Q1 2022 Avalonbay Communities Inc Earnings Call
And ladies and gentlemen, please standby.
Good day, ladies and gentlemen, and welcome to the Avalonbay communities first quarter 2022 earnings Conference call. As a reminder, today's conference is being recorded at this time all participants are in a listen only mode. Following remarks by the company. We will conduct a question and answer session. He may enter the question and answer queue at any time.
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Your host for today's conference.
Mr. Jason Reilley, Vice President of Investor Relations Ms. Riley you May begin your conference.
Thank you Jay and welcome to Avalonbay communities first quarter 2022 earnings conference call before we begin. Please note that forward looking statements made during this discussion there are a variety of risks and uncertainties associated with forward looking statements and actual results may differ materially.
There is a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10-K , and Form 10-Q filed with the SEC.
As usual. This press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion.
The attachment is also available on our website at www Dot Avalonbay dot com or slash earnings.
Encourage you to refer to this information during the review of our operating results and financial performance.
With that I'll turn the call over to Ben Shaw CEO and President.
<unk> for his remarks.
Thanks, Jason and thanks, all for joining us on today's call, Matt and I will open with some prepared remarks, and we're joined by Kevin and Shawn for Q&A.
Starting on slide four of our presentation Q1 was a very strong start to what we continue to expect to be a very strong year of operating results core <unk> per share came in at $2 26.
15, 9% year over year increase in <unk> <unk> above the midpoint of our guidance.
Although deeper dive deeper into the drivers of that outperformance in a moment.
On the capital allocation front, our industry, leading development platform continues to drive meaningful earnings growth and value creation.
With a very robust six 9% yield on developments completed this quarter.
The year, we're projecting about $700 million of completions at an average yield of six 3%, which represents a substantial spread to current market cap rates.
As we grow we're also optimizing the portfolio through the selective sale of older slower growth assets from our established regions this quarter with $270 million of dispositions at a high 3% cap rate with the intention to then redeploy this capital primarily due to acquisitions and our expansion markets.
And in April we executed on an equity forward for $495 million as an.
The source of capital to Opportunistically draw down through the end of 2023.
Locking in our cost of capital for future development activity and what we expect to be accretive spreads.
Turning to slide five GAAP residential revenue increased eight 5% on a year over year basis led by about a 6% increase in effective lease rates and 100 basis point improvement in net bad debt.
On a cash basis residential revenue increased almost 10%.
As Shlomo as shown on slide six the eight 5% GAAP revenue growth was 150 basis points greater than the 7% increase we assumed in Q1 guidance with lease rates and occupancy above our prior guidance and while still at elevated levels better than expected bad debt and rent relief collections driving the bulk of the outperformance.
Relative to our expectations.
Portfolio performance has been supported by a number of tailwind as detailed on slide seven.
Starting with chart one we continue to see elevated move ins from greater than a 150 miles away.
Which speaks to a continued flow of residents back to our established markets as particularly as it particularly positive indicator for our urban and job centers suburban communities.
In chart. Two we also continue to see Densification with less roommates and a desire for more space, leading to fewer adults per apartment and as a driver of incremental demand across our portfolio.
As rents continue to grow they are supported by greater household income from new residents, which was up 12% in Q1 relative to the prior year period as shown on chart three.
And finally in chart four rent versus own economics, the monthly cost of renting versus the cost of owning a home materially favors renting in our markets with a difference of almost $1000 per months historically high level, and one which provides a meaningful cushion and support to our rent growth.
As shown on slide eight this backdrop is translating into continued momentum and like term effective rent change, which accelerated throughout Q1 and continued into April at 13, 7%.
Looking forward our portfolio is positioned extremely well heading into the peak leasing season.
As shown on slide nine occupancy remained strong and steady at about 96, 5%.
Annualized turnover remains very low relative to historic figures and 30 day availability effectively in the near term inventory that's available for lease remains limited at less than 5% of our units.
And while we continue to capture meaningful loss to lease as existing resident leases expire our portfolio wide loss to lease remains high currently at 14%, which has been supported by a 4% increase in asking rates since the beginning of the year.
Turning to slide 10, we are making meaningful progress in the transformation of our operating platform as we drive toward our goal of improving margins by 200 basis points or an additional $40 million to $50 million of NOI with approximately $10 million generated to date.
This slide highlights three of our many initiatives, including bulk Internet and managed Wi Fi, which is projected to ultimately ultimately deliver $25 million of incremental annual NOI.
Smart home technology, which unlocks both operating efficiencies and revenue opportunities going forward.
Third our digital mobile maintenance platform, which will not only enhance our residents' experience with us, but also deliver material value to enhance operational efficiency.
Before turning it to Matt Slide 11 provides our updated full year guidance.
Projected 16% core <unk> growth.
Reflecting our strong momentum in Q1, and incorporating our increased outlook for same store revenue and NOI growth.
We've also updated our guidance to take into account a couple of factors on.
On the operating side, while core operating performance is quite strong there continues to be some uncertainty about net bad debt in certain markets, particularly in southern California in Alameda County, and Northern California.
And in some other markets, while eviction moratorium have expired the core processes are moving slowly.
As a result, some of the growth we're expecting in the back half of 2022 May get question in 2023, which we have assumed in our updated guidance.
As it relates to our projected <unk> growth for the year, we've scaled back our assumption for acquisition activity for 2022 based on where we stand through today as we keep a close eye on cap rates fund flows and assess any shifts in the transaction markets.
