Q4 2021 Avalonbay Communities Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Avalonbay communities fourth 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.
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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 Anita and welcome to Avalonbay communities fourth quarter 2021 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 from 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.
Catherine is also available on our website at Www Dot Avalon Bay Dotcom Ford Flash 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 Ben Shaw, CEO and President of Avalon Bay communities.
Yep.
Thank you, Jason and thank you to everyone for joining us on the call today and for your engagement, Kevin Matt Shawn and I will provide some initial commentary and then we will open the session up for questions.
I'm going to start by thanking the AVB Associate base 3000 strong for all their contributions throughout 2021.
Thanks to your commitment we produced strong business results and embarked on our next phase of growth by ramping up our development and investment activity all while navigating the challenges presented by the pandemic. Thank.
Thank you, especially to everyone working on site at our communities and construction projects enter our human resource teams for all you do to support each other and serve prospects and residents and build for our future.
Turning to the presentation slide four provides a summary of our success and strong finish to 2021.
On the operating side in the fourth quarter, we delivered a 12, 4% increase in core <unk> and a four 7% increase in same store revenue.
On a cash basis same store revenue increased eight 3%.
This momentum continues in the new year as we build on our strong operating foundation with healthy occupancy levels low resident turnover and strong embedded revenue growth.
We also successfully ramped our investment activity in 2021, with almost 2 billion of new development starts and acquisitions and with the bulk of this capital funded by dispositions and incremental debt financing at historically low cost of capital.
And then otherwise low yielding environment, our development capabilities allow us to generate significant value and meaningful incremental NOI growth on top of the internal growth generated by our operating portfolio.
As shown on slide five we completed $1 1 billion of projects in 2021, with an expected 65 million of new NOI upon stabilization.
At a development yield of 6% and with 230 basis points spread to an estimated market cap rate of three 7%. These communities have created $650 million in value.
It's a very robust 60% value creation margin.
As Matt will describe further we expect to start an additional billions of billions to 50 of development projects. This year are projected yields of five 5% to 6% and we control a growing development rights pipeline, which will set the stage for continued accretion and value creation from our development platform for many years to come.
As we continue to invest and grow we're also optimizing the earnings growth and long term.
Yeah.
A large component of this optimization is the selling of older assets with slower growth profiles and redeploying that capital into our expansion markets.
During 2021 as highlighted on slide six this led to our acquisition of $725 million of assets with an average age of three years at a three 8% cap rate and the disposition of $865 million of assets with an average age of 26 years at a three 7% cap rate.
The bulk of our acquisitions were and will continue to be in our expansion markets, which overtime across southeast, Florida, and Denver, Austin, Dallas, Charlotte and Raleigh, Durham, we see as having the potential to grow to become 20% to 25% of our portfolio through a combination of development and acquisitions.
These expansion market share many of the same characteristics as our established markets.
Including concentrations of knowledge based workers and strong housing fundamentals.
They also provide portfolio diversification and increased exposure to longer term population shifts.
Most of our portfolio and new development capital in the long term will be in our established markets, where we have a high quality portfolio of assets situated in regions that we believe will continue to thrive as vibrant centers of innovation education technology, and with strong job and income profiles and in regions, where we continue to leverage our long tenure.
With some of the strongest operating and development teams in the multifamily industry.
Turning to slide seven we continue to make significant investments in technology and innovation as we evolve our operating platform in order to provide enhanced value to prospects and residents, while achieving operating efficiencies and driving new sources of revenue.
We generated approximately $10 million of incremental NOI from our initiatives already deployed and are about one third of the way to delivering our target of 200 basis points of margin improvement or 40% to $50 million of NOI to the bottom line.
Finally, I want to emphasize our continued investment in our people and our leadership in ESG.
<unk> with ESG, our goal is to keep Avalon Bay on the forefront as a leader in sustainability and corporate responsibility.
In an area of increasing importance for all residents associates and investors.
As an output of this corporate leadership, we've been recognized by various entities as ESG leaders as shown on slide eight including the NAREIT leader in the Light award as the top ranked multifamily REIT for ESG leadership.
And most importantly, we continue to invest in our people and our culture Avalon Bay is an amazing place because of its people and we are extremely focused on fostering an inclusive and diverse culture that attracts retains and provides growth opportunities to our people.
We're excited for the year ahead are fortunate to have a deeply dedicated team of associates and we entered the year with our foot forward and in growth mode with that I'll turn it to Shawn to talk further about our operating results and tailwind heading into 2022.
Alright, Thanks Pat.
What I would share a few slides on recent portfolio rent trends.
So overall and across different markets and Submarkets.
Starting on slide nine 2021 was a pretty unique year in.
In the first half of the year, we experienced not only a significant recovery in our business, but the average move in rent it grow fast enough to exceed pre COVID-19 peak rent levels by mid year.
In the second half of the year, the combination of lower turnover, which was down 20% year over year.
11% below pre COVID-19 levels and the lowest we've seen in 10 years.
Along with healthy demand resulted in rents defined seasonal norms by growing into September and then flattening and through year end historically.
Historically, we'd see rental rates peak in July and August and then declined in the low single digit single digit percentage range through year end.
As represented by the dashed line for 2019.
For the calendar year 2021, the portfolio average move in rate grew by 23% and at year end exceeded 2019 levels by about 9%.
Moving to slide 10 improved performance has been broad based with every region experienced a significant increase in average move in rent over the past year.
They always move it ran in new England increased by 30% during 2021, the highest of our established regions ended the year about 10% above pre COVID-19 levels.
<unk> performance in Boston has been supported by healthy job growth across various industries, most notably biotech and reduced apartment deliveries in both urban and suburban submarkets.
In addition for our region is typically more seasonal given the weather patterns, it's quite unusual to see rents flatten out in the last quarter of the year versus decline that's a sign of a pretty strong market.
In Southern California, the average move move in rent grew by 23% during 2021 at year end was 21% above 2019 levels to highest of our established regions.
Performance has been supported by solid job growth, particularly in the content producing sector of the economy in L. A the lowest level of new multifamily supply of any of our regions at one 1% of stock at a very tight single family market.
At the other end of the spectrum and Northern California continue to lag the portfolio did a major tech employers delaying their return to the office impacting the reopening of other businesses and the general quality of life in the region.
Well the average move in rent increased by 15% during 2021 at year end it was still roughly 7% below pre COVID-19 levels.
While the region has lagged in the recovery, we could see a very meaningful increase in move in rents in 2022, when a greater percentage of the workforce, particularly the tech segments that have experienced very robust wage increases the past couple of years.
