AvalonBay Communities Inc. Q1 2023 Earnings Call
Good morning, ladies and gentlemen, and welcome to the Avalonbay communities first quarter 'twenty twenty-three earnings conference call.
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Your host for today's conference call is Mr. Jason Reilley, Vice President of Investor Relations.
Mr. AHL you may begin your conference.
Thank you, Doug and welcome to Avalonbay communities first quarter 2023 earnings Conference call.
Reminder, this call may contain 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.
Yeah.
I'll now turn the call over to Vince <unk>, Chairman and CEO and president of Avalonbay for his remarks.
Thanks, Jason.
In terms of key themes for this quarter I will start by reviewing our strong start to the year and describe why we believe our suburban coastal portfolio is particularly well positioned.
Shawn will discuss our operating performance and relative strength as we enter the peak leasing season.
I will comment on the evolving development market in detail the differentiated earnings stream that our developments currently underway set to provide.
And Kevin will review, our strong financial position and highlight the advancements at our industry, leading centralized service center for utilized to drive revenue and operating efficiencies.
Turning to our presentation starting on page four we continue to meaningfully grow earnings in Q1 with <unk>, increasing 13, 7%.
Significant part of this uplift is related to the roll through of leases signed last year.
We also continue to grow rents during Q1, we'd like term effective rent change of four 1%.
For the quarter, we exceeded guidance by <unk> <unk>.
With the one center revenue, primarily attributable to better than expected collection rates from residents <unk> due to lower operating expenses and <unk> related to interest income and other items.
In early April we drew down the proceeds of our equity forward, which we entered into about a year ago at the spot price of $255 per share a couple of items to highlight here.
The initial cost of this $500 million of capital is in the low 4% range.
As it was originally intended we've allocated this capital to development projects underway, which are projected to generate development yields of 6% or more.
So when we talk about funding our underway development at yesterday's capital cost. This almost 200 basis points spread is what we're referring to and leads to significant value creation for shareholders as these projects stabilize.
The second aspect of the drawdown on the equity forward is unique to the current environment in which we can earn outsized returns on cash.
We werent originally planning to draw down the equity forward until Q4 of this year, while we executed it now and have invested the cash at 5% plus interest rates with extremely strong banking partners.
On a net basis the incremental income on this cash is projected to increase 2023 core SSO alright.
By approximately <unk> <unk> per share after factoring in the incremental shares outstanding.
We in turn increased our full year core <unk> guidance by <unk>.
The $10 41 per share at the midpoint.
The breakdown is as follows.
<unk> revenue with a one cent from Q1, and then an additional one cent in Q2 based on slightly better rental rates.
There was an assumed <unk> improvement for operating expenses for the full year, which includes the <unk> from Q1, partially offset by one higher opex in the second half of the year.
And then <unk> of additional core ortho, primarily from the interest income on the equity for proceeds as well as other cash management and slightly updated assumptions related to the transaction timing.
We did not adjust our same store guidance ranges at this point and we will reevaluate those as part of our more fulsome mid year re forecast.
Turning to page five regarding market fundamentals occupancy and rent trends and our established regions are experiencing less volatility than in the sunbelt regions.
Part of this is a reversion to the long term trend lines. There are also underlying demand factors, providing greater stability in our established regions and two are worth noting first rent to income ratios are generally in line with traditional levels. As noted in chart three effective market rents in our established regions have grown about 10% over the past three years with income Levy.
It was more than keeping pace with rent growth.
And second with limited single family home inventory and higher interest costs. The economics are renting are considered really mean considerably more favorable than buying a home in our markets.
The near term supply picture also bodes well for the performance of our suburban close to portfolio.
As shown on page six our established regions have meaningfully less new supply coming online. This year estimated at one 6% of stock as compared to sunbelt markets at three 6%.
And as shown on the right hand side of the stage when we look at supply that is directly competing with our portfolio levels or even lower at one 4% of stock overall and only one 2% of stock in our suburban markets, which comprises roughly two thirds of our portfolio.
In terms of our portfolio allocation objectives, we do still want the shift 25% of our portfolio to our expansion regions over time in order to diversify and optimize our longer term growth profile. So that has not changed and in the near term the relative trade of selling assets and our established regions to acquire assets and expansion regions could be more attractive to us.
And it has been allowing us to more profitably reposition our portfolio for future growth.
With that I'll turn it to Shawn for more specifics on the operating backdrop.
Alright, Thanks, Ben Kantar.
Continuing to slide seven to address market trends.
Fact of rents in the east and west or up about 10% from pre COVID-19 levels.
Very different paths to get to the same point.
Firstly on the West Coast, which has historically been more volatile than the east.
Sharply in 2020 escalated significantly in 2020, one and the first half of 2022, and then soften consistent with seasonal norms in the back half of 2000 and trying to.
So on the east coast experienced a more modest decline through COVID-19 and have grown steadily since Q1 2021.
Very modest seasonality in the back half of 2022.
And consistent with historical norms, both coasts posting positive sequential monthly rent growth during the first quarter.
From a year over year growth rate perspective, the west coast continue to decelerate during Q1.
Well the east coast showed signs of stabilization bolstered by slightly better growth in absolute rent levels since the beginning of the year.
Moving to slide eight to address trends in our same store portfolio keep.
Key performance indicators were healthy during Q1 and remained so heading into the prime leasing season.
Our availability was in the low 5% range during the quarter turnover, which was relatively stable during the quarter was lower than Q4 of 2022.
As the volume of residents, leaving our communities to purchase a home declined by roughly 25% sequentially and about a third year over here.
Occupancy increased about 30 basis points from Q4 and as noted in chart four on slide eight and also in our earnings release, Brent change improved from three 7% in January to four 9% in April .
Additionally, our portfolio average asking rents.
<unk> about three 5% since the beginning of the year up 4% on the east and about 3% on the West and is slightly ahead of our original expectation.
Also renewal offers for May and June went out of roughly 7%.
