Q3 2023 AvalonBay Communities Inc Earnings Call

Okay.

Welcome, ladies and gentlemen, and welcome to Avalonbay communities third quarter 2023 earnings Conference call.

At this time all participants are in a listen only mode.

Following remarks by the company, we will conduct a question and answer session.

I answered the question and answer queue at any time during this call by pressing star one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue. Please press star two on your telephone keypad.

If you're using a speaker phone please lift the handset before asking your question and we ask that you refrain from typing and have yourself phones turned off during the Q&A session.

Your host for today's conference call is Mr. Jason Riley Vice President of Investor Relations. Mr. Riley you May begin your conference.

Thank you, Rob and welcome to Avalonbay communities third quarter 2023 earnings Conference call before we begin. Please note that forward looking statements may be made during this discussion there are a variety of risks and uncertainties associated with forward looking statements and actual results may differ materially there is a discussion of these risks and uncertainties in yesterday afternoon's press.

Relief 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. This attachment is also available on our website at www Dot Avalon Bay Dot com.

Forward Slash earnings and we encourage you to refer to this information during the review of our operating results and financial performance and with that I'll turn the call over to Ben Shaw CEO and president of Avalonbay communities for his remarks.

Thank you, Jason and thank you everyone for joining us and keeping with our costume we've posted a presentation last night to accompany our earnings release. In addition to my opening comments, you'll hear from Shawn on our operating performance and revenue building blocks for 2024 for.

For Matt on the significant earnings being generated by our development projects in lease up and from Kevin on the strength of our balance sheet.

Want to start with my thanks to the Avalon Bay team and our 3000 plus associates for delivering another strong quarter of financial performance and operating results.

Particularly in the current environment of higher interest rates and uncertain cap rates, we are laser focused on driving cash flow growth from our portfolio.

Bottomline results from our operating model transformation led by our onsite and centralized teams and powered by our technology revenue management and data science teams and proprietary systems continue to outpace expectations.

Our strong operating performance also speaks to our portfolio positioning, which is 70% suburban and primarily in suburban coastal markets, which continue to benefit from the combination of steady demand and limited new supply.

Turning to slide four in the presentation. We grew core <unk> by six 4% in Q3, which was <unk> <unk> ahead of our expectations.

This outperformance was primarily driven by better than expected revenue growth, which positions us well as we enter the traditional slower leasing season.

As shown on the bottom of slide four we have raised $855 million of capital. This year at a four 3% initial cost which includes the drawdown of our $500 million equity forward in which we priced at $2 $250 per share and with the remainder coming from asset sales that we sold at an average cap rate of four 7%.

We completed three development projects in Q3.

Two in suburban Submarkets in the northeast and one in Miami at a seven 2% stabilized yield.

As Matt will emphasize later our lease up communities continue to outperform our original expectations by a wide margin.

These projects are funded with yesterday's capital at yesterday's capital cost and are slated to generate outsize value creation and earnings for investors.

We also started two projects this quarter, one in Princeton, New Jersey, and one in South Miami with projected yields in the mid 6% range and I'll come back to our positioning on new development and capital allocation at the end of our prepared remarks.

In Q3, we made $50 million of commitments under our structured investment program or CIP and feel fortunate to be building. This book of business in today's environment, where these new commitments generating an attractive 13% return.

Slide five provides a breakdown of our Q3 revenue outperformance relative to guidance from the end of July with a 30 basis point uplift from higher than expected occupancy 20 basis points from higher rates and 10 basis points from improving bad debt.

Turning to slide six we've exceeded and raised guidance three times. This year, we now expect <unk> to grow eight 6% in 2023, which is 330 basis points above our initial expectations for the year.

Same store revenue growth expectations are up a 130 basis points expenses are down slightly leading to NOI growth of six 3% and with that I'll turn it to Shawn to comment on the favorable demand and supply drivers in our markets and provide a fuller operating update.

Yeah.

Thanks Pat.

As we start to look forward to 2020 four I thought I'd provide some initial thoughts on two topics.

First I would like to highlight a few macro factors that will support the performance of our portfolio in the coming year, and then second share a few building blocks as it relates to the outlook for 2020 for revenue growth specifically.

Starting on slide seven we believe our portfolio is well positioned as it relates to rental affordability, particularly as compared to other regions of the country and single family for sale product.

In short one you can see that rental affordability in our established regions is actually better than pre pandemic levels given the strong wage growth that's been experienced over the last few years.

And then charge to the difference between the cost of owning the median price home and median rent and our established regions as they increased by roughly 10 X. If you look at the first three quarters of 2023.

Relative to the average during 2020.

We're certainly makes apartment living in a more attractive option in these regions.

We are already seeing the impact of this trend in multiple data points. For example, the volume of existing home sales in our established regions has declined by roughly 25% over the past year.

And in our own portfolio as a percentage of move outs to purchase this purchase a home is.

It dipped below 10% this year well below the mid teens long term average.

Moving to slide eight our portfolio is also relatively we're relatively insulated from new supply, particularly as compared to the sunbelt.

Established regions, we expect new multifamily deliveries of approximately one 5% of existing stock.

And then the specific submarkets, where we own assets new supply is projected to be roughly 1% of stock.

This bodes well for revenue growth in all market cycles, but as a particularly valuable attribute of our portfolio. If we experience a weaker economic environment during 2024.

Transitioning to slide nine I'd like to highlight four specific building blocks for 2020 for revenue growth.

Firstly embedded growth in our rent roll from leases with executed during 2023 stands at approximately one 5% which is above our long term average at this point of the year.

Second our current loss to lease is roughly 2% led by the east coast at about two 5%, while the west coast, an expansion regions trailed behind at approximately one 5% and 70 basis points respectively.

Third we continue to drive incremental revenue from our operating model initiatives.

For example, the September revenue from our Avalon connect offering was about 40% greater than the average monthly revenue for the first nine months of the year and then monthly revenue run rate will continue to grow during the last two months of 'twenty to 'twenty three and throughout 2024.

Lastly, we are expecting a continued tailwind from the normalization of bad debt.

In the first half of the year underlying bad debt averaged approximately two 7% as compared to the Q3 average of roughly 2% and we expect continued improvement as we move through 2020 for the.

The benefit from an improved improvement in underlying bad debt will be partially offset by the loss of rent relief we've recognized in 2023.

Still be at net meaningful benefit for 2024.

Taken together these building blocks shift to support healthy revenue growth during the upcoming here.

So with that I'll turn it over to Matt to address our lease up activity and structure of investment platform, Matt Alright, Thanks, Sean turning to slide 10, our lease ups continue to deliver outstanding results laying the foundation for strong future growth in both earnings and NAV.

We have five development communities that had active leasing in Q3 and those five deals are leasing up at rents that are $485 per month or 17% above our initial underwriting. This in turn is driving a 90 basis points increase in the yield on these investments to seven 4% far above any estimate of current cap.

And even further above the cost of capital we source to fund these deals back when they broke ground several years ago.

After a relatively light year of deliveries in 2023, we do expect to see a significant increase in our apartment completions in 'twenty, four which will provide incremental NOI and <unk> as these communities reached stabilization.

Slide 11 provides an update on our structured investment program, where we initiated two new investments last quarter and $52 million at an all in average interest rate of 13%.