While we remain active including another acquisition, we recently put under contract to update our guidance from being a net buyer in 2022, so an assumption of balancing acquisition volume of disposition volume before taking into account proceeds from Columbus Circle.
I'll turn it to mass adult further into our development and capital allocation activities.
Thanks, Dan.
Turning to slide 12, our development activity continues to generate outstanding results.
<unk> consolidated communities currently in lease up which are widely dispersed across five different regions have rents, which are currently $230 or 9% above pro forma which in turn is contributing to yields that are 40 basis points ahead of our initial expectations at six 1%.
With an estimated value on completion in excess of $1 billion in it.
Cost savings were $690 million. This provides roughly $360 million in value creation for an exceptional profit margin of 52% while hard costs are certainly trending up there is plenty of room for margins to compress from these elevated levels and still provide strong risk adjusted returns going forward.
As we mentioned on last quarter's call. Our teams have also been very active in sourcing new development opportunities as shown on slide 13.
At the end of the first quarter, our development rights pipeline had grown to $4 billion up from $3 3 billion at the start of the year with new sites added in our expansion regions of Denver, and Austin as well as established regions in new England and Northern California.
All of these new development rights are in suburban locations and with the total pipeline weighted 75% suburban and 25% urban our stabilized portfolio will likely trend towards that mix over time as well.
The chart in the lower right hand corner of this slide provides an illustration of how inflationary pressures on both analyze at the hard costs, we typically flow through to development yields. This is an increasingly important issue in the current environment.
Our development rights pipeline is underwritten to a current average yield at cost of roughly five 5%. The chart shows how it changed.
Or minus 10%, so its hard costs and analyze what impact that yield holding all else constant.
Because hard costs represent 60% of total capital costs on new development with variances depending on the specific site you can see that rising NOI have roughly twice as much of an impact on yield as rising hard costs of a similar magnitude.
As a reminder, we underwrite all of our development on a current basis and typically do not trying to either analyze or costs.
Even in the current environment with hard cost inflation running at a high level. This gives us a measure of safety. This math suggests even if our costs rise by 10% from current levels.
Five 5% yield can still be preserved with just a 6% increase NOI.
Slide 14 provides a quick update on our progress in our expansion markets of Denver and Southeast Florida.
We have been measured in our approach to building diversified portfolios in these regions investing through a combination of acquisition funding local third party developers and developing our own communities directly as we do in our established regions.
This has allowed us to put together portfolios that we believe will be optimized for future revenue growth as well as initial investment return with strong locations in both urban and suburban Submarkets in both regions critic.
Critically we are also focused on getting the products, we bought it will be well positioned to take advantage of demographic trends like the ageing of the millennials and the increase in work from home as reflected in the larger than typical average unit size and young average asset as shown on the chart. We expect to follow a similar trajectory as we ramp up our investment activity.
And our newest expansion regions of North Carolina, and Texas and make steady progress towards our goal of a 25% allocation to these expansion region.
Turning to slide 17, we also launched a new investment vehicle in the first quarter, which we are calling our structured investment program or CIP.
This is a mezzanine lending platforms to provide short term construction financing to local third party developers and our established regions plus Denver in Florida with our position in the capital stack between the primary construction loan and the sponsor equity.
<unk> provides another way for us to leverage our deep expertise in development construction and operations to generate attractive risk adjusted returns for our shareholders and we expect to build this program to a $3 million to $500 million total investment level over the next few years.
I'll turn it back to back for some closing remarks.
Thanks, Matt.
To wrap up and summarize key themes Q1 was a strong start to the year with several tailwind continuing to support our operating fundamentals, which are some of the strongest we've experienced and have us well positioned going into the peak leasing season.
We continue to invest in our operating platform with the teams executing across a number of transformative initiatives for 2022, including both Wi Fi smart access and mobile maintenance.
As you heard we continue to lean into our development platform lease ups, outperforming and generating meaningful earnings growth and value creation.
So building our development rights pipeline now up to 4 billion.
Abiding options on future value creation, including significant investment in our established regions at accretive returns as well as our continued focus on optimizing the portfolio by growing in our expansion markets and finally, we continue to look to tap our companys strengths with our structured investment program being our latest offering by tapping into our development construction and financial.
How to grow earnings and create value.
With that I'll turn it to the operator for questions.
Ladies and gentlemen, if you would like to ask a question. Please do so by pressing star one on your telephone keypad do keep in mind, if you're using a speakerphone make sure your mute function with east to allow that seemed to reach our equipment.
Again star one for questions, we will begin with Nicholas Joseph with Citi.
Thank you very much.
As you look at entering the structured investment program. How quickly do you expect to scale up to that 300 to 500 million and how are you thinking about lottery in the deals and redemption timing.
Hey, Nick This is Matt I guess I can take that one.
I think it will take us a couple of years, it really will be dependent on the.
Volume the transaction market starts volume and kind of.
How our origination goes but I would expect it's probably going to be two to three years before we get it up to that level.
And then once you get into that level. These are typically three to five year investments. So.
Each year, there are some redemptions and hopefully youre, putting out some new money. So it's a ramp to get it there and then.
Probably that's worth it to keep it there.
Thanks, and then as you work to to enter it you know what were you thinking in terms of just the competition.
Within this market and then are you going to have an option to buy your own.
Throughout all of the deals.
Yeah. Thanks for that so the second question no. We do not expect to have an option to buy the deals and.