Back to the office.
The mid Atlantic, New York, New Jersey, and Pacific Northwest regions, All delivered a 20% to 25% increase in average move in rent during 2021.
The mid Atlantic into the year with rents that were about 5% above 2019 levels.
While the Pacific Northwest and New York, New Jersey regions were trending at roughly 10% ahead of 2019 levels.
Turning to slide 11 to address suburban and urban performance trends the average move in rent for our suburban portfolio increased by roughly 20% during 2021 and was approximately 13% above 2019 levels at year end.
And our urban portfolio, while the average move in rate increased almost 30%. During 2021. It was essentially a 2019 levels by the end of the year.
Urban markets with rent still below 2019 levels include San Francisco at about 17%.
In Washington D C a roughly 3%.
In contrast rents in New York City are currently about 4% above 2019 levels.
Without this utilization rates in the high teens in the San Francisco Metro area and low to mid 20% range in both New York City, and Washington D. C. We should continue to see a meaningful improvement in demand in our urban submarkets as a greater percentage of the workforce is called back to the office.
We've seen increasing signs of that demand returning in Q4, our urban portfolio experienced about a 30% increase in the share of move ins from more than 150 miles away as compared to pre COVID-19 norms and.
In markets like New York City, and San Francisco, the share of move ins from greater than a 150 miles away increased by roughly 50% compared to historical norms.
Similar along just to move ins are incurring in our suburban portfolio as well, but the increase share is more like in the 20% range.
And finally moving to slide 12, the improvement in rent levels has translated into strong like term effective rent change.
We averaged 11% rent change in Q4 2021 without.
With October and November in the high 10% range, followed by December at roughly 11, 5%.
The positive momentum continued into January with rent change of roughly 12, 5% importantly, we experienced a meaningful increase of rent change across six of our eight regions in January .
And overall, we're starting the year from a position of strength January occupancy averaged 96, 4% asking rents have increased one 5% since the first of the year and we're seeing early signs of continued low turnover and in an environment with very healthy rent increases.
With that operating summary, I'll turn it to Kevin to address our full outlook for 2022, Kevin Thanks, Sean turning to 2022.
Fundamentals in our established markets remain highly attractive on.
On Slide 13, we show just how strong they are by providing data on some key trends.
Including strong job and wage growth for the professional services sector, which includes our target renters.
The opportunity for further gains in office utilization from today's low levels.
Rising single family home prices, which support rental demand and a relatively stable outlook for new apartment deliveries in our markets.
On slide 14, we provide our financial outlook for 2022.
For the year, we expect robust growth from both our same store portfolio and from stabilizing development to drive nearly 16% growth in core <unk> per share at the midpoint of our guidance of $9 55.
And our same store residential portfolio, we expect a continued rebound from the pandemic in our urban markets and continued economic momentum across our entire portfolio.
Using the midpoint of guidance, we project same store residential revenue will increase by 8.25% based on growth in our urban portfolio in the low 10% range and growth in our suburban portfolio in the low to mid 7% range.
We project same store residential operating expenses will increase by four and three quarters percent.
Primarily due to cost pressure in a couple of categories initiatives being deployed and some one time benefits in 2021 that are not present in 2022.
As for cost pressure, we're experiencing this primarily in two areas.
First and utilities as a result of very favorable supply contracts for commodities that expired late last year.
Second and property taxes, resulting from successful appeals in the prior year period, and the exploration of certain pilot programs in New York, which will burn off over the next few years.
At the same time allow us to exit rent stabilization and achieved full market rents on most of those committees overtime.
Among our various initiatives, we started to deploy our bulk internet smart access offering.
Which will create a year over year expense headwind of about 50 basis points in 2022.
But as part of our strategy to deliver a net profit of more than $30 million. When this has stabilized over the next few years.
And lastly, we realized some one time benefits in 2021, including a payroll tax credit in Q4.
Creating about a 30 basis point headwind to opex growth in 2022.
As a result, we expect same store residential net operating income will increase by 10% in 2022.
For development, we expect to continue to generate earnings in any of the growth from stabilizing developments and to continue investing heavily in this differentiated capability as you can see here on this slide.
For our capital plan, we project external capital sources of above $900 million.
From asset sales park, loggia sale activity and capital markets activity.
For our capital uses we expect to deploy about $1 $2 billion towards development redevelopment and debt maturities in 2022.
Finally in our earnings release, we are also providing earnings guidance for Q1.
Which at the midpoint, we project core Fad per share of $2 20 in the first quarter were about <unk> <unk> lower than in Q4.
This sequential earnings decline is driven by several items, including Opex increases in utilities property taxes and payroll, including the previously mentioned payroll tax credit in Q4.
Overhead increases due to compensation adjustments and strategic initiatives and NOI decreases from net disposition activity in Q4.
On slide 15, we illustrate the components of our expected 15, 6% growth in core <unk> per share.
Most of our growth.
<unk> of $1 <unk> per share is expected to come from NOI growth and our same store and redevelopment portfolios.
About a third of our earnings growth or <unk> 44 per share is due to NOI from investment activity, which in turn is primarily from development.
Modestly offsetting these sources of growth as a combined increase of about <unk> 17 per share from capital markets activity and increases in overhead.
On slide 16, we show the key components driving our expected EBIT quarter overall increase in same store residential revenue, including our expectation for a strong increase in lease rates sustainable impact from a lower level of amortized in newly granted concessions.
An increase in other rental revenue and a modest improvement in underlying uncollectable lease revenue, which we expect will remain elevated in the first half of 2022 before slowly improving in the second half of the year.
However, we are assuming a year over year reduction of $18 million and recognize rent relief collections from the emergency rental assistance program, which results in about a 90 basis point headwind to our projected full year residential revenue growth rate.
Moving to same store residential revenue trends across our markets on slide 17, our expansion markets of Denver and Southeast, Florida are excited to lead the portfolio revenue growth 2022.
Followed by the Pacific Northwest.
For the reasons, Sean mentioned earlier, we expect northern California to trail the portfolio average however, it's a region with a history of outsized down cycles, followed by robust recoveries.
So it could be favorably surprised by actual performance.
As we move through the year.
And with that I'll turn it over to Matt to discuss our plans for future development activity.
Alright, great. Thanks, Ted.
On slide 18.
See that we're continuing to ramp up our development activity in response to these favorable market conditions, we have been starting roughly 1 billion one of new development per year most of the prior cycle before sharply curtailing new investment activity as Covid hit in 2020.