As we've discussed on prior calls these are three to five year investments, where we provide capital to merchant builders that sits above the construction loan but below common equity in the capital structure. We're still early in the buildup of this new line of business and expect it to continue to grow to roughly $400 million over the next few years, providing a nice tailwind to earnings growth.

As these dollars get invested and start earning a return.

We're also fortunate that we're able to underwrite most of this business and today is more restrictive environment, providing a strong risk adjusted return, particularly for the latest additions to the program and with that I'll turn it over to Kevin.

Thanks, Matt turning to the next two slides, we continue to enjoy tremendous financial strength and flexibility both from a balance sheet and liquidity perspective, specifically from a balance sheet perspective as you can see on slide 12, we enjoy low leverage with net debt to EBITDA of $4, one times, which is below our target range of five times to six.

<unk>, our interest coverage ratio and our unencumbered NOI percentage are at near record levels of seven five times and 95%, respectively. Our debt maturities are well lathered with a weighted average years to maturity of seven and a half years and our development underway is nearly 100% match funded essentially with yesterday's lower.

Cost of capital, which in turn helps ensure that these projects provide earnings and NAV growth when they are completed and stabilized.

In addition from a liquidity perspective as shown on slide 13, we continue to maintain a high level of excess liquidity relative to our open commitments for development and structured investment products.

As of quarter end, specifically, we enjoy one $5 billion of excess liquidity and so as a result, we continue to enjoy tremendous financial strength and stability and the flexibility to pursue attractive growth opportunities that may emerge across our investment platforms in the coming months.

And with that I'll turn it back to Ben.

Alright, Thanks, Kevin.

We have consistently maintained a strong balance sheet throughout cycles and as a result, we are well prepared for the current environment as we have shown over the last over the past couple of years, we proactively adjust our capital sourcing and capital allocation activities based on changes in the environment as emphasized on slide 14, we locked in our equity forward in early two.

And 'twenty two to pre fund future development activity with.

We shifted in the second half of 2022 and in 2023 to be a net seller of assets with a portion of the proceeds being utilized to fund acquisitions as we reshape the portfolio and the balance to fund accretive development.

And we have continued to be responsive and adjusting our development start activity, reducing starts last year and this year as our cost of capital changed.

As we've emphasized we are 95% match funded on our development underway, which means all of that capital has already been raised in an attractive initial cost and allows us to deliver projects in 2024, and 2025 that will generate significant earnings and value.

On a go forward basis, we have raised our return requirements on new development for.

For our standard development deal our target return was in the low to mid sixes in the middle of the year and is in the mid to high <unk> is today.

These targeted returns are up over 100 basis points since last year with the goal of underwriting 100 to 150 basis points of spread between development yields and market cap rates.

Operator: Welcome, ladies and gentlemen, and welcome to AvalonBay Communities' 3rd quarter, 2023 Earnings Conference Call. At this time, all participants are on a listen-only mode. Following remarks by the company, we will conduct a question and answer session. You may enter the question and answer Q at any time during this call by pressing star one on your telephone keypad. If your question has been answered or you wish to remove yourself from the Q, please press star two on your telephone keypad. If you're using a speaker phone, please lift the handset before asking your question, and we ask that you refrain from typing and have your cell phones turned off during the Q and A session.

We expect to be in the lower development, we expect to be in a lower development start environment in the coming quarters and with spreads at the tighter end of this range. After a number of years of outsized development profit margins.

And while in the current environment, we're focused on maintaining our balance sheet strength. We do believe that we are well positioned given our low leverage and ample liquidity and unique strategic capabilities to capitalize on opportunities that might result from market dislocations in the near term while volumes are modest we're able to deploy capital at double digit returns through our site.

Graham.

Jason Reilley: Your host today's conference call is Mr. Jason Reilley, Vice President of Investor Relations.

Slide 15 concludes our prepared remarks with our key takeaways, we continued to deliver strong operating results with tailwind specific to our suburban coastal markets incremental NOI to come from our developments in lease up and all supported by a fantastic balance sheet and with that operator. Please open the line for questions.

Jason Reilley: Mr. Reilley, you may begin your conference. Thank you, Rob, and welcome to AvalonBay Communities' 3rd quarter, 2023 Earnings Conference Call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risk and uncertainties associated with forward-looking statements, and actual results may differ materially. There is a discussion of these risk and uncertainties in yesterday afternoon's press release, as well as in the company's Form 10K and Form 10Q filed with the SEC.

Thank you at this time, we'll be conducting a question and answer session.

To ask a question. Please 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'd like to remove your question from the Q.

Jason Reilley: As usual, this press release does include an attachment with definitions and reconciliations of non-gap financial measures in other terms, which may be used in today's discussion. This attachment is also available on our website at www.avalonBay.com forward slash earnings, and we encourage you to refer to this information during the review of operating results and financial performance.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

Our first question comes from Eric Wolfe with Citi. Please proceed with your question.

Hey, Thanks for taking my questions.

I think you said that you raised your development yields.

Ben Schall: And with that, I'll turn the call over to Ben Shaw, CEO and President of AvalonBay Communities for his remarks. Ben. Thank you, Jason, and thank you, everyone, for joining us. In keeping with our custom, we posted a presentation last night to accompany our earnings release. In addition to my opening comments, you will hear from Sean on our operating performance and revenue-building blocks for 2024.

It's underwritten to be mid to high <unk>.

I'm just curious why you think that's the appropriate level and what percentage of your future development pipeline.

So could you take care pipeline.

Pipeline and everything else what percentage would be starting to do that criteria.

Hi, Eric It's Matt I guess I can speak to that one a little bit as Ben mentioned, where we're really trying to preserve that spread of 100 to 150 basis points between cap rates and development yields.

Ben Schall: From Matt on the significant earnings being generated by our development projects in lease-up, and from Kevin on the strength of our balance sheet.

Ben Schall: I want to start with my thanks to the AvalonBay team and our 3000 plus associates for delivering another strong quarter of financial performance and operating results. Particularly in the current environment of higher interest rates and uncertain cap rates, we are laser focused on driving cash flow growth from our portfolio. The bottom line results from our operating model transformation led by our onsite and centralized teams and powered by our technology, revenue management and data science teams and proprietary systems continue to outpace expectations.

And so you know mid to high fixed as a reflection of where we think it's very hard to know where spot cap rates would be today I think that we had a pretty good sense of where they were over the summer when transaction activity and starting to pick up with the most current ryzen rats rates, it's a little bit of a gas, but if you think cap rates are maybe in the mid fives.

Then you know that would translate into development yields in the mid to high fixes to preserve that spread and it does vary by product type and by region of course, but.

So that's really kind of the thinking behind that.

Ben Schall: Our strong operating performance also speaks to our portfolio positioning, which is 70% suburban and primarily in suburban coastal markets, which continue to benefit from the combination of steady demand and limited new supply. Turning to slide four in the presentation, we grew core FFO by 6.4% in Q3, which was six cents ahead of our expectations. This outperformance was primarily driven by better than expected revenue growth, which positions us well as we enter the traditional slower leasing season.

And as it relates to what percentage of the current book need stack threshold.

It's actually hard to say because things are moving around so much and what we found is that until we have.

Cds permits in hand hard drawings to bid on the street, we don't really know where hard costs are today. They are starting to come down, but you don't necessarily realize that.

<unk> estimates that you really only realize that when you're ready to go so what I would say is we have plenty of deals.