I'll turn it over to Matt to address development now, Matt Alright, great. Thanks, Sean turning to.
Slide nine our lease ups continue to deliver outstanding results laying the foundation for strong future growth in both earnings and NAV we.
We currently have four development communities that had active leasing in Q1, all of which started construction early in the pandemic before rents had started to rise meaningfully.
As a general rule, we do not update our projected rents on lease ups until we open for business and start to gain leasing velocity at which point, we mark those rents to current market levels.
These four deals we have seen an increase of $485 per month were 17% above our initial underwriting.
This in turn is driving a 70 basis points increase in the yield on these investments to six 7% well above current cap rates and even further above the cost of the capital we source to fund these deals back when they broke ground consistent with our match funding approach.
Looking ahead, we expect to start leasing on an additional seven communities before the end of the year, we have not yet mark the rents on these projects to current market, but in general the locations in which they are located has seen similar increases in market rents. Since we started construction, providing a great opportunity for further lift in their results as well.
As shown on slide 10, with most of our communities development community is still early in lease up are yet to open we realized just $10 million of the total projected $142 million and NOI from the entire development book in Q1. This leaves over 130 million of incremental NOI to come as these assets complete construction.
Stabilized.
And as per the prior slide that total NOI figures also likely understated given only four of those 18 total projects had been mark to market today.
Turning to slide 11, as we look to future development starts we're certainly starting to see shifts in the development market in response to the fed tightening of the past several quarters.
One of our competitors many planned projects are being postponed or abandoned as third party financing becomes scarce.
And some of these drop land contracts are starting to come back to the market with much lower pricing expectations.
We've already been able to take advantage of several of these situations with recent additions to our development rights pipeline and we do expect to see more as the market adjusts.
The slowdown in starts in turn is starting to impact the construction market, where we're finally, starting to see some retraction and subcontractor trade pricing after three years of outsized increases.
An environment, where capital is scarce and certainty of execution becomes more critical both to land sellers and subcontractors plays well to our strengths as both the developer and the general contractor.
Traditionally seen as some of our most profitable investment opportunities when these more challenging cyclical conditions have prevailed.
With that I'll turn it over to Kevin for an update on the balance sheet in the CCC. Thanks, Pat turning to slide 12, as we look ahead, our balance sheet remains exceptionally well positioned to provide financial strength and stability, while also giving us the flexibility to continue funding attractive growth opportunities across our investment platforms.
In this regard we enjoy low leverage with net debt to EBITDA at four six times, which is below our target range of five times to six times.
Our interest coverage ratio and unencumbered NOI percentage are at near record levels at six nine times and 95% respectively.
And our debt maturities are well ladder weighted average years to maturity of about eight years.
In addition, as disclosed in our release, we also enjoyed tremendous liquidity of about $2 $8 billion today with no borrowings under our two and a quarter billion unsecured credit facility and an additional $5 billion from just having settled our equity forward that we originated a year ago.
As a result, we don't need to tap the capital markets for an extended time.
We are well positioned to lean into our balance sheet to take advantage of future investment opportunities that may emerge in our markets over time.
On slide 13, we highlight our recently announced agreement to provide back office financial administrative support the gables residential portfolio of 25000 apartment homes from a centralized customer care center, which we established in 2007 to create operating and scale efficiencies and supporting our own portfolio, while enhancing our resin cost.
Our experience.
At the outset I want to acknowledge the efforts of the entire tableau team that brought this business relationship to cables across the finish line.
We highlight this achievement for several reasons first because we are genuinely excited to be able to extend these services to a highly respected multifamily company such as cables tend to its residents.
Because this agreement demonstrates the appeal of the innovative capabilities that we've created in the 16 years since we established the CCC.
And third because we haven't had embarked on extending those capabilities in a way that allows us to create additional value for avalonbay shareholders by often these support services to other institutional multifamily owners now and in the future.
As a reminder, we are not offering property management services under our agreement with gables, nor do we intend to do so as all business and operational decisions related to Avalonbay isn't gables portfolios will continue to be managed separately by each company, rather we are providing back office financial administrative support to cables.
And finally from an economic and guidance perspective, while we are not disclosing the specific terms of our agreement for confidentiality reasons. The near term earnings accretion from disagreement is relatively modest and was included in our initial outlook given back in February 2023.
With that I'll turn it back to Ben for closing comments alright.
Alright, Thanks, Kevin Page 14 summarizes our key takeaways and focus areas. We're.
We're pleased with our start to the year, we expect our portfolio to outperform as we look ahead.
We are also mindful that these are the types of environments, particularly in environment in which capital is generally less abundant in the industry to selectively take advantage of opportunities in order to create value for shareholders with that.
I'll now ask the operator to open the line for questions.
Thank you, ladies and gentlemen, we will now be conducting a question and answer session.
If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
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Our first question comes from the line of Eric Wolfe with Citi. Please proceed with your question.
Thanks, It's actually Nick Joseph here with Eric.
Kevin You mentioned the agreement announced last week with gables recognize you cant talk too much on the specific terms of that but if you could talk more broadly about.
Is this a one off deal or are you looking to scale. This business, what sort of margin and economics could you derive formats.
And then I know this isn't a third party management contract, but would that be of interest as well for other property owners.
Sure.
Thanks, Nick I'll start and others.
John May want to chime in.
In terms of the go forward view of this we're certainly excited to have this agreement in place.
And without getting into the specifics of the economics I mean, the impact is at the moment is fairly modest if you just think about the relative size of our business and our main value creators outside of operations in developing and so forth.
But we are excited to have them in place. It is accretive there are from a contribution point of view healthy margins for sure that make this worth the while.
So the future potential.
Hopeful inspire to do more business like this but we're not proactively looking for that new business right now.
We've just completed this transaction for us with gables, so but.
But we do hope looking ahead to be able to do more business like this over the time.
And we think it doesn't make sense for us to do it because over time. It gets it allows us to scale them more fully invest over time and an important capability that allows us to further differentiate ourselves from our peers.