We've been able to shift gears aggressively last year getting back to an annual starts level of roughly $1 2 billion and expect similar volume this year and as development continues to be very profitable with current development underway underwritten to an initial stabilized yield of 6% with cap rates in the mid threes. This puts us on track to extend the tremendous value creation margin.
Dan mentioned on our 2021 completions.
In the pie charts on the right you can also see how market performance and our portfolio allocation priorities are reflected in our recent starts activity with 90% of the 'twenty, one and 'twenty two starts in suburban locations and our broad geographic mix, including more than 20% in our expansion ranges.
As we accelerate our starts activity our regional development teams have also been focused on back filling the development rights pipeline to generate the next set of investment opportunities for 2023 and beyond as shown on slide 19, we have future development sites under control across all of our regions and have seen a market increase in pipeline activity in the past few quarters.
The projects shown on the slide here represent $2 6 billion of future starts activity over the next two to three years and exclude some of our longer term densification opportunities at existing assets, which brings our total development rights pipeline to $3 3 billion at the end of 2021, and we've been even more active so far this year with an additional 700.
And approved by our investment Committee just in January and more on the way, including our first development right in Austin, Texas. This activity puts us on track to exceed $4 billion in development rates by the end of the first quarter and with that I'll turn it back to that.
Thanks, Matt as you've heard on the call today, we're entering the new year from a position of strength on multiple fronts and to close I want to emphasize five key themes that will guide us in 2022, as we seek to generate outsize value and earnings growth and as we continue to differentiate ourselves as one of the leading real estate companies in the country.
First our decades long track record as a leading developer with deep market knowledge and experience across a breadth of communities and apartment style allows us to create value by tailoring each development to best fit the needs of the local area as well as continuing to meet the evolving needs of residents, but also drives meaningful incremental earnings NOI growth across cycles.
Second as we grow we are optimizing the earnings growth and value creation potential of the existing portfolio by pruning slower growth assets and diversifying into new markets, providing an expanded domain to create value through our development operating and strategic capabilities third our operating model is set to deliver meaningful earnings growth by utilizing.
<unk> and investing in innovation to improve operating margins and to unlock additional revenue opportunities.
Fourth we will continue to lead on ESG and area increasingly important to municipalities as we seek development approvals to residents as they make housing decisions and to our associates as we meet our mission of creating a better way to live and.
And lastly at the center of all that we do we will continue to foster our evergreen culture and invest in our people.
We look forward to our engagement with shareholders and stakeholders on these themes and others during the year with that I'll turn it to the operator to facilitate questions.
Thank you as a reminder, please press star one to ask a question.
We'll take our first question from Nick Joseph with Citi.
Thank you I appreciate all the color I guess, maybe starting on the portfolio optimization and the target of 20% to 25% of new expansion markets.
Expected timing of actually getting there.
Yes, thanks, Nick.
I would continue to look at our growth in southeast, Florida, and Denver is a good proxy we've been active in those markets over the last three to four years, we have a target for each of those markets of about 5% and we're about halfway through.
Increasingly we've got our people on the ground there our development activity continues to source additional opportunities and the hope is that we can accelerate from there in those two markets. So when you look to our next set of expansion markets I would expect them to to move on a similar type of timeframe over the coming years.
Thanks.
Another another timing question in terms of the 200 basis points on the margin expansion opportunity I think you mentioned, you're a third done when would you expect that 200 basis points to be in the run rate.
Yeah, Nick this is Sean.
It is a multiyear process, it's going to take US a few years to work through everything, but we're making steady progress. So I would say he talked about it over the next 36 months to 48 months, it's in the ballpark of work through all of it.
Great. Thank you very much.
Thanks.
Thank you we'll take our next question from Rich Hill with Morgan Stanley .
Hey, good afternoon, guys I'm, sorry, if I missed this but could you confirm the loss to lease in the portfolio.
As of January .
Yeah Rich this is Sean it's trending at 12%.
Okay, great and so maybe just going back to some of the timing questions. If I heard correctly. It sounds like your leases of 23% higher than where they were.
At this time last year give or take.
But leasing spreads are really strong, but not at 23% does that mean that you're that you're that you're not capturing all of the loss to lease and some of it will bleed into 'twenty three years, how should we think about that.
Yes, so just to clarify a couple of things the 23% represents a move in values.
At the end of the year as compared to the beginning of the year not all of the leases in the portfolio.
Up 23% if that makes sense.
The lease side of it.
Okay, unless lease side like I said its 12% today.
As I think I mentioned on the last call about a third of the portfolio at this point in time is constrained by various things.
The rent regulations in New York City.
There is a couple of COVID-19 overlay issues out there et cetera, So what's really achievable today, if you just mark everything to market is call it 8%.
So how will that manifest its way through the portfolio will be as leases expire throughout 2022, and we're able to move people to market. So that's how things will slowly fade Lee to answer.
If you're trying to understand sort of the pace of revenue growth given that phenomenon then.
We do expect revenue growth will accelerate as we move through the year because all of those leases are being mark to market as they expire.
That's very helpful and so maybe just framing the debate here a little bit on your guidance range.
You may be give us a little bit of color as to what assumptions are driving to the to the high end of the first is the low end.
Yes, I mean, theres, a number of different factors that play into that.
So we can spend some time on obviously Kevin talked about.
What we're seeing in terms of what we expect in the way of bad debt trends being modestly positive, but then we have a drag.
From rent relief that he also pointed out those two variables could swing one way or another and we're expecting an improvement in underlying bad debt in the second half of the year that could accelerate.
Which gives us a little extra juice.
Rent relief could also accelerate but could also go the other way, it's a pretty unpredictable.
Factor and then obviously you have the normal things that we talk about in terms of turnover where it occurs is that in markets that are currently regulated that we can get people to market.
How fast is market rent growth as we move through the year. So there's all those normal factors that we would expect in addition to the unusual factors in the current environment.
Okay got it and then just.
You didn't mention anything about development I appreciate the range that you gave for NOI contributions.
But is there.
Yes.
It was higher than what we were expecting which is obviously a good thing any any any things that youre looking for in development that would make you more bullish or bearish.
Hey, rich, it's Matt I mean, as it relates to the 'twenty two earnings.
That's more or less.
Yes. The die is cast at this point theres not going to be huge variations in that number because those are deals that are already under construction and in many cases have already started leasing so the variability there would be around what is the actual lease up pace and rate does it do a little better a little worse than what we projected but.
The bigger place, where it will start to move the needle more materially in the out years would relate to starts that might happen. This year. So.