Do you clear that hurdle and indeed, we just started two deals this quarter that we're in the mid sixes and we have at least a couple of more that could start over the next couple of quarters that we think are kind of in that position. We do have some that you know on the most current underwriting from six to 12 months ago will probably fall a little bit short of that and you know and.

Ben Schall: As shown on the bottom of slide four, we have raised $855 million a capital this year at a 4.3% initial cost. Trust, which includes the drawdown of our $500 million equity forward, which we priced at $250 per share, and with a remainder coming from asset sales that we sold in an average cap rate of 4.7%. We completed three development projects in Q3, two in suburban submarkets in the Northeast, and one in Miami, at a 7.2% stabilized yield.

Many of those cases, we're hoping that with some value engineering, maybe some.

As to the land economics with the landowner and changes in hard cost that you know by the time those deals are ready to go they will meet that.

Ben Schall: As Matt will emphasize later, our lease-up communities continue to outperform our original expectations by a wide margin. These projects are funded with yesterday's capital, at yesterday's capital cost, and are slated to generate outsize value creation and earnings for investors. We also started two projects this quarter, one in Princeton, New Jersey, and one in South Miami, with projected yields in the mid-6% range.

Understood. That's helpful. And then you gave some good detail on the building blocks for same store revenue growth for next year.

Obviously, the one piece that's missing is just your expectation on what market rents will do yeah, and I know, it's too early to provide that but was just hoping you could give us a sense for the <unk>.

Process that you go through.

In terms of figuring that out whether you're putting up and down and then sort of if you were to do it today. If you just have a sense for what market rent growth would look like.

Ben Schall: I will come back to our positioning on new development and capital allocation at the end of our prepared remarks. In Q3, we made $50 million of commitments under our structured investment program or SIP until fortunate to be building this book of business in today's environment, with these new commitments generating an attractive 13% return. Slide 5 provides the breakdown of our Q3 revenue app performance, relative to guidance from the end of July, with a 30 basis point uplift from higher than expected occupancy, 20 basis points from higher rates, and 10 basis points from improving bad debt.

Yeah, Eric as Sean Good question, Good Crystal Ball question, I guess I'll characterize it as but.

And we sort of do two things we have a macro view and then there was sort of a grassroots bottom up approach from a macro perspective in terms of providing commentary today, that's probably where I spend a time, which is based on what we know today, we would anticipate.

From a demand standpoint things with decelerate as we move into 2024.

Ben Schall: Turning to slide 6, we've exceeded and raised guidance three times this year. We now expect Q5O to grow 8.6% in 2023, which is 330 basis points above our initial expectations for the year. Same for revenue growth expectations are up 130 basis points, expenses are down slightly, leading to NOI growth of 6.3%.

Given what we've been seeing in terms of the expectations for slower job and wage growth and other potential headwinds as it relates to whether its oil prices, obviously interest cost student loans et cetera, et cetera, There's a number of macro factors that appear to be more headwinds.

Take a really good look at the consensus forecast for a number of macroeconomic variables at multiple points throughout the year, but certainly when we get into January at the latest forecast helps drive our outlook for 2020 for like it does for pretty much every calendar year and every line that up with what we're seeing on the ground in terms of what actually is going to deliver.

Sean Breslin: And with that, I'll turn it to Sean to comment on the favorable demand and supply drivers in our markets, and provide a full or operating update. Thanks, Ben. As we start to look forward to 2024, I thought I'd provide some initial thoughts on two topics.

Sean Breslin: First, I'd like to highlight a few macro factors that will support the performance of our portfolio in the coming year, and then second, share a few building blocks as it relates to the outlook for 2024 revenue growth specifically. Starting on slide 7, we believe our portfolio is well positioned as it relates to rental affordability, particularly as compared to other regions through the country and single family for sale product. In chart 1, you can see that rental affordability in our established regions is actually better than pre-pendemic levels given the strong wage growth that's been experienced over the last few years.

We scrub our supply pipeline et cetera to try and estimate what effective market rent growth would be based on the algorithms. We use. So it really is again, how you sort of macro top down as well as a bottoms up approach depending on the variables that you are looking at in terms of today I'd say its hard to provide an estimate other than as I mentioned, we would expect so.

Software demand environment in 2024 as compared to <unk> 23 based on the current sort of consensus outlook for macro variables.

Got it that's helpful. Thank you.

Sean Breslin: And in chart 2, the difference between the cost of owning the median price home and median rent in our established regions has increased by roughly 10X. If you look at the first three quarters of 2023, relative to the average during 2020, which certainly makes the Department of Living a more attractive option in these regions. We've already seen the impact of this trend in multiple data points. For example, the volume of existing home sales in our established regions has declined by roughly 25% over the past year.

Yeah.

Our next question comes from Yes, I'm here. Our next question comes from Austin, <unk> with Keybanc capital markets. Please proceed with your question.

Thank you so more near term I guess is the moderation in lease rate growth has been.

Partly strategic as you start to backfill some of the occupancy you lost around mid year.

And then you've just kind of continued to build occupancy into the softer part of the leasing season or is this more related to the pockets of softness across the portfolio like you know in northern California. It looks like and then you know also in some of your expansion markets.

Sean Breslin: And in our own portfolio, the percentage of move-outs to purchase the home, as Diplo 10% this year, well below the mid-teens long-term average. Moving to slide 8, our portfolio is also relatively insulated from new supply, particularly as compared to the Sunbelt. In our established regions, we expect new multifamily deliveries of approximately one and a half percent of existing stock.

Yes, Austin good question.

I'd say, it's kind of a mix of those answers frankly.

At the early part of the third quarter I would say it was more a reflection of our efforts to build occupancy which was successful on a number of markets combined with I'd say, one or two places that continue to remain so.

Sean Breslin: And in the specific submarkets where we own assets, new supplies projected to be roughly one percent of stock, this both well for revenue growth in all market cycles, but as a particularly valuable attribute of our portfolio, if we experience a weaker economic environment during 2024.

Soft and even a little softer as we got to the end of the third quarter and I would certainly point to northern California is the primary region, where we experienced that so really a combination of two things as it relates to what you saw on rent change through the quarter as well as into October.

Sean Breslin: Transitioning to slide 9, I'd like to highlight four specific building blocks for 2024 revenue growth. Firstly, embedded growth in the rental from leases we've executed during 2023 stands at approximately one and a half percent, which is above our long-term average at this point of the year. Second, our current loss to leases roughly two percent, led by the East Coast at about two and a half percent while the West Coast and expansion regions trail behind at approximately one and a half percent and 70 basis points respectively.

And then just on the external growth side or just investment side I mean.

How are you feeling about the size of the development pipeline and based on what you do know today do you think that as those deliveries and completions kind of pick up next year are you going to be able to maintain the size of the pipeline in 'twenty four or do you think your dollars in dry powder are better spent.

On new acquisitions, just given the risk reward profile in some of your strategic goals of getting into those expansion markets.

Sean Breslin: Third, we continue to drive incremental revenue from our operating model initiatives. For example, the September revenue from our Avalon Connect offering was about 40 percent greater than the average monthly revenue for the first nine months of the year. And that monthly revenue run rate will continue to grow during the last two months of 2023 and throughout 2024.

So now I'll start with that it's been so on developments we have underway.

We do have strong conviction that those are going to continue to create meaningful earnings and value and we obviously, we've got good visibility there on when they're going to be delivering and as we head into 2024 and 2025.

