable do you think.
Yes. Good question it hasnt softened as much as we've seen a little bit of softness it's hard to tell on that chart.
But it has been the market is currently less than historical norms.
And I mentioned, there is a number of reasons not out there I mean, it's been a pretty robust market in terms of job growth the last six months.
A lot of the travel entertainment.
<unk> business is coming back online the content producers.
The media space had been on overdrive producing content.
So the market has had a pretty robust recovery so.
How long that is sustainable.
See how things kind of play out next year as it relates to all the macro variables that we think about but the outlook for southern California is pretty healthy given.
Very low expected volume of multifamily supply next year, the lowest of any of our coastal markets.
Pretty healthy job growth and a very tight for sale market both for rent and for sale. So there are a number of reasons why the general outlook for Southern California is pretty good.
Okay. Thank you.
And my last question was around the kimco product.
Do you see more opportunities develop.
Do you think it's going to be harder to ask a question.
Versus your typical product with more amenities.
Hi, This is Matt.
Certainly out there looking for opportunities to grow the console brand again, our market research would indicate that there is a large untapped segment of customers that are looking for what <unk> offers so I do think theres, a great opportunity out there.
It's going to take us a little time to get at it but we're very focused on it.
In terms of future rent growth.
I mean, I don't see any reason to think that it would rent growth in console product would be materially different than the sub market to which its apart maybe it's a little less exposed to new supply because its competing at a little bit lower price point and typically we found that the more modest price points have a little more rent growth kind of over a full cycle. So.
We think that it should be well positioned both for initial return and for long term growth.
Just to add onto that maybe one other comment.
Based on what we've seen Etsy test community of the constant community. We have today rent to income ratios ratios are pretty similar to our.
Portfolio and the suburban Maryland market and so if you think about if you get equivalent rent grow higher.
Higher margins because you don't have the same operating cost at the same ultimate capex costs as well NOI growth could potentially be even stronger to the extent of similar rent growth.
Okay. Thank you so much.
We will take our next question from Austin <unk> with Keybanc.
Great. Thank you.
There's been a lot of discussion this quarter around the embedded loss to lease across portfolios and the benefit is you're able to capture that mark to market, but you guys highlighted the fact that in the presentation that rents are 7% above pre Dan pre pandemic levels across the portfolio are up around three 5%.
For the past couple of years.
So do you think as we kind of get through to the back half of next year that pricing power. It could then exceed the inflationary level given some of the positive variables that you identified like the strong single family housing market personal income growth and then the fact that rent income ratios arent overly stretched today.
Yes, I mean, if the key point is is there room beyond the existing loss to lease I mean, the macro environment is such that.
There is good pricing power.
And as Ben pointed out in his prepared remarks are still a number of things out there.
From a macro standpoint that should continue to benefit rental demand.
And both our urban and suburban Submarkets I think if you think about it.
That 7% is kind of a blended number.
But as you pointed out in the urban Submarkets, it's still trending is slightly below 2019 levels.
Urban occupancy rates and job centre suburban occupancy rates.
Officers are still very low.
<unk> been picking up which is great and we're starting to see signs of that in terms of people moving back into the cities that we're we're still a long ways to go in terms of full recovery. So should there be incremental pricing power beyond what we've experienced in our portfolio is all of those macro factors have been alluded to.
Start to come together.
The answer is yes.
Obviously, if we see some reversal may impact certain markets differently.
So one of our expansion markets is southeast, Florida as an example, and when you look at where the loss of leases relative to historical norms.
On a long term trend lines is it well above historical norms, yes. So we're going to be buyers. There are developers there, but we're going to be careful about the pets, we place might some of that revert back to New York and that case Youll see a little more softness there yes.
So those are the types of things that we talk about but at a macro level. There is reason to be optimistic for sure.
That's helpful. Thank you and then Kevin just last quarter, you had rank kind of the most attractive source of proceeds and with debt and dispositions I think we are at the top of the list in here recently, you dusted off the continuous equity program with those small issuance any change in the preference or ranking today and willingness to use equity.
As you think about growing the development pipeline over the next year.
Hey, Austin, yes, so.
It Hasnt changed tremendously I guess, probably if we had the heat map out right now and looked at things.
Probably asset sales would be at the top pretty close to about the 100% tell when you look at the.
The historical precedent for that source of capital.
Particularly so for suburban asset sales, so that would still be our most attractive source of capital but.
It would be followed pretty closely by unsecured debt, which would probably be in the mid to high 90, 95 percentile at 95% all in.
<unk> common equity would be not far behind pretty much in that kind of 90% to 95% health. We had again if you if we had the heat map in front of us.