Got it that's what I'm looking for thank you guys.
Thank you we'll take our next question from Rich Hightower with Evercore.
Hey, good afternoon guys.
Just to follow up on the development question really quick just.
Yes.
A little bit of nitpicking, but I guess at the midpoint of the starts forecast for 'twenty two is a little bit less than what occurred in 'twenty. One is there a reason for that is the timing is it something else that we're not aware of.
Yes, no hey, rich it's Matt.
Just these deals are lumpy.
One deal happens to start in December versus January or February that can change changed the number of kind of on a.
Any particular payer.
Period of time, you want to take rolling four quarters or calendar year. So I tend to look at it more kind of on a.
On a two year basis, which is why that's why we presented a slide you think about 'twenty one 'twenty two together to 232 $4 billion worth of starts.
And again, we're looking to accelerate that and hopefully 'twenty three we do even more.
Okay perfect.
I appreciate the detail around the sort of the composition of the same store revenue outlook.
Within that I don't think it was mentioned, but do you what are you baking in for sort of your underlying market rent growth assumption within all of that sort of separately from just what's baked in already and so forth.
Yes, that's reflected in the bar that Kevin identified on the slide Rich if you take a look at that that includes a it's basically a confluence of different pieces. The very first bar on the lease rates. It reflects sort of the embedded piece how much of the loss lease you can capture as well as the effective <unk>.
You might see in rents as you move through the year. So all of that is embedded in that number.
That's all in that first bar than in other words.
Correct.
That's correct yes.
Okay perfect. Thank you.
Got it.
Thank you, we'll now take our next question from Austin <unk> with Keybanc.
Great. Thanks, everybody, Sean just curious based on what you saw in urban markets in the fourth quarter are sort of bucking seasonal trends do you expect this have you seen it continue do you think it can continue into 2022 and what did you guys assume in your guidance did you assume that it's just more typical demand.
Trends.
I'm, just just any any thoughts there would be I appreciate it.
In the urban markets, specifically youre talking about Austin.
Yes, correct you referenced I think you know 50.
50% or so upside versus what you've seen historically in New York and San Francisco.
And then 30% against thank you.
Yeah again, we started to see that occur in in.
In Q2, it certainly accelerated as we got into Q3 and Q4 in terms of the percentage of movements coming from more than 150 miles away.
I suspect I haven't looked at the full data for January may have slowed a little bit just given off across but I think our belief is that we're going to continue to see a steady improvement in places like New York City D C. San Francisco as more people are brought back to the office. We don't think office utilization is good.
Go back to exactly where it was pre pandemic at all take most people do but if you are in the high teens to low 20% range.
So if it goes to 70% utilization still triple what it is today.
So would you expect to see improvement across those markets as we move through the year.
As well as some of these jobs that are suburban locations that have sort of at the same time going on should be like at Tysons corner here in Northern Virginia. As an example, so we do expect healthy performance out of those markets.
As we move through the year and we've seen that begin and the trend should continue.
Well, it's a little hard to tell us the exact pace and Thats why I, Kevin made the comment that northern California is still expected to trail the portfolio average for revenue growth.
But it is a market that could surprise to the upside.
Such a wait and see.
Yeah, no that was helpful.
Additionally.
Sorry, I was I was just going to add on additional data in your comments that Sean to drivers that Sean referenced you also just have overall job growth right and you look at the overall job growth relative to pre COVID-19 levels in our urban markets and we continue to think that there is some pretty meaningful room to run there and will serve as a decent driver.
Yeah that makes a lot of sense.
Sean you had started to hit a little bit on my follow up there. So how did you go about I guess underwriting.
Same store revenue growth for Northern California, you know, what what pace did you assume or how.
How should we think about whats currently.
Underlying that that range.
Yes, I mean, the way I would think about it as kind of three pieces.
Rough roadmap.
First is obviously whats embedded which is easy in terms of where leases are today in January compared to they were basically on average for 2021.
And then you've got the loss to lease component, which is easy to compute.
And then you have what you expect in terms of market rent growth. The third piece is the one that's most.
Uncertain.
So we can see where we're moving people and today in the last quarter as an example, and so we can assume that as leases expire and moving through the year, we should be able to achieve at least that level and then we have some modest growth built in beyond that based on a slow pace in terms of the return to office.
But as Kevin mentioned earlier things could accelerate there. It's just hard to put your finger on it as to how much.
Incremental demand will show up when it will show up and how much it will drive performance in 2022 for the most part you need to see a meaningful increase in that demand and in market rents in the first half of the year for it to bleed into revenue in 2020.
Once you get to the second half that is may lease explorations et cetera et cetera.
But it should can begin to converge versus other markets most likely towards the back half of the year given comps otherwise and then this potential lift that you kind of spoke to from demand coming into the market is that fair.
When you say converge converge relative to what either blended lease rates slowing in other markets due to more difficult comps, whereas northern California is certainly.
Lagged as you guys highlighted and then it starts to accelerate either as others decelerate.
Or it's catching up that possibility yes.
Possibility, yes, one thing you have to realize is that the.
The leases that were signed in the first half of 2021 still had fairly decent concessions rents are much lower than where they are so you're going to see pretty good effective rent growth in that market in the first half of the year. The second half will be dictated by some of the factors that I mentioned as it relates to demand.
Certainly very helpful. Thank you.
Yes.
We'll now take our next question from John Kim with BMO capital markets.
Good afternoon can you just clarify the relationship between move in rents in your effective rent growth. So.
Theoretically if you had or hypothetically if move in rents were 23% above for the remainder of the year would your effective rent growth the 23% once it plans to catch up.
Not necessarily for some of the factors I mentioned earlier, John I mean, you've got.
Those are strictly move in rents.
Which given turnover rates just call it roughly 50% Theres also renewals.
And there are as I mentioned earlier, when I was talking about loss to lease there are constraints on renewals and <unk>.
All of our markets. Some are normal lifestyle rent regs in New York several sort of this COVID-19 overlay, but it impacts about a third of the portfolio.
Effectively assume that youre going to mark everyone to current move in rent values over the next 12 months as leases expire.
So with that move in rent always going to be higher than your effective rent growth. Yeah. I think part of it is timing and part of it is other fictional factors, but I'm just wondering did.
You can move in rents always appear higher than the effective rent growth that you achieved.
Yes, I mean, you've got there.
Theres a number of different factors that feed into it I mean, you've got a lag so again move in rents for as a moment in time, we were talking about December versus January being up 23% that was for that batch of move ins during that period of time.