We would expect a fairly significant ramp up of that activity.

Sean Breslin: Lastly, we're expecting a continued tailwind from the normalization of bad debt. During the first half of the year underline bad debt average approximately 2.7 percent as compared to the Q3 average of roughly 2 percent and we expect continued improvement as we move through 2024. The benefit from an improved improvement in our line bad debt will be partially offset by loss of rent relief. We've recognized in 2023, but still be at net meaningful benefit for 2024. Taken together, these building blocks should support healthy revenue growth during the upcoming year.

May not be quite at the same outperformance levels that we've seen over the last year, but still expecting strong performance out of that pool.

As we think about new capital.

And the decision making process there on.

On the development side I think we've been very clear we want to make sure. If we're going to undertake new development that there is a sufficient profit margin relative.

Relative to underlying market cap rates, another way of saying we want to make sure. There is sufficient profit margin to where we could buy an asset.

And in today's environment, there's been opportunities in both there are certain markets and certain projects that we've been able to structure for new development, where we're able to obtain sufficient spreads and there are other markets and you saw this in some of our acquisition activity over the last quarter or two.

Matt Birenbaum: So with that, I'll turn it over to Matt to address our lease up activity and structure investment platform. Matt. All right. Thanks, Sean. Turning to slide 10, our lease ups continue to deliver outstanding results, laying the foundation for strong future growth in both earnings and NAB. We have five development communities that had active leasing in Q3 and those five deals are leasing up at rents that are $405 per month or 17 percent above our initial underwriting.

An example, in Dallas, where we're able to buy assets below replacement cost and start to build the portfolio in those markets. So it's a multifaceted approach. We're fortunate in that we have multiple multiple levels to grow over time and as we've emphasized what's on us as a team to make sure that we continue to stay flexible in that approach.

Matt Birenbaum: This in turn is driving a 90 basis points increase in the yield on these investments to 7.4 percent far above any estimate of current cap rates and even further above the cost of capital we source to fund these deals back when they broke last several years ago.

And change our approaches depending on what's happening in the market environment as well as what's happening with our cost of capital.

Matt Birenbaum: After a relatively light year of deliveries in 2023, we do expect to see a significant increase in our apartment completions in 24, which will provide incremental and online FFO as these communities reach stabilization.

Thank you.

Our next question comes from John Kim with BMO Capital markets. Please proceed with your question.

Thank you I wanted to ask on leasing trends in some of your markets, specifically, Northern California, which.

Matt Birenbaum: Slide 11 provides an update on our structured investment program where we initiated two new investments last quarter and $52 million at an all in average interest rate of 13 percent. As we've discussed on prior calls, these are three to five year investments where we provide capital to merchant builders that sits above the construction loan but below common equity in the capital structure. We're still early in the buildup of this new line of business and expected to continue to grow to roughly 400 million over the next few years, providing a nice tailwind to earnings growth as these dollars get invested and start earning a return. We're also fortunate that we're able to underwrite most of this business in today's more restrictive environment, providing a strong, risk-adjusted return, particularly for the latest additions to the program.

It looks like the lease growth rates kind of nosedived in September and October.

And that diverged from Seattle, which is a similar market in terms of protect job growth.

Where you saw an improvement but can you just discuss the demand picture and why it was such a difference in performance in those markets.

Yeah.

Yes, John Sean Good question.

There's a couple of different answers to that so first as it relates to what you saw in Seattle, which also occurred by the way in the mid Atlantic in Denver is that we're just starting to get into a period, particularly as you get further into the fourth quarter here.

Where the comps are easier on a year over year basis, and that's a reflection of the step up that you saw in rent change in those three regions.

Kevin: And without a turn over to Kevin. Thanks, Matt. Turning to the next two slides, we continue to enjoy tremendous financial strength and flexibility, both from a balance sheet and a liquidity perspective. Specifically, from a balance sheet perspective, as you can see on slide 12, we enjoy low leverage with net debt to even a 4.1 times which is below our target range of 5 times to 6 times. Our interest coverage ratio and our unencumbered NOI percentage are at near record levels of 7.5 times and 95% respectively.

And a more meaningful way, particularly in Seattle as you may have noticed.

Whereas in northern California, most concentrated in San Francisco, I would say, which is only 30% of our northern Cal portfolio things did soften more so, particularly as we get to sort of mid September into October and Thats whats reflected in the rent change you saw as it continue to tick down through the quarter and then more.

Kevin: Our debt maturities are well-lattered with a weighted average of years to maturity of 7.5 years. And our development underway is nearly 100% match-funded, essentially with yesterday's lower cost to capital, which in turn helps ensure that these projects provide earnings and NAV growth when they are completed. In addition, from a liquidity perspective, as shown on slide 13, we continue to maintain a high level of excess liquidity relative to our open commitments for development and structured investment products. As of quarter end, specifically, we enjoy 1.5 billion dollars of excess liquidity.

Meaningfully into October and I think there is a couple of things there one is.

San Francisco just to pick on it.

Everyone seems to like two lately.

A number of different headwinds there.

I think we're all well aware of.

Probably not the best time of year to be.

<unk> seen some.

Elevated demand there is just not the case and there is not really a great reason for people to be coming back to the office at this point still so fundamentals have remained weak and they did get weaker as we've moved through the quarter into October so trying to know exactly what's underneath that other than weaker demand overall.

Kevin: And so as a result, we continue to enjoy tremendous financial strength and stability and the flexibility to pursue attractive growth opportunities that may emerge across our investment platforms in the coming months.

Hard to be precise, but I'd say, we did not see the same level of weakness in Seattle, and you combine that with a year over year comp and Seattle and that's why you saw the uptick there. So Seattle is still not strong but on a relative basis compared to last year. For example, where there was a lot of short term leasing activity throughout the year and that it burned.

Ben Schall: And that will turn it back to Ben. All right. Thanks, Kevin.

Ben Schall: We have consistently maintained a strong balance sheet throughout cycles. And as a result, we are well prepared for the current environment. As we have shown over the past couple of years, we proactively adjust our capital sourcing and capital allocation activities based on changes in the environment as emphasized on slide 14. We locked in our equity forward in early 2022 to pre-fund future development activity. We shifted in the second half of 2022 and in 2023 to be a net seller of assets with a portion of the proceeds being utilized to fund acquisitions as we reshape the portfolio and the balance to fund a creative development.

In the third quarter put more pressure on rates at the end of Q3 Q4, we didn't have a lot of that short term demand in 2023, and therefore the year over year competencies here, so not to get too far into the weeds, but thats some insight into what you saw in a place like Seattle as compared to northern Cal.

That's very helpful. Thank you. My second question is on that debt, which you discussed has improved this year and is likely to be a tailwind in 'twenty for earnings.

Ben Schall: And we have continued to be responsive and adjusting our development start activity, reducing starts last year and this year as our cost to capital changed. As we've emphasized, we are 95% match funded on our development underway, which means all of that capital has already been raised at an attractive initial cost and allows us to deliver projects in 2024 and 2025 that will generate significant earnings and value. On a go forward basis, we have raised our return requirements on new development.

My question is how much of an improvement can you see from the two 1%.

Free resident relief funds that you got this quarter.

And in particular in Southeast, Florida was surprisingly your your worst performing market in Baghdad.