We were trying to be very clear with the market and the sponsors that we're working with for US. This is not a program. That's about ultimately owning that real estate is a program that's about leveraging our expertise and our local market presence in these markets to generate good risk adjusted returns during the duration of the investment. So we really are viewing it as a one.
Time investment.
What was the first part of the question.
Competition the competition competition sorry, yeah.
There is competition there is competition from some of our REIT peers as we're aware.
Although I would say I think that the market conditions are probably shifting in a way that's going to make this program more attractive going forward.
As you know our development capital maybe gets a little more challenging.
First loan proceeds start to.
Get constrained so.
We're pretty bullish and the other thing is we have deep relationships in all of these markets.
And we've been in them for many years.
And so it's we view it as really another way we can work with a lot of folks that we've worked with another capacities in the past and it's kind of another sleeve of capital if you will.
Do you think about us in our established markets suffered self performing being our own DC right come with a ton of daily on the ground knowledge that we think we can leverage here and do so in a competitive way as we think about risk risk adjusted returns.
Thank you.
Now, we'll move to a question from Rich Hill with Morgan Stanley .
Hey, good afternoon, guys I wanted to maybe circle back to.
The acquisition, taking down guidance by about <unk> from acquisitions, but also square that to the recent equity raise.
I'm just trying to understand it seems like I'm thinking about this correctly.
Using the equity raise to potentially fund development in the future.
But maybe taking a little bit of a pause on the acquisition market given uncertainty for capital.
Right [laughter] does that does that sort of the right way to think about that and if so it doesn't mean, you're really taking a medium to long term approach rather than trying to maximize returns over the near term and I say that in a complementary way not a negative way.
Yeah sure Rich this is Kevin.
Maybe just tell you what the first part of the dividend I think youre right with respect to all of that basically maybe to break it apart into two pieces.
You're correct, obviously, we did the equity forward $500 million as Ben mentioned, our intention at least at this point is that while we can pull that down and one of our settlements from here through the end of 2023.
Our expectation is at this point that we're going to use that equity capital to drawdown over the course of 2023 developments in 2023. So that's our current attention. So it's it's basically capital the BD earmarked at this point to fund the future starts into 'twenty.
As to the kind of the first part of what you're referencing in terms of the change in the re forecast in.
And acquisitions you are correct.
We increased overall.
Expectations for core for Boe.
For full year by three cents to $9.58 at the midpoint and as you can see on page four of our earnings release, there are a number of pluses and minuses that result, net net we said change.
And you know among the more notable changes are obviously.
And expectation for an 11th and increased earnings from higher same store NOI, primarily driven from higher rental rates and to a lesser extent from higher occupancy and rent relief payments and then second as you pointed out rich five cent decrease in earnings from capital markets and transaction activity, which in turn when you kind of net the pluses and minuses in that category.
Lori is driven by a decrease in forecasted acquisition activity based at least on where we stand today at this early point in the airports, what we may do in acquisitions can change pretty quickly that the dynamic.
Dynamic part of our budget in and what May or may be doing that's important so that can certainly speak to that at the moment, we've pulled that down a little bit which creates a little bit of applied cent decrease and any other notable item is just the <unk>.
The decrease in earnings related to the flow through of your compensation items. So.
That is sort of a you know.
The.
A reconciliation of the re forecast for 2022 and the equity forward to be clear its not being pulled out in that model for 2022.
At our current expectations.
Okay. So it doesn't vary a little bit.
Yes.
Kevin Richardson, just got more and more tidbits there. So on the acquisition side you know, it's Kevin hit on.
That's a reflection of where we stand today, we did narrow the box some right or you know earlier this year wanted to assess the market and obviously some macro dynamics happening there.
And you know the assumption, we pulled it down to as similar to we had last year, which is sort of a balance between acquisitions and dispositions.
We continue to think about it really sort of trade capital right and so capital that we can be looking to monetize out of our established regions and then redeploying that capital into our expansion markets.
So Ben Thank you for that and that's a good segue into my next question.
Why.
The risk averse overstepping here why Wouldnt, you accelerate dispositions you've done a really good job of taking you know maybe older properties with higher capex spend selling those that tight cap rates and rolling it into expansion markets why wouldnt you accelerate dispositions.
Right now and maybe take that money and use it as.
Call it dry powder.
Yeah, I'll start and then Mike.
Can chime in but we were very active last year had a lot of activity at the end of last year and are continuing to push there for some of the reasons that you hit on.
The bulk of our portfolio, we've got a lot of conviction around is performing well right. So our movement as we think about optimizing the portfolio is a longer term approach right. So we're thinking about assets at a point in time, how do we think about value today versus value six months from today and you know.
Why there could be some movement in cap rates lets say Theres also you know very strong operating fundamentals right that are going to help support asset values as we look forward.
I guess, one thing I would just add to that rich is it's also about the relative value between what we're buying and what we're selling.
I will say.
If that changes and.
Yeah, we may be starting to see a little bit of a change in where values might be in the regions.
We're looking to buy in and some of the regions, we're looking to sell and maybe haven't been quite as in favor and that shifts maybe changing so I actually think looking forward.
Looking forward that relative value proposition on the trading they look a little better than it is say in the first quarter of this year when we broke even more cautious.
Thanks, guys that's it for me.
Well now move to Steve <unk> with Evercore ISI.
Thanks, Good afternoon.