And so you've got sort of the two endpoints. So theres a lag in terms of what asking rents are and then people move in there's typically a lag there you've got a lag because of renewals but.
Theory to your original question. If there are no constraints and no lags and you can mark 100% of the rent roll to market on February 1st.
Yes, you would see a significant move in the average rent lease rent for the portfolio.
Okay. That's helpful.
And a question on your development starts this year are predominantly are 90% suburban.
Is this your view of where secular trends will continue.
Suburban versus urban or do you see urban development picking up after this year.
Hey, John It's Matt Yes.
I think last year was also our starts level was also.
Certainly at least 80% suburban if not 90 so.
I think it'll still be a while for us.
When I look at our development rights pipeline.
As expected our starts will continue to weigh pretty heavily suburban over the next couple of years that is where we're seeing better economics.
In terms of obviously rents have recovered a lot more there is as Sean data showed.
And also you know that.
That tends to play to our strengths because the suburban submarkets are more supply constrained actually entitlements are more difficult to get there. So.
We like the risk return profile there the market as a whole.
Thank you.
In our established regions, you probably will see far fewer urban starts not just from us but in general in our expansion regions. There is a lot of urban start activity going on as well as suburban.
That's great color. Thank you.
Thank you, we'll now take our next question from Tom Nealon with Kim with Goldman Sachs.
Hi, Thank you for taking my question. So I wanted to talk about that development pipeline.
For 2022.
Just go back in the last cycle, you would have to think about $1 4 billion in development starts sort of peanuts to adopt I think 2014 16.
Uh Huh, so do we think about development starts.
But you have today.
Looking out will there be a big step function change.
Think about the next couple of years.
It's Matt and I can take a shot at that and then you know I don't know if Kevin may want to weigh in as well or Ben but.
Yes.
We last cycle, we did ramp it up coming out of the GSC and then there were a couple of years, there where we were running at that level. You described I think over the course of the six or seven years. It was more like 1 billion too.
But we're a bigger enterprise now and costs are up so you know even on an apples to apples basis to do that much volume.
In the current environment, that's probably more like 1 billion $5 six a year and starts and if we can find those opportunities and we're feeling pretty optimistic based on our current book of business and the pipeline that we're seeing we're certainly ready and prepared.
I look forward to the opportunity to be able to continue to grow it.
I would add on to the other part is the tie in with our expansion markets right and so part of that moves provides an expanded opportunity set there and so early on we're growing through a combination of acquisitions funding of other developers in our own development, but that pipeline will also start to accelerate and so you look at a couple of years out yes, we expect the overall development.
Line to continue to grow in size.
The final point there Chinese you think is sort of about the our ability to fund. This development activity. It sort of is somewhat tied to what's going on in the core business, where we are in the cycle.
EBIT growth, we have in and what are our capital.
Options look like.
At the moment you know what.
We've been doing it's in funding our external needs through a combination of newly issued debt and disposition activity for this year with respect to our capital needs are about $900 million.
Current plan, which of course can change is that we're likely to fund that through primarily through the issuance of new debt.
Then modestly through some net disposition activity of course capital market conditions.
Our uses can change.
But it kind of speaks to the notion of a couple of things, obviously with our EBITDA rising very <unk>.
Briskly here. This year, we can utilize debt to help fund development and it's an attractive sources. It is both in its own right and on a real basis, when you think about inflation.
And we can do that by issuing debt because our EBITDA is rising quite a bit and we can be leveraged neutral in doing so.
But in a typical year and in most years, we can fund about 1 billion to $1 billion three or so.
Development activity through a combination of.
And free cash flow.
Selling assets, where we can retain the capital because of our gains capacity and then leveraged neutral issuance of debt. So that's kind of in a normal environment plus or minus what we can do we can probably do a little bit more early in the cycle as same store NOI growth briskly as it is now.
And potentially at some point right now our equity our equity as attractive as a source for funding development, although at the moment, we find asset sales to be more attractive, but if we're going to be doing an awful lot more than those that kind of level of development funding. It does imply that we're going to have some level of equity market access. So that's that's another constraint to layer.
And as you think of it look.
As possible. So the three constraints, we traditionally think about ours, we're constrained by opportunity set where they were constrained by sort of organizational capacity and they were constrained by sort of what we have in the capital side. So that was speaking sort of that third bucket right there.
Oh, great level of detail. Thank you for that.
For my follow up question.
I know you gave out.
Details on how should we think about the new invoice at high end of guidance and wouldn't get you all right. Thanks.
Could you, perhaps contextualize cadence through the healer and how should we think about seasonality. This year given this concept that's pretty much coming out of the window.
'twenty one.
Again this is Sean.
What I was indicating earlier just based on.
Leases that were written.
In early 2021 in the first half of FY 'twenty one basically.
Kind of being substantially below where things are today.
Do expect revenue growth to accelerate as we move through the year.
As you move those leases to market certainly is a driving factor as Kevin mentioned, when we get to the back half of the year, we expect bad debt to improve so that also leads to accelerating revenue growth.
Go through the year, so as it relates to seasonality in the back half of the year.
It's a little too early to tell we are expecting getting back to more like seasonal norms. When we get in the back half of the year as compared to what we experienced in 2021.
But it may be very different by market, depending on the sort of shape of effective rent growth as we move through the year.
What demand comes back and when it comes back to some of these markets that we're talking about we're real still expecting a more full return to the office et cetera. So I would say that we are expecting more like seasonal norms.
We hit the back half of the year, but we will probably know better as we get through say mid year, what that might look like.
Very helpful. Thank you so much.
Sure.
Thank you, we'll now take our next question from John Pawlowski with Green Street.
Thank you for the time, Sean just one quick one for you the 11% same store like it's like term effective rent change in fourth quarter could you give us a sense what it would have been had there been no regulatory curbs.
Yes, it would have been higher.
I can't give that sub my head, John but I can certainly circle back.
And let you know what I would say as I mentioned earlier is about a third of the portfolio is currently constrained.
And you would have seen better renewal growth. My guess is to provide a little bit of color in our move ins were at 12, and a half and renewals were at 10.
You probably would have seen the renewal side look more like the move in side, but still a little bit of a delta just because of the lag between when that when renewal offers are made and when they are actually signed leases renew.
Since you said that renewal offers 60 to 90 days in advance, but you would have seen maybe another 100 basis points on a blended basis. If the 10 went to 12 and 50% turnover as an example, if you're looking at it kind of theoretical terms.
Okay.