Wonder if you could provide some commentary on that.

Sure. So on the first question as it relates to bad debt. So 2023, if you look at the beginning of the year to sort of where we're trending today, just sort of rough justice Theres about a 100 basis point improvement in underlying bad debt, roughly 3% down to sort of trending around 2% today.

Ben Schall: For a standard development deal, our target return was in the low to mid sixes in the middle of the year and is in the mid to high sixes today. These target returns are up over 100 basis points since last year with a goal of underwriting 100 to 150 basis points of spread between development yields and market cap rates. We expect to be in the lower development, we expect to be in a lower development start environment in the coming quarters and would spread at the tighter end of this range after a number of years of outsized development profit margins.

We've seen improvement across almost all regions, Florida kind of being the outlier as you noted.

But.

What we've seen in 2023, there is meaningful improvement in a market like southern California, which started the year at roughly 6% and now we are below 3% as compared to some other regions. There's certainly improve with better improved at a more modest rate. So as we look forward to 2024.

Ben Schall: And while in the current environment, we're focused on maintaining our balance sheet strength, we do believe that we are well positioned given our low leverage, ample liquidity and unique strategic capabilities to capitalize on opportunities that might result from market dislocation. In the near term, while volumes are modest, we're able to deploy capital at double digit returns through our SIP program.

The expectation for continued improvement is there, but it may be at a slightly lower rates of what we experienced in 2023, given the meaningful improvement that we experienced in southern California, and now we're down to some regions like New York as an example, where things are moving a little more slowly so the pace of improvement throughout 2024.

Operator: Slide 15 concludes our prepared remarks with our key takeaways. We continue to deliver strong operating results, with tailwinds specific to our suburban coastal markets, incremental NLI to come from our developments in Lisa, and all supported by a fantastic balance sheet. And with that operator, please open the line for questions. Thank you. At this time, we'll be conducting a question and an answer session. If you'd like to ask a question, please press star one on your telephone keypad.

It may be slightly lower than what we experienced throughout 2023, if that makes sense.

But the other thing to keep in mind is that we will have some meaningful improvement, but it will be partially offset by the loss of rapidly if that's going to be call. It roughly 7 million Bucks.

That we're not expecting to recognize in 2024 that we did recognize in 2023. So those are some of the building box as it relates to bad debt that hopefully are are helpful.

Operator: A confirmation to help indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your hand set before pressing the star keys. One moment, please, while we poll for questions.

As it relates to Florida, specifically, what I would tell you is.

Where we stayed elevated bad debt and frankly, it's been beyond our expectations is really been in Miami Fort Lauderdale, West Palm Beach market has held up kind of where we would expect that it would have been but it has been elevated in the other two markets beyond what our expectation was.

Eric Wolfe: Our first question comes from Eric Wolf with City. Please proceed with your question. Hey, thank you for taking my questions. I think you said that you raised your development yields underwritten to be mid-die-sixes. Just curious why you think that's the appropriate level, and what percentage of your future development pipeline would be that criteria. So if you stick here, you're like the pipeline and everything else, what percentage would be starting under that criteria?

Yeah.

Yes.

Okay. Thank you.

Yes.

Our next question comes from Adam Kramer with Morgan Stanley. Please proceed with your question.

Hey, guys. Thanks for the time wondering where you are sending out lease renewals for opt for November and December at.

Eric Wolfe: Hi, Eric. It's Matt. I guess I can speak to that one a little bit. As Ben mentioned, we're really trying to preserve that spread of 100 to 150 basis points between cap rates and development yields. And so, you know, mid-to-high-sixes are a reflection of where we think it's very hard to know where spot cap rates would be today. I think that we have a pretty good sense of where they were over the summer when transaction activity had started to pick up with the most current rise in rates.

Yes, Adam we sent them out at 6% for November and December which is relatively consistent with what we.

<unk> four where we were for the two months of Q3 on our last call.

We have seen in some markets a little more degradation in terms of the committed offer to realization, but still within sort of the 150 to 200 basis point range.

What we're seeing renewals came in at four to four 5% depending on the more recent time period, you're looking at.

Eric Wolfe: It's a little bit of a guess, but if you think cap rates are maybe in the mid-fives, then that would translate into development yields in the mid-to-high-sixes to preserve that spread. And it does vary by product type and by region, of course. So that's really kind of the thinking behind that. And as it relates to what percentage of the current book needs that threshold, it's actually hard to say because things are moving around so much.

Yes.

Got it helpful. And then maybe just another quick one just remind us kind of where are the most recent quarter.

What the percent of move outs to buy a home.

Yeah as I mentioned in my prepared remarks has been trending below 10% of all years about nine 5% in Q3, I think we're roughly 9% for Q2. So it has been trending down as I mentioned, the long term averages kind of in the mid teens and it's been as high as the sort of high teens.

Eric Wolfe: And what we found is that until we have CDs, permits in hand, hard drawings to bid on the street, we don't really know where hard costs are today. They are starting to come down, but you don't necessarily realize that on an estimate set, you really only realize that when you're ready to go. So, what I would say is we have plenty of deals that do clear that hurdle. And indeed, we just started two deals this quarter that were in the mid-sixes.

Kind of pre GSC.

Great and then maybe just one last quick one for me if that's okay, which is just.

Eric Wolfe: And, you know, we have at least a couple more that could start over the next couple quarters that we think are kind of in that position. We do have some that, you know, on the most current underwriting from six to 12 months ago probably fall a little bit short of that. And, you know, in many of those cases, we're hoping that with some value engineering, maybe some changes to the land economics with the landowner and changes in hard costs that, you know, by the time those deals are ready to go, they will meet that.

On the bad debt kind of progression and not asking you for kind of a specific timeframe or number necessarily but if you think about kind of the recovery path back to pre COVID-19 levels.

First of all I guess is that kind of the go.

We'll kind of or is it achievable I guess to kind of get all the way back to pre COVID-19 levels.

Kind of whats the rough kind of timeframe for getting back there.

Yes, good question.

In terms of pre Covid levels.

Typically you know call it 50 60 basis points for us.

The question is whether there's going to be a new normal or not I think probably the industry expectation is given various regulatory changes that have occurred.

Eric Wolfe: Hunter said that's helpful. And then you gave some good detail on the building blocks for St. Phil Revenue Road for next year. Obviously, the one piece that's missing is just your expectation on what market runs will do. Then I know you two are late to provide that, but we're just hoping you could give us a sense for the process that you go through in terms of figuring that out, whether you're building up or down.

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Both markets are for across the country.

It might be ideal to get back to 50 50 basis points. Maybe 70 80 is more realistic I don't think we really know yet and in terms of the time to get there certainly.

I would say is.

Eric Wolfe: And then sort of if you were to do it today, if you just have a sense for what market regret. Yeah, Eric is Sean. Good question, good crystal ball question, I guess I'll characterize it as, but we sort of do two things. We have a macro view and then there's sort of a grassroots bottom-up approach. From macro perspective in terms of providing commentary today, that's probably where it's been the time, which is based on what we know today.

I don't believe we will get back to full stabilization by the end of 2024.

I would expect it to carry into 2025, and what we really need to see is a little.

More movement as it relates to cases moving through the courts.

Particularly in markets like Maryland, DC, and the Greater New York region as I mentioned earlier, we've seen significant progress in southern California.

6% bad debt down sub three now.