I was wondering first if we could just start on kind of the renewables that you're sending out for I guess, either May June July and how those stacked up the first quarter and in April .
Yeah, Steve It's Sean.
In terms of renewal offers that have gone out where basically in the low teens.
Which is a little bit better than we originally expected when we contemplated the budget probably.
850, bips or so higher than what we originally expected.
So that's what's out now.
Okay and on Sean are the take rates you know is there any change in kind of the attitude or acceptance from kind of consumer or once they shop. The market realize it's kind of no better anywhere else they kind of come back inside.
Yeah, I mean, I think as a whole was reflected on the slide that presents it as it relates to turnover the acceptance rates.
Renewals as well as lease breaks, which typically account for about a third of move US both of those were down pretty materially I mean turnover is down.
So call it 20% year over year, but it's down 15% to 16%.
Compare to kind of pre Covid norms are when you look at Q4, and then again in Q1 of this year. So our pricing power is strong for us.
I think when people get a renewal offer and they go shop it to use your phrase.
They see the work of pet like value.
And then there was you know if there's transition costs. So if I'm Gonna go Oh I bet, it's gonna pay roughly the same.
And I've got moving costs or switching cost for a client just stay where they are.
Right that makes sense.
Kevin maybe one for you and if I missed it in here I apologize.
What is the assumption for for bad debt or on collectibles for the full year.
Today, and kind of what was it and just trying to compare that to 2021 .
So.
Steve.
I'll jump in here and Sean may want to add a little bit so.
In terms of overall bad debt on a percent of revenue basis Theres not a whole lot change of course, there's two categories that feed into that number but just to kind of give you a sense of it so the full year in our budget, we assumed the uncollectable revenue overall would be you know about 207.
The basis points of a headwind.
70 basis points of revenue.
And at this point, it's 264 basis points, so on a net basis marginally better but as.
As you probably saw reflected this theres some theres a bit of movement as we've seen in the first part of the year, so far and some of those underlying pieces.
So underlying bad debt trends, if you will.
Couple all of our jurisdictions have trended worse, such that overall for the full year, we expect.
That that category to be a little bit worse over the course of the year at.
At the same time, we saw more rent relief payments in Q1, and we now expect to receive more web payments overall for the full year.
And so kind of when you net that out on a full year overall, we forecast or overall bad debt, taking account rent relief and underlying bad debt trends, it's roughly net neutral relative to our initial outlook with higher expected rent relief payments.
The front half of the year.
To be nearly offset by a higher underlying bad debt projected.
Primarily the back of the year.
Yeah. The only thing I'd add just sort of your question for 2020 one as the uncollectible revenue reported for 2020 walnuts to 0.1.
As compared to the current forecast as Kevin alluded to it's just like six four for 2022.
Got it okay. So it's a little bit of a headwind year over year, but youre, saying within the 9% revenue growth you've got about a 270 basis points and in fact bad debt.
Sort of a headwind in there and the growth this year.
Correct in the way I'd, probably think about it Steve is relative to our original budget some markets are getting a little bit better.
Given the delay in the eviction moratory exploration, particularly throughout Los Angeles in Alameda County, and Northern California.
We adjusted our outlook to reflect continuation of bad debt trends in those markets through 2022.
Not seeing significant improvement so if we get into 2023, and that's really where do you kind of double click through it from a geography standpoint, that's where we expect a little more of a headwind than we maybe originally anticipated, but as Kevin noted a little more than offset by greater rapidly.
Great and just one last question for Matt just on kind of the construction supply chain. Just you know how is that sort of unfolding as youre looking to start new projects. You know was that a lot more challenging today is it getting better.
Just you know where the bottlenecks and you know what is that maybe due to the risk of starts or how do you sort of manage that and what should we expect.
Ah, Yes, Steve I guess I would say.
Construction inflation is definitely running hot so costs are on the rise this is where as being our own general contractor really does help because we're able to go.
Go back to build on the relationships we've had over many years with a lot of our subcontractors.
Negotiate early agreements and sunbelt agreements. So we're doing what we can to stay in front of it I suppose to the supply chain issues and the actual availability is she says it's probably gotten a little bit better over the last four or five months. So I havent heard as much about that.
I'd say the bigger challenges have been just getting final permits through jurisdictions in some cases getting certificates of occupancy final inspections from jurisdictions getting a power company out there to set the meters. Those things are you know probably haven't gotten it better yes. So I think that's kind of slowing down suppliers extending out.
Durations on construction jobs by a quarter or two in many cases I'm not talking about us so much as the industry as a whole.
So but for us so a couple of starts that we thought we were going to start in the first half of the year will probably get delayed a couple of months of the second half of the year, but that's really more about just kind of the delays in getting through the jurisdictions to get the final firms.
Great. Thanks, that's it for me.
Well now take a question from Austin works for it.
With Keybanc markets.
Capital markets.
Great. Thanks, and good afternoon, everybody I was curious how the 4% increase in asking rates year to date is tracking relative to your expectations at the outset of the year end and where you think that where that could finish the year.
Yes, it's Sean good question.
Say is that it's tracking a little bit ahead of what we anticipated.
And part of the reason why we looked at update in our report to us.
And outlook for the year was based on the trend that we're seeing not only in asking rents.
But you know what people are actually taking on renewals as well as what we're seeing on the new move inside as well as the renewal offers that we have in the queue.
You know I think typically what would happen if you look at our business historically as you would see rents continue to rise as we move through sort of the July maybe early August period, and then decelerate in the back half of the year.