The broader message today is similar to the one that.
I still to a quarter ago, which is.
Each of our three primary markets for capital asset sales and unsecured debt and common equity are attractively priced and they're open and they're available to support.
Funding, our investment activity on accretive basis.
And so.
When you look at what we've raised to date $1 4 billion.
It's been primarily a mix of asset sales and unsecured debt. There has as you noted it's been a little bit of common equity issuance, but only $30 million so call it 2% of the overall mix give or take.
And so I think where we stand today obviously.
It's a phenomenal position we're in right now from a financial flexibility standpoint, given where the balance sheet is positioned as I mentioned, a moment ago and where.
Pricing stands in the capital markets today, obviously, we really can't comment about what we might do in the future for the obvious reasons that the capital market conditions can change and our investment uses Ken as well.
But certainly we're in a position to tap all of those sources accretively on a leveraged neutral basis to try to.
To drive the business forward and drive NAV and earnings earnings growth.
Rising EBIT as I mentioned before there is that we are increasing capacity to issue debt.
To do so as well so.
Maybe I'll just stop there and say that's a luxury being.
Being in the situation, we can look at all those choices and its a good time for us to be able to drive the business forward and via.
Before we're facing in terms of the investment markets.
Thank you very much.
We will take our next question from Rich Anderson with SMB.
Thanks, everybody and Tim Congrats.
The leadership at Avalonbay has kind of been a constant in no small part of that so good luck in the future.
The first question for me is on Northern California.
<unk> thinks that's going to be the best growth story in their portfolio in 2022 part of that is tech.
Turning their employees back to the office next year and I know that was mentioned earlier in this call, but how impactful is that into your thought process towards northern California for next year, I know youre, not providing any 2022 color, but isn't at least possible that northern California could snapback in a way that it could be the leader in your portfolio in 2022.
Yeah rich good question.
I think one way to think about that as the potential opportunity. There just given that it is one of the markets or is the market that has not yet recovered to kind of pre COVID-19 levels.
So if you look at it and judge it just by what is left to come if you believe that all markets would revert back to their pre COVID-19 levels and continues to grow.
That is the region that has the most to rebound if you want to describe it that way so to the extent you see demand come back.
With that.
<unk> supports that then is certainly can be a leading market as you move into 'twenty two and beyond.
You have to move through the lease explorations to capture the benefit but you could certainly see a more meaningful acceleration based on where it's positioned today in terms of rents versus peak as compared to the rest of the portfolio.
Okay, Great and then second question is on the expansion markets.
Quite clear why Youre doing it and no argument there, but as it relates to how it impacts the stock.
<unk> of the 15 development projects are in your kind of core gateway markets. So.
Assuming.
You won't no matter what happens the market wont associate Avalon Bay with the Sunbelt until you kind of have a reasonable amount of your business in those markets relatively speaking so with that in mind, what what's the timeline do you think where you get like a 5% ish type number in each of those expansion markets where.
You're at 25% or 30% of the total portfolio.
Outside of the core gateway markets and you really have yourself tethered to what might happen in the sunbelt.
As it relates to stock performance I should say.
Hey, Rich this is Ben.
I would guide you towards our experience in southeast, Florida, and Denver as a decent decent proxy right. So we put out a target of each of those being 5%.
We're at a point now with our teams on the ground with those franchises building, where we are starting to see some accelerated activity right.
And increasingly our own development.
So as we think about the new four expansion markets.
Probably on a similar type of process or growth just to Orient, everyone. It's acquisitions, which obviously you can get to the quickest. So it's our own development and we do have resources on the ground in each of these markets spending time developing the relationships, they're going to be necessary to unlock that land and then the third vehicle.
As through the funding of other developers.
It's been an approach we've been utilizing.
And Denver, and southeast, Florida that will be one of our first projects in North Carolina will be of that approach and a lever that we expect to pull sort of balance the sum.
Getting some of that development profit maybe not the full development profit if we were executing our own but working with people who have sites that are entitled and ready to go.
Okay, great. Thanks very much.
We will take our next question from Alexander Goldfarb with Piper Sandler.
Hey, good afternoon.
And congrats Tim hopefully it means more golf and your future and also want to say.
Congrats to Bill Mclaughlin your development had on his retirement as well so certainly talking about ramping up development Bill has been responsible for a lot of that so congrats two questions. There first on the development part you guys do not trend your rent so that when you guys have in your development page your five 9% yield that's based on.
Escalated costs, but rents as they are as you guys underwrite new projects given how rents have grown do you expect the yields that.