So there's a lot more I could go into there, but maybe I'll just pause there and I know, it's sean or better than anything else to add yeah, I think that as well, but I'll add a couple of things and thanks for the question Nick.
I would connect for you.
Step as the kind of next continued evolution both of our operating model John journey, but as well as the role that the CCC and centralized services are fine for us and so part of the appeal. In addition to the revenue and profit opportunity with gables.
We are increasingly handling more services at least at least in part at a centralized way.
And this relationship allows us to make continued investments thinking about technology about process people.
We think in that accrued to the larger platform are at Avalon Bay. So it's a nice next step in our overall operating model journey and we're excited for this first step in potential future clients going forward.
Okay.
Eric maybe just to follow up there.
You said that the initial sort of impact was included in guidance it wasn't.
Frankly that large I guess you know how many units would you sort of have to manage before it would become a sort of a more material part of your of your earning stream and then just to make sure that I understand the last part of your answer.
I think you're effectively saying that you can invest in your platform investment technology, and even though that the financial contribution above that might not be that big youre effectively allocating those costs.
Two other parties is that the right way to think about it or did I misunderstand that.
Yeah, Eric let me kind of take a stab at it a little bit.
You know I can't really give you I mean in answer what what number of units would be have to be under this kind of an arrangement for two material partly depends on what you think is material I guess to some degree I think the way we look at it is from a slightly different perspective, not the immediate financial impact, but it's kind of been alluded to what this sort of thing does for less too.
To continue our journey to create the leading operating platform in the business and so.
We're in our 17th year with this experience and I think that we're pointing this out probably for two reasons one to your question about what this can do the more you do this for not only yourself, but for others. The more you can you can reinvest in that business create a better platform in and of itself over time, but even for our own sake. When we started we.
Werent at our current size of whatever 80000 apartment homes. When we started this in 2007 were quite a bit smaller and.
It has gotten better itself over time, we've really fine tuned and honed the CCC such that its substantially better than it was even back in 2007 and 2010.
And it has done a number of things you can see on the slide here for us over time I mean, one thing that did is when we had the archstone transaction, we were able to add 20000 units and 30 days so that bespoke speaks.
Speaks to sort of the ability to scale quickly when you've got that capability centralized in house and the other reason why we think it's worth highlighting for you apart from the fact, it is a relatively modest financial significance today.
Is the fact that you know a highly respected institution multifamily owner such as gables by entering in screening with us after its own due diligence to us in our center does provide external validation of the strength and the economic value of the capabilities. We've created the CCC over the past 16 years, and we think that that's something that's worth.
The sizing.
To our investors given the increasing importance of generating alpha and our operating platform through innovation, which we're continuing to do across across the entire business.
At this point.
Alright, thanks for all the detail.
Okay.
Our next question comes from the line of Steve <unk> with Evercore. Please proceed with your question.
Yeah.
They were pretty backend loaded for you guys. This year I'm, just curious given matt's comments about cost starting to come down, but the economies potentially weakening and rent growth is slowing you know how those potential starts are kind of shaping up for you and you know what I guess.
Are you looking for higher hurdle rates today, and maybe in the back half of the year than you were say six months ago.
Sure Hey, Steve its Matt.
Yes, so our target yields or going in initial return on new development has been rising really over the last year.
You know cap rates rise in cost of capital rise both debt and equity so.
You know our target yields were probably in the mid fives mid to high fives last year and now they're they're kind of in the mid sixes low to mid sixes, depending on the geography and the risk associated with the deal so.
Our start activity for the year is that there is probably a little more back half weighted just by the way these deals tend to pace out.
And also we do think that as time goes by we're gonna see more buyout savings on our hard costs in some that probably plays to our advantage a little bit and we can play that a little more aggressively given the reactors are in general contractor, 90% of our of our development, which is a little different than I think many others.
So.
But when I look at our development starts that are slated for this year, that's about where the yields are they're probably in the low sixes.
And you have to kind of look at the geographic mix and the risk profile of those deals.
You know to kind of weigh.
Way the profitability of each one which is what we do but again, we've been pretty consistent saying, we're continuing to look for that 100 to 150 basis point spread on new starts and frankly, the stuff that we started last year and the year before the spreads are wider than that which was kind of highlighted on the slide.
Yeah, I guess, maybe to ask it maybe dual definitely I guess, what risk or what probability would you put that you don't hit the starts number for host of reasons or do you feel reasonably confident that costs are coming your way and even if rent growth slows a little bit that you know you're still able to kind of achieve the returns.
Do you need to kind of put that you'll put those starts into the ground.
I think I'm pretty confident about it when I look at the starts for the year. We started one in the first quarter. We have one that we've just started it'll be a second quarter startup third one where we have all of our final budgets and its been approved through our investment Committee.
Three of the seven or eight starts we have planned for the year and when I look at it the other ones.
I'm feeling pretty.
Pretty confident that that we should track that unless something very unexpected happens Steve.
Steve maybe a little bit a little bit more to your question about how does our development approach changing and we do have.
Fairly fulsome development rights pipeline.
That's talking about our near term starts which are fairly baked at this point, but the next set of deals right in that pipeline over the next couple of years part of what we're going through right. Now is very proactively principally we're reworking those deals right to reflect today's environment.
And given what's happening with some of our competitors some of the formerly active developers there and sellers are.
Salaries that are starting to increasingly acknowledged that the environment has changed and so that's leading to land repricing, that's leading to more attractive terms, it's allowing us to control high quality real estate relatively limited upfront costs. So all of those dynamics continue to run in our direction.
Okay, Great and then maybe just one question for for Sean on <unk>, you talked about I guess, the renewals going out around 7% I know you don't provide a split between new and renewals and you kind of just provide the blended you know April was a nice uptick I guess given that we're going into the spring leasing season, you know how.
I guess, how much confidence do you have that you know kind of the May and June numbers might look like April could they be better and I guess what markets are you seeing the most strength and weakness.