We talked about on our last quarter call for 2021 things didn't really decelerate in terms of asking rents account has leveled off.
We do believe that this year and what's reflected in our outlook is that we start to see somewhat more normal seasonal patterns and see some deceleration in the back half of the year, but you know the macroeconomic.
Forces et cetera, just the overall supply and demand dynamics in the housing market.
[laughter] dictate kind of where things come out of this because in the second half of a year and I think we'll have a better sense for that as we get through our second quarter call.
Okay that makes sense.
What does that imply based on your current expectation.
For how things will play out in them.
Seasonal pattern, what does that imply for that 14% wash the lease how much of that do you draw down and what are you left with entering 2023 at this based on the current guide.
Yeah, No. That's a good question I'd say that one probably has a little more challenged you the answers sitting here.
Late April when we're talking about what it might be in January of 2023. So.
I would say based on what we know today it should be well above average, but trying to give you a range would be just too speculative at this point.
Okay. That's fair and then just last one for me I'm curious you know Kevin has there been any change in terms of the amount of capital that you plan to source versus the 880 million that you initially outlined.
Back in February I believe and do you still expect the balance or the bulk of that to be through that capital based on what we've seen where we've seen rates move up into this point.
Yes, thanks, Kevin.
So yeah I mean, the short answer is our capital plans changed a little bit not a lot. So you are correct. When we began the year. Our initial outlook was for $880 million of external capital most of which at that time was planned in sourced for the issuance of unsecured debt.
At this point, our current catheter play at all for just under $700 million of external capital So were down call. It two years old.
Overall relative to our initial outlook and of that nearly $700 million of external capital that we currently expect for the year about half is starting to come through net net disposition proceeds.
From sales of from pulled the circle as well as a little bit of disposition.
Dispositions, which is much more of a closer to a push as Ted alluded to a moment ago and then the other half from newly issued unsecured debt.
Against which we have $150 million in hedges in place at a forward starting swap rate.
137%, so about 150 basis points below where treasuries are today.
And then just to kind of put that perspective, what needs to still be sourced.
$700 million of external capital as you can see from our earnings materials and source 270 million in Q1 of us at $95 million.
The acquisition of Keyworth for about one fourth of the anticipated external capital needs in Q1 with three fourths left to go here and then just as a reminder.
At the moment as I mentioned is that we do not plan at this point anyway.
On drawing down capital directed towards from two but rather a fairly expensive you said 2023.
Sure.
Great very helpful. Thank you.
Okay.
Yes.
And now we'll take a question from trends knee with Luke Thrum with Goldman Sachs.
Alright, Thank you for taking my question.
Yes.
Okay.
Could you perhaps give us.
What would get you there.
Does that help me in English.
No.
So that is.
So suddenly we had a hard time hearing this is Kevin.
I think what I'm sorry.
Really messed up I can repeat.
So I think I've got I think you wanted to know what could drive us to the high end of our range of $9 78 versus the midpoint nine.
58, I think the answer primarily as an increase in expected rent rental revenue recede over the course of the year there could be other items.
Including acquisition activity and so forth that they probably would be the smaller impact and be up and down the P&L there could be changes, but anything that would drive us toward the high end of the range would be primarily driven by an expectation for much higher rental rate growth.
Let's see.
The acquisitions as well.
Got it and then I think towards the low end.
Would it take to get you there like what would have to kind of go wrong.
Christian.
Yeah, it's probably the inverse of just kind of what I suggested so something unexpected today that involve sort of a macro economic event that would cause a sharp, but unexpected decline in revenues over the course of the year.
I guess in all of this is sort of what we saw in 2020.
So of course, not their expectation but.
Certainly I guess potentially within the realm of possibility.
Understood and then as a follow up to your spending their newest right now in the low teens rate.
You mean Kinder India at this point last year, perhaps you know definitely obviously about a b to C class kind of crowding into apartments.
Just given where the market was are you seeing any divorced so from that standpoint, when it equals no longer out.
Ford.
Especially you know Don.
Those who previously did not live in saying it happened on the apartments I mean, what are you seeing from that D. O seeking activity standpoint is it worsening.
Yeah sure good question.
I would say it is not changing materially in terms of behavior.
If you look at people that are moving out for a rent increase or some other financial reason, it's up very modestly on a year over year basis.
And probably importantly, the reason we're not experiencing.
Experiencing that is wage growth has been quite robust and if you look at the wage growth, particularly across the occupations that represented primarily by our residents.
Not uncommon to find you know high single digit low double digit numbers out there for people in those sectors and I think that's consistent and even with some of the movements that we're seeing that Dan referenced in his prepared remarks, where people that are moving in this quarter as opposed to the same quarter last year, but then comes up 12% to 13% range.
Yeah.
Pretty good, especially in an environment, where people are generally spending less.
From a discretionary income standpoint.
Beer side up so so far there's not much stress in the system.
If that's kind of the main purpose of the question.
Well thank you so much.
Yes.
[noise].
And the next question will come from John Pawlowski with Green Street.
Thanks for taking the question, Matt I wanted to go back to your comments on just the development deliveries for that for the industry overall, not just Avalon Bay.
Are there are there any markets, where these delays are particularly high right now where the operating results. We're just benefiting from a dearth of deliveries and you just see in a few quarters. What are you talking about just kind of a.