Eric Wolfe: You know, we would anticipate that from a demand standpoint, things would decelerate as we move into 2024, just given what we've been seeing in terms of the expectations for slower job and wage growth and other potential headwinds as it relates to whether it's oil prices, obviously interest costs, student loans, et cetera, et cetera. There's a number of macro factors that appear to be more headwinds. You know, we take a really good look at the NAIC consensus forecast for a number of macroeconomic variables.

We haven't seen anything like that in terms of percentage improvement in some of these regions such as mentioned.

Okay.

Thank you.

Our next question comes from John Pawlowski with Green Street. Please proceed with your question.

Thanks for taking the question just a follow up on the just a delinquent tenant conversation.

As you work through the backlog of evictions and long term delinquent units do you expect in a meaningful acceleration in repair and maintenance costs next year.

Eric Wolfe: At multiple points throughout the year, but certainly when we get into January, the latest forecast helps drive our outlook for 2024, like it does for pretty much every calendar year. And then we line that up with what we're seeing on the ground in terms of what actually is going to deliver as we re-screw our supply pipeline, et cetera, try to estimate what affected market macro would be based on the algorithms we use.

Yes, good question John.

We can we have seen some of that this year as reflected in what we've posted in terms of cost because there is.

Yes, just greater damage in the units and obviously you might be building damage receipts back to the resident that's in here pretty much immediately writing it off because you're not collecting it. So I would say that that has been elevated this year and I would expect that along with legal and eviction costs to also remain elevated in 2024, it may not be a significant growth.

Eric Wolfe: So it really is a, again, a sort of macro top down as well as a bottom's up approach, depending on the variables that you're looking at. In terms of today, it's hard to provide an estimate other than as I mentioned, we would expect a softer demand environment in 2024 as compared to 23 based on the current sort of consensus outlook for macro variables. Got it. That's helpful. Thank you.

Ray from 23% 24, but it should remain elevated in both categories.

Okay.

Sean one market level question can you just give us a color some color on the large sequential revenue decline in DC proper this past quarter.

Yes, do you see there is theres a number of issues there.

Austin Wurschmidt: Our next question comes from, yes, I'm here. Our next question comes from Austin Worshmit with Keyband Capital Markets. Please proceed with your question.

As it relates to primarily what you've got is sort of a seasonal issue.

Austin Wurschmidt: Thank you. So more in your term, I guess, has the moderation and lease rate growth been, you know, partly strategic as you sought to backfill some of the occupancy you lost around mid year, and then you've just kind of continued to build occupancy into the softer part of the leasing season, or is this more related to the pockets of softness across the portfolio like, you know, in northern California, it looks like and then, you know, also in some of your expansion markets.

We have probably three assets there that have exposure to the student population near a U or other universities and so you typically see that occur sequentially during that quarter and then it bounces back in Q4, that's the most meaningful component there are other miscellaneous things as it relates to <unk>.

<unk> in the Noma Submarket and other things that you could overlay on top of that.

The sequential change for the student population is the most meaningful one.

Okay.

For taking the questions.

Yep.

Austin Wurschmidt: Austin, good question. I'd say it's kind of a mix of those answers, frankly. At the early part of the third quarter, I would say it was more a reflection of our efforts to build occupancy, which was successful in a number of markets. Combined with, you know, it's a one or two places that continue to remain soft and even a little softer as we got to the end of the third quarter. And that was certainly important to the Northern California as a primary region where we experienced that.

Our next question is from James Feldman with Wells Fargo. Please proceed with your question.

Great. Thank you.

I guess my first question can you just talk more about the acquisition both in the quarter and the October acquisition, I guess, what I'd love to hear about is how.

How distressed sellers.

How much did pricing move before you decided to buy the asset with any color on what the market looks like in pricing.

Austin Wurschmidt: It's a really a combination of two things as it relates to what you saw in rent change through the quarter as well as in October. And then just on the external growth side or just investment side, I mean, how are you feeling about the size of the development pipeline? And based on what you do know today, you think that as those deliveries and completions kind of pick up next year, are you going to be able to maintain the size of the pipeline in 24?

Sure, it's Matt I'll speak to that one.

So again, just taking a step back here, we sold $445 million worth of assets this year, including one elasticity, which will close at the end close next week.

And those were at a kind of a blended average cap rate in the high fours.

And those were kind of sold and price throughout the year I better pricing earlier in the year softer pricing later in the year.

Austin Wurschmidt: Or do you think your dollars in dry powder are better spent on new acquisitions just, you know, given the risk reward profile and some of your strategic goals of getting into those expansion markets? Austin, I'll start with that. It's been so on the developments we have underway. We do have strong conviction that those are going to continue to create meaningful earnings and value and obviously got good visibility there on when they're going to be delivering.

We bought three assets.

For about $275 million.

All in the last 60 days.

Cap rates were more like mid fours and I would say no cases, where the seller distressed.

One of those cases, we did assume some debt which probably.

Gave a little boost to the price.

So and all of those assets if we if they were to price in today's market would certainly price at a higher cap rate than that I don't know how much higher but.

Austin Wurschmidt: And as we head into 2024 and 2025, do expect a fairly significant ramp up of that activity may not be quite at the same out performance levels that we've seen over the last year, but still expecting strong performance out of that pool. As we think about new capital and the decision making process there on the development side, I think we've been very clear. We want to make sure we're going to undertake new development that there's a sufficient profit margin relative to underlying market cap rates.

Same with the disposals, and then again what happened as we pivoted to being a net seller of assets. So we sell first and in many cases, we're holding some of those proceeds.

For 1031 exchange and that's informing kind of our appetite on the buy side.

So we were net sellers of $200 million really more like $230 million. After you factor in the assumed debt in terms of the cash proceeds we realized from it.

The other thing I'd say is when you think about what we bought versus what we sold it. It is a good illustration of what we're doing with our portfolio allocation.

Austin Wurschmidt: Another way of saying want to make sure there's sufficient profit margin to where we could buy an asset. And in today's environment, there's been opportunities in both. There are certain markets and certain projects that we've been able to structure for new development. Where we're able to obtain sufficient spreads and there are other markets and you saw this in some of our acquisition activity over the last quarter or two. As an example, in Dallas, where we're able to buy assets below replacement cost and start to build a portfolio on those markets.

Sold the four assets out of our established regions. They were on average 25 years old we sold them at an average price of 450000 a unit.

And the average rents on those assets was $3300 a month.

The three assets, we bought in Dallas and in the greater Charlotte area in all three cases there.

Are there assets, where we are able to add value through our operating platform in many cases it's.

Austin Wurschmidt: So it's a multifaceted approach. You know, we're fortunate in that we have multiple multiple levels to grow over time. And as we've emphasized, you know, what's on us is a team to make sure that we continue to stay flexible in that approach. And change our approaches depending on what's happening in the market environment as well as what's happening with our cost of capital.

It's part of getting to operating scale in those regions. So we think that while the cap rate to the mid fours. The yield is more like a five.

John Kim: Thank you.

Between some value add we're doing a little bit of light value add with washer dryers and some hard surface flooring, but a lot of it is just bringing it onto our operating platform as we get economies of scale in those regions and those three assets on average are seven years old we paid on average 345000, a door, which is below today's replacement cost has been mentioned.

John Kim: Our next question comes from John Kim with BMO Capital Markets. Please proceed with your questions. Thank you.