And then Ben or Kevin the 880 million earmarked for from capital sales or asset sales and capital markets activity can you Peel that back what's the kind of preliminary assumption assuming your cost of capital stays where it is in the private market pricing stays where it is what's the preliminary.
For asset sales within that figure.
Yes.
Let me start a couple a little bit a little bit.
Sternal funding need of 880 is kind of what we really need to run the business if we werent.
And we're just sort of really kind of focused on it the trading activity. So there'll be a fair bit of acquisition and dispositions just kind of on a trading basis.
Through the investment group that matter receives from the standpoint of raising external capital. Our current plan as I mentioned, a moment ago that is funded largely through the issuance of newly issued debt.
Just given where debt rates are today, although they are up from where they were 346 months ago. There is still quite attractive by almost any metric and certainly attractive relative to our investment use which in this case is development. So the $900 million or so is related to primarily fund the investment activity.
So it'll be mostly through that and we will likely be able to do so in a leveraged neutral basis. There is we do expect to be at a modest net seller of assets and so those net district provision net disposition proceeds will be worked into a small component of that $900 million and again of course as you point out that's where we stand today.
We thank all of our main capital choices.
Unsecured debt selling assets and issuing equity or attractive, but when we rank order those debt and asset sales are a lot more attractive than selling assets selling equity today. So our plan at the moment it contemplates no asset sales in depth, but just given our rising EBITDA growth and our capacity to issue debt on.
On a leverage neutral basis.
Both on an <unk> on a nominal and then on a real basis, where debt rates are today, we our preference is probably for to use a little bit more debt here right now.
John just a little bit more color on kind of overall transaction activity acquisition and dispositions. We are expecting both of those to be up relative <unk> relative to 2021, and Kevin used the term sort of trading capital and that tends to continue to be our approach, which is the trading capital out of predominant we've been northeast and ask.
<unk> had pretty good runs up in value tend to be or older assets lower IRR profiles, and then redeploying that capital into our expansion markets, how to capture that growth and as part of our overall portfolio allocation objectives.
Okay understood, but just one follow up on the rank ordering them.
I'm sorry.
Sources of capital just I know, it's a very very modest amount, but I still don't understand why there was any equity issued given where cap rates are right now and to your point that.
The private market pricing. So how is that conversation in the fourth quarter to issue equity at these levels.
Yes, I mean this is maybe ill kind of hit on a few high points. We could certainly talk about efforts to some of this gets a little bit nuanced and so forth.
Starting at the top in terms of where we rank order pricing asset sales are kind of number one it's more or less at the 100% tailwind in the past we've talked about our heat map in a way of sort of looking at spot pricing.
On an absolute historical relative basis, so asset sales are probably the number one.
Debt issuance is kind of behind that into the low 90 percentile range and then equity for US is probably more in that mid 80% range. So I think we'd agree with you probably on the rank order I think probably where we might differ is perhaps just given where I know you are.
How youre looking at things maybe have a slightly different view of a greater separation with respect to.
QWERTY pricing versus some of the other choices from our standpoint.
It's particularly in a dynamic environment like this it's hard to be dogmatically focused mechanistically on <unk>. Although it is a dominant factor in our analysis. Because then you can move dynamically here in terms of what we did.
Philosophically there is it does make sense to infuse the balance sheet with equity issuance. When we think it is attractively priced relative development.
And so just because it helps preserve a higher basis set of assets does that in turn over time can help support our recycling strategy to continuously fund development.
And so that's one element of why when it does make sense and we feel it's attractively priced.
Bringing in some equity does makes sense in terms of what we did in Q4, we had a modest amount of ATM issuance in early October before issuance window closed and then a little bit more in on a forward basis in late November early December and the reason why we were looking to do a little bit there was just given where pricing was at the moment, but.
Market volatility as you may recall is starting to work back into the market.
And we just chose to step back out of the market given given that dynamic as well as capital position, which as you can see here.
Mainly into dollars of unrestricted cash on our balance sheet was in an excellent position. So.
Those are really the thoughts we've probably raised by.
About $2 billion last year, and maybe about $30 million was equity. So I think that gives you a sense of where we feel the equity ranks in the mix, it's attractive, but not nearly so as asset sales and so that's.
That's kind of our general thoughts on about presenting else you'd want to add.
Yep.
That's very helpful. Thank you for talking through that.
Thank you, we'll now take our next question from Rich Anderson with NBC.
Hey, Thanks, good afternoon.
So 10 years ago, you guys got the big multiple and as the multifamily Reits in the Sunbelt players.
Several rungs below you I know that that has changed and so this question really is on your expansion market approach you said that you're increasing number of people are moving into your urban areas for more than a 150 miles away and if I'm a resident I understand trying to avoid regulation, but if I'm a resident I might want to live in those regulated mark.
And protect myself to some degree so to what extent are you married to this 20% to 25% range.
If you start to see some some systemic things going back in the other direction that support long term urban over Sunbelt would you yourself make a change yourself.
Yeah, Richard It is a it's a target right and so we put that out there to help drive internal activity and to drive our resource allocation, particularly on the on the people side.
The other part of it emphasizes this is we're going to move into these markets and diversify our markets over time right and that is very much a part of kind of our measured approach here right.
<unk> our development activity in these new markets inherently paces in our investment over a period of time.
Yes, we think it's the if we look at overall portfolio optimization for some of the reasons that we talked about diversification diversification away from regulation.
We think it makes sense to continue to move in this in this fashion, but that said our established markets. That's the bulk of our activity, where we're strong believers in those and the trajectory of those markets going forward and they're going to continue to get the bulk of our investment both on the development side and on the people side.
Okay Fair enough and then just a quick follow up some strange labor markets in the present tense inflation interest.
Interest rates and so on but you're ramping up development.
That you are making a commitment by doing so to out years 2023 and 2024.
Is that the way we should be thinking about it that this is not just a 2022 story, but but you are making a call also on a continuation of above average fundamental.
Performance in out years does that is that a fair statement.
It is yeah. It is the direction. We're moving we're definitely continue to pivot into growth mode. The buildup of our development pipeline a lot of that is options on land right. So we had a little bit to your first question. We will continue to be able to be flexible and adapt to bake those based on market conditions at that point in time, but we are leaning in.
And do you know do you want to secure additional land rights given the economics that we're seeing today and we start forecast going out over the next year or so.
Okay fair enough. Thanks.
Thank you, we'll now take on that.
Question from Joshua <unk> with Bank of America.
Yes, hi, everyone.
Just wanted to follow up on a comment you made earlier you mentioned that it's harder to get building permits in the suburban markets versus urban.