Yeah, Steve good questions maybe.
Maybe I'll provide a little of a high level commentary as it relates to renewals versus new move ins and.
And then a little bit about trends, but in.
In the first quarter, but I would say is if you look at the blend there renewals were kind of in the high fives and live events are sort of in the mid 2% range and then in April .
Renewals were sort of in the mid fives, but new move in just given the seasonality of rent. So it's kind of moved up into the mid fours.
Just to give you some perspective there.
And our expectation is that consistent with what we talked about on the first quarter call that we would see that best friend change kind of in the first quarter and then it would begin to decelerate.
But that's dependent upon what happens.
With growth in asking rents as we move through the year. So our expectation is still consistent with what we communicated in Q1 is that we would see Q1 performed well and then we would start to see some moderation.
Both in rent change and overall rental revenue growth and that's still the expectation and part of that you're going to have to keep in mind, yes.
The year over year basis, he has a headwind associated with a reduction in rapidly becomes far materials, you get it into the second and third quarter and that will create some moderation from our rental revenue growth perspective, but as it relates to rent change.
Based on what we know today I would say as you get further into the second quarter, we would expect that to begin to moderate more southern one obviously, we saw in the first quarter.
Great. Thanks, that's it for me.
Our next question comes from the line of Austin <unk> with Keybanc. Please proceed with your question.
Great. Thanks, everybody.
Going back to <unk> for a minute I guess.
I'm curious what sort of precipitated the discussions with gables, and whether or not you pursued.
Other potential portfolios to add.
To the CCC platform and and while.
Understanding you're not handling the property management could we see these partnerships lead to a feeder for future acquisitions.
Yes Austin.
First piece short version of it there were some existing relationships across the firms, which sort of started the conversations. We then went through a pilot with gables on a smaller portion of this portfolio to the test at both for them and for us.
And on the heels of that we both decided to proceed given the benefits that were being realized.
And then to your last piece.
This is not a acquisition.
Approach or or angle here. This is much more focused on operational benefits.
Understood and then going back to development I recall, you know some some cables you provided over time showing kind of IRR is on development and certainly recall coming out of the Dfc.
There were some really attractive returns over time, so given what's going on with the availability of bank financing the more attractive land and input costs I guess it seems like a unique opportunity today. So how are you thinking about ramping development.
As quickly as you can to maybe capitalize on whats going on today.
Hey, Austin, it's Matt I can speak to that a little bit and then maybe one two as well but.
The good news is we have a we're controlling a lot of really good real estate right now for very modest upfront investments so.
We've kind of been operating the platform in anticipation of a potential opportunity emerging like this really for the last couple of years and we've added quite a lot to our pipeline over the last year or two.
We're controlling I think 40 or 41 potential deals.
Pretty modest land on our balance sheet I think it was $180 million at the end of the quarter. The total investment, including capitalized pursuit cost is only around 235 or $240 million.
So.
We have and a lot of those.
The options are.
Not yet at the point, where we have to make a decision about are we going to close or are we going to as Ben mentioned there are some conversations going on with some sellers about these deals are struck at a different environment.
So I think we're well positioned I wouldn't say, it's quite there yet it's not like development economics are screening.
Value yet you know, we kind of have to see where asset values settle out and thats. The other side of this is what's going on in the transaction market.
Which is still pretty muted deal volumes, but we do have the ability.
To ramp it up if we see that.
Emerging kind of later this year, particularly when we look to next year. The other thing is as I mentioned, we are starting to see the moderation in hard costs, particularly in some markets where start volume has come down there are other markets, where that's coming but it's not quite yet.
So we're watching that very closely every day.
That's the other.
The opportunity that we will see you know there are some markets, where we think it's going to come down more if there's other markets, where it's going to take a little more time, but over particularly the next four or five months as we have more deals out in the market actively bidding will have a much better sense for where we're hard costs are going because what we're finding today is if you have a job that youre going to start in a year.
And you're showing preliminary drawings, youre, not getting particularly attractive pricing, but if you have a job. It's truly ready to go you got a permanent hand subcontractors can see some early site work and they have a hole in their production schedule thats when youre seeing the more aggressive bid.
Two areas I'd emphasize one just on the point of our relatively limited land holdings. When you look across our peer set and our land holding numbers below a number of our peers.
Despite kind of or our ability to execute at a higher development levels throughout cycles. So we've got some room in there.
Second part is an environment right now we recognize we need to be selective about that but in places could be markets, we know really well.
Hereby operating communities places, where we can bring our platform into.
We're finding opportunities there in our expansion markets for some high quality land deals that are falling out of contract ability to step in and.
Yes.
A couple of situations, where land is getting repriced at 30% to 35%, where it was priced nine months ago.
We can step in and control that land with relatively limited cost.
We look at a couple of years, and we think that'll accrue some significant benefits.
Okay.
Thanks for all the detail.
Our next question comes from the line of Adam Kramer with Morgan Stanley . Please proceed with your question.
Hey, guys. Thanks for the question I, just wanted to ask about bad debt it looks like 500 basis points.
On a gross basis in the quarter.
I'm just wondering.
No you're going to you're really helpful kind of market by market breakdown. There. So just wondering kind of how youre thinking about gross bad debt.
Over the next few quarters.
Is there a chance that this could be kind of a you know.
Some sort of a tailwind going into next year. If this does return to maybe doesn't even return all the way to kind of normal pre COVID-19 levels right, but just you know you get some year over year improvements on that number.
Sure Adam this is Sean.
Just a couple of comments on that first as it relates to.
Bad debt during the quarter, the sort of uncollectible portion from our residents as we think about sort of underlying bad debt.
It came in around 3%.
Which is about 22 basis points better than what we anticipated.
And that's the pennies. It then basically spoke about in terms of what we picked up in the first quarter.