A lot of deliveries dropped onto a market once some of these jurisdictional delays here I'm just trying to get an understanding of whether some of these operating results in certain markets are artificially high right now and there's going to be a shoe to drop.
Yes, its interesting John I don't know that it will suddenly correct.
And then there'll be I think what's more likely to happen is you're going to see supply.
No bleed in over a longer period of time, so it's going to extend out that delivery pipeline.
It'll get there eventually so you know maybe it gives those markets a little more time to.
To absorb it but people are starting just as much. So I don't I don't think it's going to change anytime soon to some of these issues, particularly when its jurisdictions or utilities.
You know those are structural issues those those types of entities don't suddenly go and hire a bunch of new people. So.
If you spend time in Austin today for example, which is one of the markets. That's got the most new supply coming in all the way you'll hear all the developers and contractors to talk about how a job that should take two years from start to finish is taking two and a half to three.
But there's tons of starts there. So I don't think I think it's just going to extend out the delivery times in general and among our markets, including our expansion markets. The two that I'd say are probably both stretch that way are probably Denver and Austin I don't know that.
You know theres a lot of supply in some other markets we're not in that.
That I've read about but those are the two off the top of that I would say, where we're seeing it the most disruptive.
Kind of pressures on the system, just not being able to keep up with the amount of supply.
Not in terms of demand in terms of deliveries.
All right final inspections, much out and all that.
Okay makes sense and then final question just on South East, Florida, 25% year over year revenue growth now, it's just a few assets.
Can you give me a sense for how much of this is really strong market fundamentals versus these acquisitions being previously under managed.
Okay.
Yeah, John it's Sean.
It's just a little bit of a blend of both.
Certainly the market fundamentals.
Yeah, I'll pick a source that you want to.
To use had been quite healthy.
With significant market rent growth as you move through particularly the back half of 2020 . One that's currently being captured in early 'twenty two but there are you know I'd say, there's a couple of different assets out of the big and small pools, you referenced that we felt had a compelling opportunity when we bought the asset.
So how is managed whether it was how the parking garage is managed in one case the price. He was manage in terms of revenue management and in another case that have probably given us a little bit of a lift.
But I'd say you know market fundamentals have been very robust.
You'd still see pretty.
Pretty robust numbers come out of the southeast Florida are.
Maybe the high teens range or something like that low twenties. It depends on sort of the management value added with all of that.
Okay.
Alright, great. Thank you.
Yes.
Now I will move to Brad Heffern with RBC capital markets.
Yeah, Hey, everyone I just wanted to go back to the acquisition guidance and make sure I understand the thought process. There is it that you think prices will come down as higher rates flow through and you don't want to acquire ahead of that.
Are you concerned about the economic outlook and therefore like the rate growth assumptions.
Is it just lower accretion given the higher cost of capital I guess, what are the key factors that are making you more defensive.
Brian This is Ben I'll start and back and provide more color.
It's primarily.
Just an updated snapshot of where we stand today right and as part of that as I mentioned before we did get more selective and that was to assess and sort of feel out whether there we're gonna be changes right.
Obviously.
It factors in the macro market, putting rising rates and part of that is that much circuit.
Offset or is there a countervailing balance with fund flows right, which continue to be very strong and in the multifamily sector. So yeah.
Yeah, we're you know you'd be.
Looking forward, we're hoping that there is opportunity right.
Although group right and it's going to be most impacted by higher rates. It's gotta be those levered buyers right. We're not that and we're also able to take a long term approach right with our investment thesis so.
We're paying close attention as I mentioned in my prepared remarks, you know we're active in the market.
Turning to accurately underwrite and pursue acquisition opportunities.
Yeah, Okay. Thanks for that.
And then I guess you have this chart on the Densification in the deck I'm curious is that something that you expect to be semi permanent or is it a sort of a COVID-19 anomaly that will reverse as people go back to work and I need to double up again financially.
Yeah, Brian It's Sean I mean, the short answer is it's probably too early to tell but I would say there are a number of macro factors.
We see out there that could support this theme, maybe a little bit longer phenomenon.
That being maybe more of a secular as supposed to just a cyclical issue and.
You'll certainly see people working from home and wanted to have more space or quiet space as opposed to the old roommates it might be doing something else.
People spending a little bit more on housing in general whether it's single family multifamily.
As a thought of home.
Yeah.
I mean, how you want to describe it but you know place where they're spending more significant time.
The only from a work standpoint, but are there other reasons.
I would just say just given the nature of the population and how we see things evolving.
Demographically you know a lot of the growth. We've seen has been a single person households, and you can you can see that kind of playing through with the people who are on that bubble maybe going through COVID-19 .
They were just getting married had you had kids.
Sometime during Covid to say Okay. This is a good window for us to leave X Y Z location of it somewhere else so people coming back maybe more just singular nature.
And Susan if you feel that way for a longer period of time. So there's a number of different issues out there you could point to probably several others as well that would tend to lead you to the conclusion that this may be durable.
Short answer is we'll know probably over the next few quarters, if we continue to see.
That trend remain in place.
Another theme that supporting it.
I want to emphasize it's just the financial health of our resident right our customer right think about job and wage growth do you think about savings you add on the factors that Sean referenced sort of the increasing importance of the home definitely a feeling that that's going to create an additional stickiness.
As they look for a quality home environments and more space.
Okay. Thank you.
Now moving to rich Anderson with F N B C.
Thanks.
So I recognize your.
Hey, rich rabbit Youre very soft on the phone.