Average rent of $1700, so much more affordable price point, which we think has a much better growth profile.

John Kim: I wanted to ask on leasing trends in some of your markets, specifically Northern California, which looks like the least growth rates kind of knows dived in September, October. And that diverged from Seattle, which is a similar market in terms of the tech job growth where you saw an improvement. But can you just discuss the demand picture and why there was such a difference in performance in those markets? Yeah, John Sean. Good question.

Okay. Thank you for that.

I mean MAA comment this morning that they're seeing developers cut rent so that they can get occupancy up and get asked it's ready for sale, if theyre having debt maturity.

I guess sticking with Canada distressed line of questioning I mean, do you think that's coming your way in.

In your expansion markets.

And then similarly as you think about the ESI book over the next few years I know you mentioned $400 million, but do you think this environment helps you accelerate that and do you have a view on maybe what you could do over the next 12 months and what kind of yield.

John Kim: There's a couple of different answers to that. So first is it relates to what you saw in Seattle, which also occurred, by the way, in the mid-Atlantic in Denver, is that we're starting to get into a period, particularly a further into the fourth quarter here. We're the concert easier on a year over your basis. And that's a reflection of the step up that you still haven't changed in those three regions in a more meaningful way, particularly in Seattle, as you may have noticed.

Hey, Jamie it's Ben I'll step in.

We're not seeing distress at this point, we do expect there to be some dislocation that comes through the system and on the buying side a couple of different areas in which we're hunting.

One is what Matt talked about places, where we can be adding to the density of our portfolio assets nearby other assets places, where we can add incremental value by bringing the operating initiative activity over two of our acquisitions. So that's very much top of mind.

John Kim: Whereas in Northern California, most concentrated in San Francisco, I would say, which is only 30% of our Northern California things did soften more so, particularly as we got to sort of mid September into October. And that's what's reflected in the rent change you saw as you continue to take down through the quarter and then more meaningfully into October. I think there's a couple of things there. One is services go just to pick on it since everyone seems to like to lately.

Other potential pool, and we've been staying close to potential opportunities here are deals in lease up that maybe are coming up against near term loan maturities, while we've been seeing there today is.

Situations, where equity capital is putting more equity into those deals effectively recapitalize minimum and or lenders, who are agreeing to standout extend out those loans and so what you're finding as borrowers and lenders are agreeing to say extended out you get the step up in the interest rate not going to be a lot of cash flow generated off the asset but.

John Kim: It's a number of different head ones there as I think we're all well aware of. Probably not the best time of year to be seeing some elevated demand there, which is not the case. And there's not really a great reason for people to be coming back to the office at this point still. So fundamentals every main week and they did get weaker as you move through the quarter into October. So trying to know exactly what's underneath that other than weaker demand overall.

Better to extend their get the asset fully leased and monetize at least for the types of assets in the markets that we're looking to.

To acquire and now that won't be the case for all types of equity theres going to be equity that doesn't have the ability to put in more capital and it won't be the case for all types of lenders right. There's only certain profiles of lenders that can extend out. So it's an area that we are staying close to.

John Kim: It's hard to be precise, but I'd say we did not see the same level of weakness in Seattle. And you combine that with the year of your confidence yet all and that's why you saw the uptick there. So Seattle's still not strong, but on a relative basis compared to last year, for example, where there was a lot of short term leasing activity throughout the year and then burned off in the third quarter.

Quickly on kind of two other areas of opportunity one on the land side.

So our developers as Matt talked about today are actively reworking our existing pipeline re cutting deals re striking deals. We're also out looking for new land opportunities and.

John Kim: More pressure on rates in the Q3, Q4. We didn't have a lot of that short term demand in 2023 and therefore the year of your confidence, here. So not to get too far into the weeds, but that's give some insight into what you saw in a place like Seattle is compared to Northern Cal. It's very helpful. Thank you.

The current capital environment, and our expectations for what that capital environment will be over the next year, we expect.

You see opportunities there inherently theres going to be less competition from merchant builders in those markets. So we'll be selective but that could be.

John Kim: My second question is on that set which you discussed has improved this year and is likely to be a tailwind in 24 earnings. My question is how much of an improvement can you see from the 2.1% free resident relief funds that you got this quarter? And in particular, Southeast Florida was surprisingly your worst performing market in bad debt, and I was wondering if you could write some commentary on that. Sure, so on the first question as it relates to bad debt.

A fruitful area and then the third area of opportunity is providing capital to third party developers and we have two programs there DSP and SSP.

We'll be selective but for sure. We are in terms of the quality of sponsor that's approaching us the quality of the real estate that they have under control and the return profile of those deals all of that is enhanced in this environment and so that's another place that we can deploy capital accretively.

John Kim: So 2023, if you look at the beginning of the year, to sort of where we're trending today, just sort of rough just as there's about 100 basis point improvement and underlying bad debt. You know, roughly 3% down to sort of trending around 2% today. We've seen improvement across almost all regions of Florida, kind of being the outliers you noted. But, you know, I think what we've seen in 2023, there was meaningful improvement in a market like Southern California, which started the year at roughly 6% and now we're below 3% as compared to some other regions that certainly improved but improved at a more modest rate.

So on the do you have a sense of how much you can deploy over the next year or so.

So on the IP, we have a target of building that book of business up to $300 million to $500 million over a couple year period, given the financing markets. It is tough for deals to pencil, but there are some that do.

John Kim: So as we look forward to 2024, I think the expectation for continued improvement is there, but it may be a slightly lower rate than we'll be experiencing 2023 given the meaningful improvement that we experienced in Southern California. And now we're down to some regions like New York as an example, but things are moving a little more slowly. So the pace of improvement throughout 2024 may be further lower than we'll be experiencing throughout 2023, if that makes sense.

We are very selective these are deals we are underwriting not to own them, but to be comfortable owning them. If we need to and in places where we can get a 13% return we think that's a pretty attractive source of capital. So.

That scenario of focus I wouldn't necessarily say, it's an area. We're looking to accelerate activity, we want to build that book up in a measured way over the next couple of years.

Okay, great. Thank you.

Our next question comes from Michael Goldsmith with UBS. Please proceed with your question.

Good afternoon. Thanks for taking my question. My first question is on customer behavior.

Probably a little color on traffic.

People listen to move out to buy homes, and just if youre seeing anything.

John Kim: But the other thing to keep in mind is that we will have some meaningful improvement, but it will be partially offset by the loss of rump relief that's going to be called roughly $7 million that we're not expecting to recognize in 2024 that we did recognize in 2023. So those are some of the building boxes that relate to the bad debt that hopefully are helpful. As it relates to Florida specifically, what I would tell you is where we've seen elevated bad debt and frankly, it's been beyond our expectations has really been in Miami and for a lot of the West Palm Beach market has held up kind of where we would expected it would have been, but it has been elevated in the other two markets beyond what our expectation was. Okay, thank you.

About residents doubling up and related to that I believe it seems like a long time ago, but November December of 2022 was particularly weak and then it rebounded in early in 2023. So how are you thinking about the last three months do you expect the trajectory to repeat as it.

Did last year or.

Should we see some better growth in the fourth quarter here on the easier comparisons.

Yeah, Michael it's Sean I'll take those so in terms of customer behavior.

Say the trends we've seen this year have remained relatively consistent.