Moving forward for the balance of the year, we're expecting Q2 through Q4 to average roughly two 7% starting at about 3% in Q2, and then sort of trending down throughout the year in terms of that underlying sort of bad debt percentage.
That's how the sort of trajectory looks as you move forward.
Different markets are doing different things, we saw some nice improvement in New York.
The Greater New York region in the first quarter.
Possible for about half the variance.
In the quarter about a third in southern Cal and then kind of sprinkled across the other markets as well. So overall, we were pleased with what we saw in the first quarter, but you know it.
It doesn't necessarily make for a trend just yet.
And we will be able to revisit the mid year. Once we have a better sense for how things are playing out as we move through the second quarter as well.
Great. That's really helpful. I appreciate the clarification there of about 300 basis points.
My higher number that I appreciate that.
Just as a follow up.
Is there a chance that you can kind of have a I guess kind of more of a one time onetime in nature, but are you kind of a benefit from residents who kind of true up right, who not only kind of get current on rent and also pay a prior period.
They were delinquent on Manhattan paid.
Is it possible you can kind of see a onetime benefit from that.
Adam what I'd say is anything is possible I don't think that is probable based on the resident behavior, we have seen thus far.
So I would not anticipate that to the extent that we all of a sudden.
Cash started raining than from people who haven't paid.
Not necessarily what we've expected in our guidance it would be a bump.
I would not expect that as the likely outcome.
Got it really helpful guys. Thank you for the time.
Yes.
Our next question comes from the line of churn the Lutheran with Goldman Sachs. Please proceed with your question.
Hi, Thank you for taking my question.
Could you talk about concessions you know what are you seeing across your markets, particularly on the last call.
Perhaps even in your expansion markets.
And how has the churn been lost.
90 days, you'll have things gotten worse. Thanks.
<unk>.
Sure Anthony this is Sean I'm happy to answer that.
First in terms of Q1 activity across all of the leases we signed in the quarter, which is about 16000 leases. The average concession was less than 200 Bucks. So very very modest obviously more concentrated in certain places.
What I would tell you it's about 30% of the concession volume that we experienced in the quarter in terms of leases that were captured for.
Spread across Seattle.
And.
The area, particularly in San Francisco, So Thats, where most of the volume is frankly.
But if you look at concessions over the last few weeks just gave you a little more recent data less than 10% of the transactions that we're executing.
Are seeing a concession and again, it's more concentrated in those two areas of San Francisco.
In the Pacific Northwest.
And in those markets.
30, 40 to 45 basis, depending on the Submarket, we're getting some type of concession. So those are the two places where we're focused on it both in terms of moving volume, but it's not as significant an issue elsewhere.
Noted and then as a follow up last quarter you laid out.
Cap rates in the mid to high fours range.
What are you seeing right now.
At what level would you think that it would become appealing enough for you to dive in.
Yeah, Hey, this is Matt I guess I'll speak to that one.
So what we've said.
Cap rates and then our own trading activity.
I think what we're seeing is that there is a.
A bifurcated market.
There are a lot of assets that are not trading.
Those that are kind of put them into two buckets, we kind of have hasn't had thoughts the haves, which is highly desirable assets in locations either markets or submarkets that are on a lot of investors lists for growth those assets are still trading in the mid fours cap rates I think in fact I would've she does.
90 days ago, I, probably would've said high fours, but and.
And we do have some assets actively in the market today.
Hopefully will close here in Q2, and we have at least one that's in that <unk> category I would say, that's probably more of a mid fours cap rate.
Now when I say cap rate I'm, not necessarily talking about the yield I'm talking about kind of a market convention the way they required a cap rate which include the management fee.
Capex allowance and the buyer's property taxes.
The other the other side of the equation is the assets that maybe have a little bit less Ah <unk>.
Interest that have less deep pool of bidders and there.
The have nots, you might have one or two that are seriously interested and there I'd say cap rates are probably more like low fives.
And you know.
So call that range anywhere from four five to five in a quarter and we may have an asset or two that's in that latter category as well.
Currently working in the market.
As it relates to our own asset trading activity.
Our plan for the year was to be net neutral, but to really we started last year, saying, we're going to sell first and by seconds. So that to the extent, we're trading out of assets in our established regions into our expansion regions. We would know what the cap rate and pricing was on the asset that we were selling which in turn would inform our appetite on the buy side.
So now we do have a couple of dispositions that are that are in process and so we are going to be looking here over the next quarter or two to reinvest that capital into potentially some acquisitions in.
In the expansion regions.
We would expect I don't know that anything is going to close on the acquisition side in Q2, but it is our plan to kind of resume that forward trading.
I appreciate all the color. Thank you.
Our next question comes from the line of John Pawlowski with Green Street. Please proceed with your question.
Thanks for the time I just wanted to follow up on the conversation around the state of the development market in the bullets you lay out on page 11 of the investor deck.
Ben I know you threw out I guess, 30% to 35% reduction in land value comps is that representative of the market right now and like.
Is the volume of these <unk>.
Broken sites meaningful right now or we're just getting started on the repricing.
I think we are we are still early.
There are.
More sellers than less who are frankly, we're willing to give.
Current contracts sort of time, right extend out and see where it heads.
But we are starting to see some situations where deals are breaking.
And the two situations I was referring to buyers who are relatively motivated.
And when they're looking at on the landscape and this goes to Matt's comments about our ability to execute.
Or that we don't need to rely on construction financing to execute projects today. Those buyers are going to on the margin looked at somebody like Avalon data contract to contract with.
Yes, I'd say, that's the kind of the general environment, our expectation is that there is.
More to come starts.
We're expecting to be down substantially this year.
And a big part of underlying all of this as you look out at the private market environment and the merchant builders, who have been very prolific their ability to get capital for new construction deals. It's just very challenging.
And the cost of that capital is also.
Expanded out significantly right. So on a relative basis. This is one of one of the parts that we're starting to see while our cost of capital is has gone up and our cost of debt borrowing has obviously gone up from the 2% range that 5% range. The private market players if they can get construction financing those senior mortgages are at 7%.