That we see in the supplemental to come up meaning our rents outpacing the cost of construction.
Timing delays et cetera, where we will start to see higher yields in the supplemental or we're not yet there yet.
Yeah, Hey, Alex it's Matt.
So youre right. We when we started job it's based on today's rents and today's cost and we basically locked in a good amount of the costs. When we start the job. So we have an excellent track record of delivering on the cost side.
So what you see is and then we don't remark the rents to market until we have 20% leased give or take so the rents will kind of stay where they are for the first year, plus and then we will market to market and so.
The materials that was shown earlier, we've been talking about how our rents are running 170, <unk> hundred $8 above pro forma that's based on those six jobs, which are now coming to market. So the first thing is.
There is jobs that are on that schedule that were started 12 or 18 months ago.
But have not yet been mark to market. So there should be some lift out of those and again, that's what we're seeing on that basket that we have currently in lease up they're beating pro forma by 30 to 40 basis points on the yield on the deals that haven't yet started.
What we're finding is that.
The greater rent and NOI definitely helps the higher costs hard.
And it falls through to land value pretty darn quickly and it's a very competitive market in terms of there's a lot of merchant builders out there and.
Where where it all takes your yield.
New business, we're signing up today, reflecting today's rents is in that kind of mid to high fives yield that I mentioned.
So.
Where those yields settle out when you actually start the job in a year or two.
It's about what will grow faster from this point.
Kind of rents are costs, but I feel pretty good that that kind of mid to high fives is probably a pretty consistent number you can see for a while.
Okay and then the second question is in your expansion markets like in Dallas.
Dallas I think your entry is out towards Grapevine area.
And at $2 75, a door would suggest pretty.
Pretty efficient pricing Charlotte it sounds like it's a little bit more infill at $3 50, or so but based on your experience in the coastal markets and then looking at companies like a mid America in the Sunbelt is your sunbelt focus more on the outer rings or do you think that you will.
Target infill.
I think it's a little bit of both Alex I mean, ultimately will have.
A diversified portfolio some of it is where we want to buy versus where we want to build so if you look at what we've done in Denver. The assets, we bought have tended to be more of the garden assets on the perimeter and where we're developing we have a deal and right. Now we just started deal in Westminster, which is kind of a second ring suburb, but we have a deal that will start here.
Shortly in the city of Denver So.
We're trying to balance out the development, which tends to be at the higher price point with particularly in the sunbelt markets, where historically over time more of the rent growth probably has come in more of the moderate price point. So we are more focused on acquisitions that are younger assets, but not necessarily.
The downtown $3 50, a foot type brands.
So we like the position the Charlotte acquisition was a little bit different just because there is an opportunity to pick up in AR.
Three community portfolio in the South end, which is an incredibly dynamic.
Part of Charlotte, where Theres, just tremendous amounts of growth retail employment as well as residential but I think the great buying or the flower mound acquisition that you referenced is probably more in keeping with what we bought in Denver, and what we've mostly been buying in Florida, and where we're looking.
Okay. Thank you.
And we'll take our next question from Hunter Keay with.
With Mizuho.
Hey, good afternoon, Thanks for taking my question.
Tim also it's been a pleasure and good luck on the next phase of your career.
My question here is on.
On the technology platform and how you feel that can help you manage some of the <unk>.
Healthier controllable expenses.
Given the inflation.
So we're seeing a call.
Just about every aspect of life here, but maybe you can make some comments on that.
The benefits that you outlined the $25 million to $30 million.
The next few years, what's the key drivers there.
And some of the core assumptions.
Yeah.
Yes. Good question as it relates to technology, and just sort of the inflation most of what we're focused on relates to in simple terms kind of sizing the business.
Creating a more self serve model for customers.
Which.
Just so you know they have expressed the desire for that a continuing desire for that to be able to self serve like to do with any other major brands.
Across the country and I would say that for the most part the impact on the P&L. It will show up predominantly in payroll.
Probably a little bit in R&M, just in terms of the efficiency of in source and outsource activity, but a lot of the things that we're doing relate to digital digitizing the application lease.
<unk> process as an example that a customer can self serve and complete that entire process and move into a community without ever talking to anyone who's at Avalon Bay staff member.
Avalon Bay staff may be available on our centralized call center or other locations regionally to be able to support that activity, but to the extent that they would like to do it on a self serve basis. They can the same thing applies to the maintenance activity lease renewals and then what we call. The live journey, which is all the interactions that a customer has with us.
When they live with us and that relates to all kinds of different things get into about transferring department, adding a pad, adding a roommate et cetera et cetera.