Curious why that is.
The new thing or it's always been historically like that.
Yeah sure Josh This is Matt, yes, it was really referring to entitlements.
And.
That has been the case in our legacy or established regions for a long time.
And if you think about it it comes back to politics, right I mean entitlements as a political decision and many of the suburban jurisdictions you take New York for example, where in New York City, where also in long Island, New Jersey Westchester County.
The latter three long Island, New Jersey, Westchester County, they all.
Have a bias against multifamily housing.
Housing stock is primarily single family.
A lot of people are there because of the school systems and they don't want more growth. They don't want more kids in the schools.
And there's a back story, there as well where they you know theres just a bias against renters.
As you compare and contrast that with New York City and.
There are certainly neighborhoods, where it's difficult to get entitlements, but a lot of what you can build in New York City, you can actually build buy right you don't need anybody's approval you just go straight to building permit you don't have to go through the planning Commission you don't have to go through the neighborhood Advisory Council and all those other things that were so good at it takes so long.
So.
Generally that's true in most of our.
Markets, maybe not in the city of San Francisco.
But certainly in the northeast that's been the case and even on the West Coast and if you look at the amount of supply in our established regions urban versus suburban the last decade.
There's been a lot more as a percentage of supply in the urban Submarkets. Some of that's because there's been demand there and some of that is because it's easier to build there. So we do think that that is a structural feature.
Feature of our kind of the way, our political and regulatory framework exists and that plays to our strengths and that's always been something thats been core to one of our strategic capabilities.
It really speaks to the benefits from the long term investment that we're making in these development platforms right.
Our long track record that <unk> developers have when the opportunities do surface for incremental rental housing in these markets.
We tend to be one of those first calls right given the relationships given with execution given what we deliver in these markets and so that's why you are continuing to see significant investment in development in these expansion markets at the types of spreads that we've referred to.
Alright, that's great appreciate the time.
Thank you, we'll now take our next question from Alexander Goldfarb with Piper Sandler.
Hey, good afternoon, and thank you. So just just a few questions here going back to Nick Joseph question earlier on the call about the 200 basis points in margin and just thinking broad picture across the company how much of the margin savings just comes from the fact that the job market is tight so the ability to.
Backfill.
Positions is tougher so you may be running with fewer.
Let's say you are running with few more open positions meeting fewer positions filled than you'd otherwise like just sort of curious.
Yes, Alex this is Sean the vacancy on payroll if you want to think of it that way. It has nothing to do with the margin expansion.
There will always be a vacancy on payroll regardless, just because you never really 100% occupied if you want to think about it from that perspective from a payroll standpoint, so there'll always be some constant vacancy because that margin improvement is directly as a result of initiatives.
Our associated with various activities.
Okay. So what youre, saying is right now in this current labor market you haven't seen any out versus your historical payroll gap you haven't seen that grow that youre saving more.
G&A slash property management whatever expense.
That gap has been pretty normal despite the tight labor.
What I'm trying to separate payroll vacancy from initiatives benefit I think it was your question.
There has been some incremental they can see both in 2021 and where we sit today that is independent of specific digital initiatives or other initiatives.
That will shape the nature of our operating model going forward that will deliver the 200 basis point of margin improvement.
Okay. Okay. That's that's helpful. And then the second question is as you guys underwrite your your next set of projects.
How are you looking at rent growth versus construction cost timing delays and all that fun stuff is your view that rent growth will continue to outpace your costs such that development yields should hold or maybe improve or are you expecting.
Yes.
There's some pressure on.
Yeah.
On yields.
Hey, Alex its Matt.
We generally tend to underwrite everything on a current basis, whether it's a deal that we're signing up now that's not going to start for two years or it's the class III budget and we're about to start it we look at today's rents today's expenses today's hard costs, and we come up with kind of a.
Spot yield.
So we don't we generally don't trend, which.
Generally is one reason why when our development stabilize they tend to beat the pro forma.
Current deals are running I think 30 or 40 basis points ahead of initial underwriting and that's not uncommon.
For us so generally that served us well what.
What I would say is that right now like if I compare deals to six or nine or 12 months ago.
The rent increases.
At which you get some operating leverage meaning the NOI increase is higher the rent increase that has covered the increase in hard costs. So far and the yields are still in the high fives on the new business, we are underwriting, which is probably where they were a year ago.
There is some risk that at some point hard costs tend to lag and so they may increase more quickly than rents or NOI in the out years, but there's also tremendous room in the margin.
Now the development deal the margins been was talking about the spread is massive so even if that comes in some it's still going to be very profitable business.
Okay. Thank you.
Thank you once again, if you would like to ask a question. Please press star one.
We now take our next question from Henderson, Jeff with Mizuho.
Yes, good afternoon.
A couple quick ones for me if I could first on bad debt, just going back to that topic.
I heard you correctly, you're not including any improvement in bad debt this year.
Baseline outlook I guess I'm curious, what's the thinking that seems a bit conservative.
Some of your peers have talked about.
With more book run outlooks, and then proportionately what percent of biopsies.
California, more specifically northern California based.
Yeah.
As it relates to bad debt, we are expecting an improvement in but if I refer to as sort of the underlying bad debt rate excluding.
Any benefit from rent relief.
And so it's roughly about a 40 basis point improvement is what we're expecting for 2022 relative to 2021.
It is timing.
The timing is not even at all through the year, we basically expect the first half of the year to look a lot like the back end of 2021 and.
And then.
Deceleration and bad debt as you move through the third and fourth quarter of this year.
So that's how I would think about it as it relates to.
The composition across the markets.
In California in particular, they having place for bad debt really is L. A.
There is bad debt in northern California, it's not nearly as bad as L. A so we can certainly get you that number specifically for northern California, but it won't be as much of an outlier as it is in Los Angeles.
Okay I'll follow up with you guys on.
Both sets of numbers.
And then a couple of quick ones on on development.
I'm curious how much of the developed cost of this year.
What's underway and what youll be starting.
A portion of those costs are locked in and then on the development NOI contribution you outlined for this year I think I heard you right and I think I understand that your current outlook for that is based on.
Current market rents it does not have any reflection of market growth or any any trending it's based on today's market rents.
Sure I can take this is Matt I can take a shot at those.
As it relates to what percentage of our costs are locked in so on the deals that have already started the 'twenty one starts.
When we start a project we have what we call a class III budgets so at that point.