Five to eight 5% now alright, and Thats before putting on some preferred equity or mezz and thats before getting the equity right. So a relative advantage in a period like this we think is we're relatively well positioned and so selectively we are going to start stepping into some of these types of opportunities.
Okay on that point.
Just curious if you guys have any internal theories of why we haven't seen a more precipitous fall off in permitting and starts activity.
Credit markets have been volatile for a while they've been tightening for a while.
And I know, they're down a little bit more on your markets, but just curious.
Do you have any internal views on why we haven't seen the relief yet.
Permanent and starts data.
Hey, John It's Matt I asked.
Craig Thomas I head of market research that question every month when the when the permit numbers come out.
It is a little bit of a head scratcher.
In the fourth quarter, a lot of that was probably the capital that was committed and have been lined up.
And then a lot of the start a lot of the permit and even start activity.
I've come to learn is not kind of what we would think of as our products.
As much of half of it is other things.
Affordable housing production is actually running pretty high right now and there was a lot of one time money.
Through some of the the covered relief funds, which which has gotten out there so that could be inflating it a bit.
And then some pains since people, maybe pulling permits and then.
Getting getting bids are not liking the numbers theyre seeing but it is it is a little bit of a head scratcher I would agree with you.
Okay. Thanks for the time.
Our next question comes from the line of Jamie Feldman with Wells Fargo. Please.
Please proceed with your question.
Great. Thank you I guess as you think about a potential acquisition opportunity you think there could be some portfolios or platforms out there for acquisition or do you think it'll be kind of singles and doubles on the land side or on the asset side.
Hey, Jamie it's Matt.
We would expect it's probably more of the latter.
Usually portfolio transactions.
Unless somebody has some kind of unless they bought a portfolio and put a lot of short term debt on at all which would be pretty unusual.
Portfolio, it usually sellers selling portfolios, it's more opportunistic and those things happen. When you know there is an abundance of capital.
Go back three or four years, there was a.
Kind of a portfolio of premium.
You know today, we talked about that I think on the last call there was a portfolio discount.
Just given you know given the capital markets. So we haven't heard of anything like that and I guess I'd be a little surprised.
Okay. Thank you and then as you think about the suburban versus urban assets.
Whether it's the April data or your views on what's to come in spring leasing any thoughts on how they're performing versus each other and versus your expectations and what we can see going forward.
But going forward.
Yes, Jamie Sean, but I would say is that generally things are in line.
The profound change that we experienced in Q1.
Let's give about 10 basis points better than what we anticipated and if you double click through that and look at urban and suburban again very very nominal variances.
Certainly as we move forward.
Particularly if we get into an environment that is.
Yes.
Weaker from an economic standpoint, we do feel very good about our suburban coastal portfolio.
And the exposure to new supply is quite a bit less.
What we're anticipating in urban environments. So I would say kind of as expected right now, but as you look forward depending on how the environment unfolds, we probably pivot more towards the suburban assets are performing.
Have you ever have is outperforming.
Yes.
Okay.
Alright, great. Thank you.
Our next question comes from the line of John Kim with BMO Capital markets. Please proceed with your question.
Hi, Thank you I know you've talked a little bit about cables already but I was wondering how big you think this is.
Revenue opportunity could be as far as offering.
Office back office support functions for other operators.
Hey, John Yes, we have.
<unk> sized it yet at this point, we went through the pilot as I described wanted to get to our first third party client fully implemented.
We got a little bit further out we will start thinking about the profile of additional clients and even further down the road thinking about where it could come but we're not at that stage yet.
Okay, and where do you see the most attractive opportunities whether it's the broken deals that you talked about in the presentation.
As mezz or or other ground up developments.
Yes.
Maybe on.
Three three areas and Matt can add him because he and his teams are living and breathing. This.
First is the development side.
Which we've talked about second is on acquisitions and this gets into we do think our relative trade selling out of the establish.
Established regions in India expansion regions as more attractive today.
We've got a couple of assets now that hopefully we will sell over the next couple of months and so when we look to deploy that capital in those types of situations. We can be looking at or could be deals in lease up right, which are harder to finance for most buyers today could.
Could be.
A place where we can bring our platform to bear for a particular reason.
Thereby asset.
Generally in this type of environment, we're not doing a ton of buying and selling on the buy side, we're going to be looking for places, where we can add and create some incremental yield on those acquisitions over the first couple of years and then the third category that I'd highlight.
As you know probably a theme in a world where capital was less abundant we believe opportunities will present themselves to us but it also makes our capital more attractive right. So you think about our programs. The developer funding program are structured investment program and we look out for that book of business and I think we'll have the ability stronger sponsors stronger quality real estate.
They better returns so that's another place where we can selectively put capital to create value.
Very helpful. Thank you.
Our next question comes from the line of Josh <unk> with Bank of America. Please proceed with your question.
Yeah, Hey, everyone. Thanks for the question I wanted to go back to the opening remarks about that.
And pipeline and how you don't mark to market.
Yields until their impact of lease up.
<unk>.
Is that.
Implied at the potential uplift from those seven projects that haven't gone into lease up yet.
Go into it later this year not included in the guidance range.
Yeah. This is Matt.
Our guidance for the most of those deals are going to really impact earnings in 2425, because theyre not going to start leasing till later this year.
We do have a lease up budgets on those deals which is reflected in the guidance, which does reflect the higher rents than kind of what's shown on the on the development attachment, but the real lift there isn't.
<unk> 24.
Okay. That's super helpful and then.
One follow up to that.
70 basis uplift for that's where you said projects you have.
Currently with the updated projection is that a fair uplift at this point for those seven projects.
I would say that that was kind of the point of including the slide yet.
If the 17% uplift in rent is roughly comparable to what we've seen across our entire same store book over that time.
If that if those.
Seven lease ups experienced similar kind of rent.
Rent growth to kind of what we've seen broadly over that time frame.