Most of it is focused on digitizing the business the second piece of it.
It's really around data science, and leveraging data science to make different decisions related to a number of different aspects of the business.
One use case mentioned.
<unk> mentioned, specifically as lease renewals and the more we know about customer behavior.
So those things will help us.
Choice to customers and also try to optimize the renewal capture in terms of the process, but also the renewal value in terms of.
At what rent they renew with us and for what duration. So theres lots of data science world that will be coming to fruition as well, but the heavy emphasis as it relates to the benefit that Ben mentioned is on the digitization of the business and the various processes that are related to customer interactions.
And most of that benefit will show up via payroll.
Got it got it I appreciate that and then.
Incremental investments.
That platform from here the money that's.
It's been spent or how much more.
Looking at in terms of the Macquarie investment.
Yes, the total investment we expect for the activities at least that we are sized up for the next two to three years.
This is an incremental roughly $20 million to $25 million.
We've incurred some cost today about 7 million Bucks.
As it relates to our automated leasing agent and various other things that are very resulted in.
About an 18% reduction in the frontline sales staff.
At our communities, which is flowing through payroll.
But going forward there is still some investment to come.
Got it got it.
One last one if I could on the rental assistant payments year to date I. Appreciate the color you guys provided there I'm curious what's left in that receivables bucket, what's the remaining opportunity for say next next year and how much has been reserved against that.
<unk>, maybe I'll start and Sean may want to jump in in terms of the rent relief payments that we received as you can tell on the same store portfolio received $11 million in the third quarter.
It's obviously a difficult line item to predict certainly is true as Sean pointed out in his opening remarks that.
Nationwide. There is $47 billion has been approved in less than a quarter of that has been distributed nationwide. So.
And we certainly have done an awful lot to apply for more proceeds or more proceeds from the various.
Governmental agencies that are involved in that and so to have our residents. It is hard to predict with great precision when it's going to come in for.
For 2022 for example, but for and even for the fourth quarter of 'twenty, one but for purposes of guidance. What we have assumed in the fourth quarter in terms of incremental rent relief payments that we'll receive in the fourth quarter, we've assumed about $12 million in our same store portfolio.
Yes, I can add onto that.
Sterling, Kevin can address the kind of gross versus net receivables and what the total pot is but just to provide a little color on what we've received.
Out of the funds we received about one third of it relates to applications that we submitted on behalf of the resident in jurisdictions, where we're allowed to do so about two thirds of it has showed up via resident applications, where we have had no knowledge of the applications submitted by the resident until we were notified by the jurisdiction that they were at.
Proved for payment and payment would be trends.
In terms of.
The percentage that we've received relative to what we've applied for again, what we can apply for independent of what the resume of applied for we've only received about 30% of the total pot that we have applied for we have applied for rough numbers about $24 million in rent relief.
And we've only received about $6 $5 million or so to date.
So to the extent that we recovered most of that is a pretty significant opportunity to datacom.
Independent of what we may receive from gross volume from either current residents who remain occupied in units, but not paying or in some jurisdictions, where we're allowed to recover it payment.
Payments associated with residents that have left us, but left outstanding balances. So there is still a part there to come it is hard to determine exactly what may come through resident applications again, because of the limited line of sight on those applications being submitted in process.
Understood I appreciate it.
Thank you again.
As a reminder to ask a question. Please press star one this will be your last chance to enter the queue.
We will take our next question from Alex Comer with Zelman and associates.
Alright, Thank you for taking the question.
Given the 210 basis point spread between the.
Your development yields and cap rates that are very low and that's despite the cost inflation.
And sourcing is very very favorable what's your sort of medium term outlook on the supply.
Notwithstanding the timing of specific markets, how that plays out it.
It seems like development is clearly winning out in this market and can create some some supply down the line.
Yes, as it relates to total supply. This is Sean I can touch on that in terms of our markets.
Our supply of expectation for 2021 has come down from the beginning of the year.
As a result of various things whether it's some of the supply chain issues that describe.
<unk> local jurisdictions as it relates to inspections and such.
Et cetera, but we expect 2021 to land at roughly about one 7% of stock in terms of deliveries and based on what we can see in 2022, probably is going to be relatively similar.
There'll be a couple of regions, where we expect a little bit of increased supply and that includes the New York New Jersey regions.
Some stuff in New York City Thats pushed into next year as an example.
We also expect an uptick in Seattle, there's been pretty heavy volume under construction.
Some of that has been delayed and pushed into 2022.