We're pretty well locked in and we don't necessarily have all of the sub contractor contracts committed yet, but we have a very high percentage of them anywhere between 60% to 70%. So I would say, we're pretty well covered there and if you look historically, we have a very good track record of delivering our projects.
On time and on budget within a point or two so.
The risk is probably more on the jobs that haven't started yet the jobs that we're planning to start in 'twenty two.
Soft costs are pretty nailed down the land cost is defined the exposure. There is further increases in hard costs between now and when we can get those deals permanent and bought out and how that increase might.
Be different than what might happen to NOI and.
So we have a little bit of exposure there but.
I would have said the same thing six months ago, and as I said, even even through the last two or three quarters. The yields are more or less held up so.
And in general those deals the deals we're looking to start this year underwritten yields today on the UN trended numbers are in the high Fives 5758, and we certainly hope they stay there, but even if they do get some cost pressure and they wind up five and a half that's still very strong value creation as it relates to the NOI on the for 'twenty two on the lease up.
That is based on today's rents.
And the lease up budgets that were prepared our deal by deal specific I think Sean has a little more color on that yes, well one thing I would add on that is most of the deals that are delivering the NOI. This year have been mark to market, but there are three deals that are expected to start delivering in 'twenty two and go on to lease up those three deals the rents have not yet been <unk>.
Back to market, so there should be a little bit given the environment, there should be a little bit of inflation associated with those three assets when they began to delivery.
Sure.
Sure.
Got it got it that's very helpful. Thanks.
One last one just thinking about your development in your expansion markets. I think you mentioned, 20% of this just starts will be in those markets I guess, how do we think about that longer term what proportion of your annual starts or spend could come from those markets and any.
Noticeable difference in the underwritten yields between in your expansion versus established.
Thanks.
Yes, Matt I mean, we'll see over time.
Certainly if our goal is that those markets are going to be 20% to 25% of our overall portfolio. We would look for it to be at least that much of our development pipeline, but it's going to take some time.
That is an activity that benefits from the local presence from the knowledge from the flywheel. If you will so.
Im not sure that it's going to be materially different over the next year or two the one exception to that would be as Bert was talking about this program. In addition to doing our own development. We are looking to provide capital and fund other developers.
Deals that they might have where they're ready to go and are looking for capital. We have one deal that we're going to start this year in North Carolina that fits that description one of our deals in Florida under construction fits that description those deals will probably be a little less profitable because we do have local sponsors there a little bit lower risk a little bit lower yield theyre kind of halfway between the development and acquisition.
<unk> is the way we tend to think about it so.
So we may see some of that pickup.
Got it very helpful. Thank you for the time appreciate the bussell.
Thank you, we'll now take our next question from Nick Joseph with Citi.
Hey, it's Michael Bilerman here with Nick.
And.
Over avalon's time in terms of.
Market.
Expansions and growing.
I take.
Take it that you are always pursued very measured approach.
There's always been some times the transaction that speeds up the process either through swaps with other Reits or potential transactions with private partners either on a buy or sell side.
Given all the activity that's happening in the multifamily market is there an opportunity today.
There are some of this transformation could be accelerated.
Yes, Thanks, Michael.
Yes, it's a possibility.
But I wouldn't describe it as a priority right now.
Yes, I think there we do look at some of the portfolios that are out there they tend to be more geographically dispersed.
Given our focus on our core set of expansion markets and really its in its approach based on for us to create value right, we want to be able to leverage our full operating teams and our development teams to create that value, we stay pretty narrow from a from a geographic perspective, so there could be a portfolio that fits enough of the kind of strike zone.
For us that we would look at.
So that that will stay on our radar, but I expect more of our activity to be similar to what you've seen in 2021 with some expanded growth going into this year and following years.
And I guess in your mind today would you be more.
Leaning towards likely accelerating dispositions or Conversely, trying to find and maybe taking down more deals before you sell right.
I'm, just curious sort of where you are finding the most demand because I would imagine even though some of these portfolios are geographically dispersed given the relationships you have with third party capital sources, you may be able to do something unique.
There as well and I just didn't know where the bias was today, whether you want to hit the bid on the sale or whether you want to be aggressive on the buy.
Yes, there is a matching component of it I would say given given the run ups that we've seen in our existing markets and also seeing the run ups in some of the markets that we're growing and we're comfortable at this point in sort of a trade capital arena right was sort of matching the level of disposition activity and redeploying that capital in <unk>.
Spansion markets for incremental growth right, then as you're referring to it means tapping into.
Additional disposition activity or potentially tapping into incremental equity.
And right now we sort of look out I don't think we're going to continue to progress in a fairly measured way.
And then the last piece that sort of emphasize.
Well, that's just emphasize I mean from an overall total investment perspective, right, we're continuing to invest significantly $2 billion plus this year.
But a good portion of that is going into our established markets around these development opportunities and so as we look at from a risk return perspective, leveraging our existing teams and being able to unlock the next rounds of the 200 to 250 basis point spread that remains very high on our list in terms of attractiveness.
When you think about all of the land you control either through contractor on the balance sheet and you have a long runway to continue that growth in your established markets with very attractive returns.
It wasn't a question that was the comment I had another just one question for you then now that you've sort of been in the seat for the last year at Avalon.
Being in a pure multifamily platform.
Your mind changed at all about sort of how you view mixed use in terms of ownership at Avalon just drawing on your previous experiences.
Just wondering how that has evolved in your thinking for Avalon in terms of its ownership of other pieces or maybe getting involved in more complex projects.
Sort of walk me through your mindset on that.
Yes, good question.
It continues to be the conversion of retail land as well as suburban office land continues to be an attractive source of land inventory for us and as we're building building up our pipeline that's a decent amount of it I'd say today actually probably a little bit more of it has to suburban.
Office product that we can control little simpler on the execution.
Smaller sites and so we are finding some good opportunities there, particularly in our established markets.
A little bit more broadly.
Avalon Bay of the peers has been the most successful in partnering with others.
When it works it really works well, we opened a project we recently in Woburn mass, which isn't even sort of the broadest of mixed use environments, but part of the attractiveness. There is the ability for our residents to walk out the door and have access to the grocery store and restaurants and so.
When we can find those opportunities with the right partners.
Something that we will continue to lean into.
Alright, I appreciate it you down in Florida.
It sounds good.
Soon.
It appears there are no further questions at this time I'd like to turn the conference back to Mr. Ben Shah for any additional or closing remarks.
Yeah.
Alright, Thank you and thank you to everyone for joining today, we look forward to engaging further with you over the coming months.
This concludes today's call. Thank you for your participation you may now disconnect.
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