And yes, I mean, we wouldn't be expecting to see yields on those deals raws vials by like roughly similar amount.
Okay and then.
You mentioned like if you could start a project today youre seeing good.
Construction pricing bids where it's like if you had something that might not start for a year now.
Youre not seeing that.
Driving that dynamic.
I think it is just certainty I mean, when you ask somebody to give you a price on a deal youre not going to start for a year. It's just they're just giving you.
An estimate number it's not you can't take that number of the bank anyway, you don't even you don't have final construction drawing so con.
Contracting at that number it's more of an allowance.
So it's natural for people to say well.
Here's what I did the last job at when you have a job that is ready to go and it's like I need your guys' onsite in 90 days Thats when some sub contractors are busy and don't need the business.
And we will give you will not give you a number that's any better than the number that we're giving you 90 days ago, but there are others, where you know as I said Navy. They were working on five jobs. They only see two coming up they have availability and they're essentially willing to lean into their margins, which got very inflated over the last couple of years when all of the subcontractors where <unk>.
<unk> beyond their capacity.
Okay. Thank you.
Our next question comes from the line of Handel St. Juste with Mizuho. Please proceed with your question.
Hey, good afternoon.
Couple of quick ones from me I guess first a question on the equity that you polls.
From your forward invested with a bank with a 5% how much is that can.
Can you requested withdraw it at any time at your option and what's the longer term plan for that capital ultimately earmarked for development funding or would you also consider acquisitions or.
Or other DCP. Thanks.
Yeah sure handle this is Kevin.
Well the amount that we pulled down the equity forward was $490 million and so roughly speaking that's the amount that we incrementally invested and we did so.
In latter time deposits with banking partners that are very highly rated known to us part of our credit facility Syndicate.
And then the later time deposits are essentially Matt too when we think we will be pulling that capital down or need the cash in order to reinvest in development.
So that's how we've structured.
That said as a cash investment and activities so far so.
And we would retain liquidity to fund development from that source as well as liquidity on our line of credit. So we of twin quarter blend where theres nothing drawn so we've plenty ability to respond to new opportunities that may justify an earlier deployment of cash either from the cashes cash we've invested or from our line of credit.
Got it thanks, Kevin that's that's helpful.
And then maybe one for you.
For those of US who followed Avalon Bay for some time. The recent changes you've made entering the mezz lending business delving deeper into third party services and even a more proactive cash management strategy capitalizing on the environment to generate some incremental episode that you outlined.
I'm curious how should we be interpreting these changes and what they suggest for Avalon is longer term strategy as we evolve the platform curious what else you're considering what else pop to mind as you navigate the company forward and then how did you think about the trade off for perhaps growing the revenue, but maybe adding a bit of complexity and maybe all over multiple as well. Thank you.
Yes, I appreciate that.
I'd start by emphasizing this is about this executive team right. So we're the ones setting the course for this business over the coming years.
We're looking for ways to continue to drive earnings process and ways to differentiate that we think can lead to long term value creation.
A number of the number of the recent announcements, including the DSP and SSP there've been versions of this that have existed.
Elements that we're working on and so we've decided as a team in certain areas, where we think we can accelerate that activity.
So you've seen you've seen that come in terms of our strategic focus areas. We've communicated this externally and continue to emphasize it internally first.
First is our operating model transformation.
And driving margin and value to customers through that.
Second is optimizing our portfolio as we grow and part of that is our movement to the expansion markets and also looking to prune assets out of our established regions.
Third is leveraging our development DNA in new ways, and so that gets into our programs like our DSP and our site.
We don't talk a lot on this call, but particularly for certain investors are matters and for associates.
And increasing our residents our leadership in ESG and then the fifth one we always drive home and this is what's special about here is people and culture. So that's.
That's what that those are what are driving us as we look ahead and I believe will create outperformance for us.
I appreciate the thoughts thank you.
Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Hey, good afternoon, so two questions here.
First.
On the expansion markets.
Can you just remind us where you are targeting.
Urban versus suburban just from some of your peers have spoken and then.
Looking to the private operators in the Sun belt. It definitely seems like the supply competition is much more concentrated in the urban areas, whereas those out in the suburbs tend to be less impacted so just sort of curious as you look at the Sun belt.
You're framing out your exposure.
Yeah, Hey, Alex it's Matt.
So.
Yeah, we don't necessarily start with a.
Particular kind of goal in mind really what we're looking for is the best risk adjusted returns and we are taking it as an opportunity expansion regions to construct a portfolio from the ground up.
And what we found over the last couple of years as we've started our investment there.
Felt like the supply demand fundamentals.
And the pricing of the assets. It was just more attractive in the suburbs. So if you look at our Denver portfolio. The assets, we bought there they've all been suburban assets we.
We did develop the one deal and right now through to a very high development yield but.
So we're going to supplement and ultimately have a diversified portfolio.
But we tend to be finding better value in the suburbs not just better supply demand fundamentals, but also better pricing you know until recently probably.
Higher cap rates as well so same thing in South East, Florida, If you look at where we brought in South East Florida.
Has tended to be more audience okapi brought in Margate, We just recently bought a couple of different assets.
Broward County so.
We tended to find better value there and.
And we are very mindful of that as we invest we may develop a little bit in urban areas. If we find a really strong opportunity, but a lot of our development pipeline is also suburban right now in Denver, We had the one deal under construction in Westminster and then we have one deal in Govs part, which is more of an urban submarkets, but.
The Sun belt markets in the first place theres not as much they're not as urban in the first place. So I don't I don't know that there is an urban submarket in Raleigh Durham.
Maybe downtown Raleigh, and we're not looking there so.
And in Charlotte.
All of our development has been in the suburbs, we did buy the portfolio in the South Congresses.
One urban Submarkets there.
It is very very dynamic so I'd say, that's the exception.
Generally speaking you're right it may be a little bit of a different strategy than the way some others have pursued it.
And it's also kind of just more of the wafer lifestyle isn't a lot of it.