Markets that will be relatively flat include probably the mid Atlantic and southeast, Florida, just based on surplus working its way through and then we do expect to see that decline in supply in Boston, Northern and Southern California, and Denver, just based on what we can see working its way through the construction process.
And the various delays so that's the lineup as it relates to overall supply and again keep in mind that a heavy.
Fluids on the supply side here is an urban submarkets.
And then kind of looking out over the course of the next year, we still expect about 100 basis points spread between.
Stock has delivered an urban environment as compared to suburban suburban getting down potentially into the 131, 4% of stock next year versus 240 to 250 basis points in the urban Submarkets. So there is a distinction there.
Alex Let me just add to that it's Matt.
You're talking longer term I think what we're.
<unk> is to your point about the dynamic of the spread developments a very profitable business.
Supply tends to respond more quickly in the sunbelt markets than in our coastal markets. So you have seen this year starts nationally are up but in our markets. They are actually kind of level or a little bit down so.
That is one of the factors.
Okay.
And supply can respond more quickly in urban and suburban submarkets in our footprint because of the supply the regulatory supply constraints are definitely more meaningful in the suburbs in the urban areas.
So across our coastal regions, what I'd say is development in the urban Submarkets doesn't doesn't work today and so youre seeing very very little urban starts.
Because the rents there are not above their prior peak for the most part as Sean had mentioned and costs are up.
So my guess is youll see a relatively muted supply response in our urban markets. Once we get beyond the stuff. That's currently underway.
As you look out two or three years, <unk>, probably a little bit more slow and steady, but I think the response the supply response to the favorable economics is going to be more aggressive in the sunbelt.
Sure.
Really appreciate the color. Thank you.
Earlier today.
<unk> about.
The potential cost inflation in labor pressures driving some problems in lease up for some developers.
Does this seem like a reasonable expectation.
For potential opportunities to take over struggling lease ups in the future.
For acquisitions.
We havent heard that I mean, we haven't seen any lease ups, having particular issues.
<unk> seen assets being sold during lease up just people trying to take advantage of the incredibly robust asset sales market, but.
And frankly, not at discounts that to us where all that compelling relative to buying stabilized assets.
I appreciate it thank you very much.
Yeah.
And we'll take our next question from Joshua <unk> with Bank of America.
Yes, hey, everyone.
I had a question on many year, Northern California strategy going into the fall winter months it seems like.
Softening starting in August.
The delay in the return to office.
Sounds like a lot of people push it back to January <unk>.
Do you think we might see a turn higher as we get closer to January one.
How are you guys thinking about that.
Josh just to be clear when you say turn high are you thinking about occupancy ramp is kind of the overall fundamentals.
Yes, I guess I'm looking at slide 10 of your presentation so that.
Whether it'll be focused on.
Yes, so I mean as it relates to northern Cal in general.
Goodbye my earlier comments or reflect a view that.
Particularly in these <unk>.
Tech markets that are highly concentrated job centers like San Francisco, and San Jose to some degree as well for us.
The.
We turned off as delays certainly had an impact.
We are starting to see people come back to those environments, we had an uptick in.
People moving into San Francisco, and San Jose from more than 150 miles away in Q3.
Compared to not only last year of course, but it's stabilized here. So we're starting to see some movement just maybe not as much as I think we all would have anticipated post labor day.
Delta kicked in and kind of created the issues. So.
Is it likely that.
San Francisco as an example, which probably has one of the lowest office.
Usage rates in the country will come back more strongly early next year as people come back to work I think the answer is yes question is the pace at which that occurs.
And the flexibility of the people are provided as it relates to work from anywhere.
Based on what we understand and try and track that as best we can most of the work from home policies that have been adopted people, Mike live maybe slightly further out or something but they still need to be within a reasonable commuting distance of their office to be in there two to three days a week, depending on the company and therefore given the.
Traffic in the.
Commuting patterns in a place like northern California people are there going to be within the MSA.
That they work in as opposed to someplace US three hour drive away. So we would expect it to come back.
And again, the pace really will be dictated by the work from home policies based on what we see in vaccination trends the vaccination requirements coming out.
And already seeing the uptick in people coming back to those markets. It's just a matter of degree as we move into 2022.
Okay. Appreciate that color that's it for me. Thank you.
Okay.
There are no further questions at this time I would like to turn the conference back to Mr. Tim Naughton for any closing remarks.
Thank you Casey and thanks to everyone for being on the call today I know we've been at it for a while here.
Look forward to seeing or talking to you at least virtually at NAREIT here in a couple of weeks.
So why the rest of your day. Thank you.
That concludes our presentation. Thank you for your participation you may now disconnect.
Yes.
Okay.
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