Maybe my headset stopped working so can you hear me now there you go okay.
<unk> got a series of calls today [laughter], so I recognize what youre doing on the acquisition side, you know, it's sort of waiting to see how that market plays out, but you know if I were to extrapolate that conversation into development. Obviously, there's no funding issues from your perspective.
But at what point do you you know do you have your pulse on things you know, we got a GDP print you know and in negative territory for the first quarter, just today, obviously inflation and and you know the war escalating.
Lot of things going on around us that could.
Play a role in property values here at home. So I'm just curious you know.
How is your perspective about expanding development, obviously youre doing that but.
But how could it change in the in the future and you know what factors are you looking at to say well, maybe we should.
You know not not perhaps take a pause in development, but but.
Introduce a little bit more caution what factors are you looking for to come to that conclusion, even though it's not happening right now.
Hey, rich, it's Matt I'll take a shot at that one has a better others may want to chime in too.
We're always very focused on risk management, and it's kind of built into our DNA as I mentioned at the beginning you know that we are in my remarks, you know we never trend. So we're always looking at things on a current spot basis.
And we structure our deals were in the vast majority of cases were not closing on the land until we're very close to being ready to break ground if not when we're breaking ground. So we're very mindful of that and what I'd say is.
We have a lot of optionality.
So today, we control a $4 billion development rights pipeline with a total investment of less than $300 million between land on the balance sheet at the pursuit costs that are capitalized for lab and we don't yet know.
So that's that's a pretty impressive to be able to control that much opportunity with the investment that we have and you know.
So that gives us the ability to respond accordingly, so right now.
The economics of development are very favorable and we can provide that sensitivity table, because we havent getting some questions about that well you know what if our costs keep going up and.
The answer is you know, it's hard costs grow faster it modestly faster than rents still preserve the yield at some point, obviously that equation changes and we're watching that every day, but I think where we're at and when we do start we will match funded so if we're match funding it and if we're being careful the risk mitigation upfront basically.
The way, we think about it is we have options on a lot of good business.
And we don't really have to make a decision until the quarters. If you will starts.
I just would like to start with.
I would just add one thing to that and to Matt's comments and that's you know as.
As we do that we bring terrific with strong balance sheet to the equation.
But from a leverage standpoint and liquidity standpoint.
And our financial flexibility standpoint, as you know from our earnings materials are net debt to EBITDA is five times, which is at the low end of our target range of five to six times.
Our unencumbered NOI to 95%, which is probably at an all time high in the company's history. So we have plenty of flexibility to seaport facing circumstances should we need it so.
And the likelihood of being as you said, it's very low because we got to $5 billion of liquidity. When you look at our line of credit cash on hand, and the equity forward. So.
Again, that's first point, we do bring that spans into the.
All parts of our business, but we also bring a strong balance sheet that gives us plenty of firepower.
Flexibility.
Okay, Great and then my second quick question is and I asked this a couple of your peers already this this week and see what you have to say.
This is a an environment the likes of which we have not seen the ability to grow rents to the degree that we have I wonder how are you looking to preserve this <unk> to extend the opportunity into 2023 and 2024 as opposed to just sort of taking the money and and and.
And taking what the market is giving you.
Is there a weighted too to take this this gift of of an environment and let it exist and have been extending the shelf life of that into 2023 beyond just you know the earn in that you would normally get maybe extend lease term or or or do something to capture this for a longer period.
Time is there any type of strategy in your in your wheelhouse that you're looking to do that that type of thing.
Yeah Rich this is al I'll start with a couple of.
Items that are top of mind, you know and as you mentioned and obviously you know fundamentals are very strong today, but.
But looking at on the medium term right. There are other ways that we need to be focused and we are focused on driving value and growing earnings and so youre hearing from US you know our other focus area and themes right driving margin driving NOI through our operating model transformation Alright, that's that's one.
Think about how do we optimize our portfolio right over time is it other Reits are selling off of slower growth higher capex assets right and then redeploying that capital into our expansion markets with newer assets that we think we have a have a better cash flow profile and the development pipeline is another area that we continue just tapping into that general development D N a.
Right is another part as we think about growing earnings and an aspect of that is finding other avenues to allocate capital other ways to grow earnings and you saw that this quarter with our announcement around the structure and investment program.
Yeah, the one thing that I would add rich.
Rich just a couple of your specific questions.
Maybe just as a reminder is that as you look forward, but we're not providing any kind of guidance for 2020 three.
There are still a number of factors that would.
If you kind of start to line them all up.
We'll give you a sense that you know 2023 out of some significant macroeconomic shock for some time.
It should be a pretty good year in an above average year was the phrase you used earlier.
And some of the things that I would point to are one yeah. We've mentioned what our forecast is for.
Bad debt for this year, which is about rough numbers, you know two 5%, 6%, that's something like 50 basis points or so at some point, we're going to unlock all of that question is just when as we've moved through this year into next year.
And then in terms of the increases that we're seeing in our rents today, they're pretty robust, but as we pointed out at the beginning of the call on Ben's prepared remarks.
I'm pretty good asking rent growth today, which is actually boosting loss to lease and it sets up pretty well as we move into 2023.
And then the other piece I'd say is you know there's still a couple of markets out there, where we're somewhat constrained in terms of the renewal offers that we could send out due to these sort of COVID-19 overlays and regulatory orders are in place. So there's a few things out there that absent anything else Mccrory and assume it's a static environment.
She has a pretty good.