Sunbelt Metros based data certainly have things transit orientation. They don't have the concentration of employment.
And a lot of the reason people are moving there is frankly to have more space and have more of that suburban lifestyle.
Okay. The second question is just given what's going on in the insurance market are you seeing more.
Oh, I see opportunity, but are you seeing that it's financially better for you to take on more self insuring your portfolio to reduce the cost or maybe especially as you partner with developers, where you guys are self insuring more to try and mitigate some of the.
Pretty sizable premium jumps or the.
Ability or inability to get certain carriers of reinsurers.
Alex This is Kevin maybe I'll, just respond strictly to the assurance aspects of this.
Ben are Matt may want to respond to the development applications, but.
Yes, you are spot on with respect to highlighting the self insurance aspect is really the relative strength of well capitalized Reits.
And particularly residential reset absorbed this risk as opposed to passing onto commercial tenants.
Having that capability yourself insurer has been a helpful thing in recent years is the insurance market has become increasingly challenging.
I'm not going to get too specific about whats going on whether it's property renewal right now because we renew on may 15th So we're actually in the market for that site.
We have in the past I would say.
Seven or eight years used our wholly owned regulated captive insurance.
Company <unk>.
Order to be strategic in these property renewals to mitigate bearing the full impact of market increases in property insurance premiums to.
To the extent individual insurers have become inefficient and their pricing and so that has helped keep our insurance costs and the property program.
Two two are far far lower than market rate of growth and so for example last year total insurance costs, which which properties is the biggest piece grew by 4% to 5% last year, we do expect a higher level of growth this year and the property program, but as we look at this year's <unk>.
No we're likely to be.
Are you willing to take a more self retained risk through our captive in order to mitigate inefficient pricing.
From some of the market participants should that be necessary.
Okay. Thank you.
As a reminder, its star one to ask you a question. Our next question comes from the line of Amy program with UBS. Please proceed with your question.
Hi.
Turnover was up from the 2022, Lois but remains low on a historic basis wondering over the next couple of years do you think we trend back toward a more historic level or has demand shifted in a way where it turned out that could remain below the historic level.
Amy This is Sean good question.
Obviously somewhat speculative in nature in terms of what happens I mean, the one thing I would say is that we continue to remain in a relatively tight housing market overall.
If you look at sort of aggregation of multifamily single family et cetera.
And the.
The ability for people to access the kind of inventory they want maybe more limited, particularly on the single family side may be condos, townhomes et cetera for the last couple of years that does not seem to be likely to correct. So I'd say, that's probably the one macro factor that may put some cap on sort of churn.
And people that would typically $13 $14, 15% if I go buy a home.
Last quarter that was less than 10%.
That's not likely to get better in the near term given the financing market, but also just the.
The production in terms of what's actually being put on the ground. So that's one factor that may kind of keep a lid on things here for the next several quarters.
Okay, Great and then.
Another quick one housekeeping yields on the projects and the developer funding program compare with Avalon Bay development yields.
Hey, Neil this is Matt.
They are the way we think about that program is basically we're allocating the risk differently than on our own development and so consequently, the target returns are also allocated differently.
Our target is for the yields to be roughly halfway between an acquisition and a development. What we've found so far and a few we've done is that it's been higher than that so the way I would think about it as the yield on those deals is probably going to be.
30, 40 basis points less than the yield on if we had done the development ourself.
But still probably at least 50 60 basis points north of where at acquisition yields would be if not more.
Great. Thanks.
Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.
Hi, good afternoon.
Broader question I guess on the <unk>.
I'm a governor in New York, So housing proposal that installed now and in the Senate and the house there that would've expanded zoning for multifamily in the suburbs.
The opportunity for you to develop or was that more supply and how do you view those times those kinds of I guess initiatives nationwide going forward.
Okay.
I would add this is Matt I think and then.
Sean may want to weigh in as well.
Yeah, it's really interesting to see these these states try to engage in that dialogue about one of the things that has really led to the supply constraints that had been turned led to really an underproduction of housing has been local control and that is a bit of a third rail politically in California, and New York and other states.
Interesting to see the state legislators try to chip away at it.
Youre right its both right it would be an opportunity for us as a developer.
If it was really effective in the long run it might.
Lower the long term rent growth trajectory of some of those markets frankly from a public policy point of view, that's kind of would be the point of it what we've seen so far at least in California has been every time there has been something that in theory would have opened up more sites to development, there's been something else on the other side, it's come with it that has made it a bit of a.
Poison pill so it's.
It has been very difficult to actually effectuate, they say they'll allow multifamily near transit, but then they are saying it has to be prevailing wage construction cost, which is a 20%, 30% premium and so economically it doesn't work or they will open it up in certain sites that they need 2025% affordable and again you can't afford that.
Price for land.
And make that economics work. So the one place we've seen a truly be effective so far has been with the smaller program in California. The Apu accessory dwelling unit, we actually have over 100 of those currently in our pipeline, where we can just add 234567 apartments in kind of underutilized storage or parking areas at existing communities.
And not have to go through zoning process. So that's not going to move the needle kind of on the problem at a macro level, but that's one small program, we have been able to take advantage of it.
And then maybe just kind of at a higher level regulatory dynamics are influencing our portfolio allocation decisions. It's been a part of the reason why over the last number of years, we've been moving more and more to a suburban oriented portfolio and if you see where we're allocating capital here, where two thirds suburban today, probably headed towards three quarters there.
It's influenced our move to the expansion regions right at a minimum to diversify away from regulatory environments.
And then the reality is you know at a more local level based on some of the steps of certain municipalities and effectively the bar is higher for allocating new capital there.
Playing into how we're shifting capital around.
Around our portfolio and within our regions.
Alright, that's it for me thank you.
There are no further questions in the queue I'd like to hand, the call back to <unk> for closing remarks.
Thank you and thanks, everyone for joining us today, we appreciate your support and look forward to speaking with you soon.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.