Good outcome for 2023 is what I'd say is to just keep doesn't lie.
You got it I'll do that thanks.
Yep.
And as a reminder, please press star one for your last chance to enter the queue well now move to Alexander Goldfarb with Piper Sandler.
Hey, good.
Good afternoon, and thank you for taking the question.
Just two questions for <unk>.
On the AR on the rents that you guys were owed I saw that nationally you received about $14 million from the federal.
From Treasury in the quarter, but just curious what the split is on a our balances. Both then apply the California <unk>.
Is that fall under the Federal program and then two within those mixes how much is owed from existing residents versus node by former residents and by saying that our understanding is from yesterdays calls that the former residents of California need too.
Participate in the process otherwise the landlord doesn't get paid so just sort of curious on the breakout of those.
Yeah, So Alex.
We probably need to get back to you with the level of detail that you're looking for in all the all the breakout between the different components.
So we've got some of that in hand, but it might be better to address that offline in terms of the specific details.
Kevin can provide a couple of comments at a high level, but just high level, that's high level assign high level was fine yes.
And maybe just in response to your first question about where the money is coming from a wall in terms of the numbers.
Our rent assistance programs.
From the beginning to the two.
We're through February so with respect to receivables from 2021 and from February 2000.
Two points to about two thirds of the funds that you see.
It's come from California.
And then.
The next biggest chunk is 10% from Massachusetts.
So that's the high level overview of attempts to question about current versus former residents and stuff like that why don't we get back to you just to follow up with you on that one.
Okay. Then the second question is.
You guys talked pretty healthily about the market rents and the demand for the product and.
But just sort of curious your guidance for the second quarter is a little bit.
Short of where the street was expecting are there some offsets or some items that are coming up that give a little caution to the second quarter.
Or is it just a matter of your view of how timing for the year that the back half of the year is going to be materially stronger such that the.
The overall guidance range basically stays the same when you look at the full year guidance.
And Alex tenants, specifically about same store.
What metrics are you talking about specifically just so we're clear what you're asking about.
Your core your core <unk> guidance.
The top end of your range is where the street is so I'm just sort of curious if there were some things of caution or maybe some bad debt items or one time items that the street would get factored in that would've.
Got it.
So Alex this is Kevin.
Yes first of all it's impossible for me to reconcile our numbers against.
Or does it or so analysts numbers on some composite basis.
As a group and individually you all are free and it should be free to sort of make your own forecasts I guess I'd make a couple of points first of all with respect to Q1, we guided to a midpoint of $2 20 per share we beat it by <unk> Street was at around $2 26 to 27, which ended up being pretty close to act.
But we certainly can guide the street there.
Similarly, I guess the street, maybe around 963 64, something for the full year, we never guided the street to that level, we guided to 955.
Frankly, we try not to sandbag or numbers, we've tried to give you an honest expression of where we think.
The year will shake out based on the assumptions that we had in place in the model today and as things stand if things play out.
Based on the kind of business plan that we outlined in our updated forecast we think the balance of risks 50, 50 around $9 55 per share.
And that includes kind of the pain point of pulling back a little bit of acquisition suffice. It so having that done so we'd probably be at $9 63 right.
So maybe that's one way to try to reconcile all the 963.
All of that I, just don't know how to compare our assumptions for so we should call it positive the streets.
That's.
That's super Awesome. So appreciate that color. Thank you.
Yes.
Yes.
Now we will hear from Joshua <unk> with Bank of America.
Yeah, Hey, everyone I had a question on the structured investment program I guess huh.
How do you use.
How do you feel like that will influence your capital deployment preference is going forward.
And then also just curious why now.
For launching the program.
Hey, Josh it's Matt.
I don't think it will influence our capital deployment strategy I think it's really more additive. It's just adding its away as I was saying to leverage our capabilities and our relationships and our presence in these markets are too you know if something else that will be accretive for the shareholders. So I don't it's.
Its not displacing anything else in our capital plans.
Why now.
In the market for a while now with our.
Different program, our developer funding program, where we have been providing capital to other developers exclusively in our expansion regions.
And as we've been doing that we've been.
Learn some things and one of the things we learned is that the expertise that we do bring is value. It's valued by potential partners type either developers is valued by lenders and so.
We did see it as a again a market opportunity to extend those capabilities and.
Frankly, I think it will be a better environment for placing these kind of investments going forward.
It's been the last couple of years when capital was incredibly cheap and easy. So if anything I think we're probably in a better position.
To place this money in competitive terms.
Look out over the next couple of years with rates starting to rise in capital, maybe becoming just a little bit a little bit more dear.
Got it and for the for whether you do a mezz loans preferred equity are you targeting fixed or floating I know you said like nine two I think 11% kind of returns. We're just curious if there's if you if it will be fixed or floating.
I think our first couple of deals that we're looking at now is like the one that we closed our fixed but it's something we're talking about it we're going to meet the market where the market is and you know.
When short rates were so incredibly low.
Fixed was quite.
I think probably the better way to go for.
For the for the capital provider, if that shifts that will shift with it.
Awesome. Thanks, guys.
And ladies and gentlemen, this will conclude your question and answer session for today I'd like to turn the call back over to Ben for any additional or closing remarks.
Thank you for joining us today and your questions before into our continued dialog and see you soon thank.
Thank you.
And with that ladies and gentlemen, this will conclude your conference for today, we do thank you for your participation and you may now disconnect.
Yeah.
Yeah.
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