As I mentioned earlier in response to a question on in my prepared remarks move outs to purchase a home is well well below long term averages sub 10% and has been below there for some time now so.

Adam Kramer: Our next question comes from Adam Kramer with Morgan Stanley, please proceed with your question. Hey guys, thanks for the time wondering where you're sending out these renewals for after November and December at. Yes, Adam, we sent them out at 6% for November and December, which is relatively consistent with what we equated for where we were for the two months of Q3 on the last call. We have seen in some markets a little more degradation in terms of the committed offer to realization, but is still within sort of the 150 to 200 basis point range. We're seeing renewals come in at 4 to 4.5% depending on the more recent time period you look it out.

Not surprising given everything youre experiencing in the single family for sale market in terms of run up in values and rates.

Now the slowing market et cetera people not terribly inclined to purchase a home and renting is not only more affordable, but if you sort of a risk off mode. You may not want to consider it anyways.

Nothing else notable I would say in terms of customer behavior at this point in time.

As you noted the year over year comp does get easier as we proceed further into Q4.

So a little bit of that as I mentioned in October as it relates to the uptick in rent change in the mid Atlantic Denver and Seattle regions.

And we do expect rent change to somewhat stabilize as we look at November and December and while it won't be anything that's a super terrific in terms of a significant rebound as an example, it should be more stable than what we experienced last year based on what we know today.

Adam Kramer: John, it's helpful. Yeah, it may be just another quick one. Just remind us kind of where, or in the most recent quarter, where, what the percent of move out to buy a home was? Yeah, as I mentioned in my prepare remarks has been trending below 10% all years, about 9.5% in Q3. I think we're roughly 9% for Q2. So it has been trending down as I mentioned the long-term average has kind of been the mid-tier teams, and it's been as high as the sort of high teams kind of pre-GFC.

Thanks for that and my follow up question was related to.

Taxes, New York City tax burn off is a significant factor in the real estate tax what's the expected impact going forward and how should we think about real estate tax with the expansion markets versus the coastal markets.

Adam Kramer: Great, and it may be just one last quick one for me if that's okay, which is just some, some of that kind of progression. I'm not asking for kind of a specific time frame or number necessarily, but if you think about kind of the recovery path back to pre-COVID levels, you know, first of all, I guess in that kind of the goal, to kind of early achievable, I guess, to kind of get all the way back to pre-COVID levels.

Yeah. Good question as it relates to property taxes, which are about 35% of our expense structure, we do expect.

Another elevated eurotax pressure in 2024.

Most of it related to the exploration of those tax abatement programs that we experienced this year and the level of impact next year will be relatively similar to 2023.

Adam Kramer: And then, you know, kind of, what's the rough kind of time frame for getting back there? Yeah, good question. In terms of pre-COVID levels, which are typically, you know, call it 50-60 basis points for us, the question is whether it's going to be a new normal or not. I think probably the industry expectation is given various regulatory changes that have occurred in most markets are across the country that it might be ideal to get back to 50 basis points maybe 70, 80 is more realistic.

As it relates to tax rate just tax growth in the sunbelt or our expansion regions versus the established regions independent of the expiration of this test tax abatement programs.

Certainly we would expect more pressure in the expansion regions in the Sun belt in general given a significant run up in values that they have experienced over the last three years relative to the established regions. So I think that's pretty clear there's always a lag effect. So the question is just which market, which submarket tax jurisdiction et cetera, but.

Adam Kramer: I don't think we really know yet. And in terms of the time to get there, certainly what I would say is, I don't believe we'll get back to full stabilization by the end of 2024. I would expect it to carry into 2025. And what we really need to see is a little more movement as it relates to cases moving through the courts, particularly in markets like Maryland, DC, and the grid in New York region.

I expect more pressure in those regions as compared to our established regions, which is still the majority of our portfolio.

Thanks for that good luck in the fourth quarter.

Thank you.

Our next question comes from Joshua <unk> with Bank of America. Please proceed with your question.

Yeah, Hey, guys I appreciate it.

Adam Kramer: As I mentioned earlier, we've seen significant progress in Southern California. 6% bad dead down sub three now. You know, we haven't seen anything like that in terms of percentage improvement in some of the regions that you mentioned.

Closure on the two new project starts.

Thanks.

Adam Kramer: Thank you.

And then also how you're kind of seeing that with those projects at least.

90 basis point higher spread just kind of hey, Josh Josh.

So we're getting a lot done a lot.

Feedback on the call.

John Poloski: Our next question comes from John Poloski with Green Street. Please proceed with your question. Thanks for taking the question. Just to follow up on the just a delinquent tenant conversation. You worked through the backlog of evictions and long term delinquent units, the expectant meaningful acceleration and repair maintenance costs next year. Yeah, good question, John. We can. We have seen some of that this year is reflected in what we've posted in terms of cause because there's.

Okay does that better I'm sorry.

I really I know you are winding.

You dial back in and we will get you back into line.

How do those guys I'm sorry.

Okay.

Okay.

Yes.

Okay.

Hello.

Okay, Joshua Ifyou could call back in you are still static yeah, I'm going to move on to the next participant okay.

The next question comes from Steve <unk> with Evercore. Please proceed with your question.

John Poloski: Yeah, just greater damage in the units and obviously you might be building damage received back to the resident, but then you're pretty much immediately riding it off because you're not collecting it. So I would say that that has been elevated this year and I would expect that along with legal and eviction costs to also remain elevated in 2024. It may not be a significant growth rate from 2324, but it should remain elevated in both categories.

Thanks.

I just wanted to circle back on the development. So are you guys planning development starts in the fourth quarter or is it is it up in the air It sounded like Matt you you had some things that would pencil in that high six maybe seven range, but I'm just not sure.

If he actually we're starting anything in the fourth quarter and if we think about 'twenty four starts with those most likely be back half weighted to give yourself some time to kind of see how the economy plays out here.

John Poloski: Okay, Sean, one market-level question. Can you just give us a color, some color on the large sequential revenue decline in DC proper as best quarter? Yeah, DC proper, there's a number of issues there. It relates to primarily what you've got is sort of a seasonal issue. We have probably three assets there that have exposure to the student population near AU or other universities. And so you typically see that occur sequentially during that quarter, and then it bounces back in Q4.

Yes, Steve.

Yes.

We may well start a deal in the fourth quarter.

It would be on similar economics to the Q3 starts again.

95% match funded on development underway today so.

If we have deals that we think makes sense. We think we do have some room there.

So.

I wouldn't be surprised if we if we have a similar level of start activity in Q4 to Q3, maybe whether it's one or two deals I don't know when.

John Poloski: That's the most meaningful component. There are other miscellaneous things as it relates to supply and the no-masub market and other things that you could overlay on top of that, but by far this sequential change of the student population is the most meaningful one.

When we think about 'twenty four I think you're probably right. It probably is more back half weighted based on kind of how the capital markets evolve in.

Kind of our access to and pricing of new capital that would fund that business, but we've been in a again for us if we track to roughly $800 million in starts this year or maybe a little bit under that that would be a pretty light year for us and certainly lighter than what we expected going into the year, which was the same.

John Poloski: Okay, thanks for taking the questions.

James Feldman: Our next question is from James Feldman with Wells Fargo. Please proceed with your question. Great, thank you.

James Feldman: I guess for my first question, can you just talk more about the acquisition of in the quarter and the October acquisition? I guess what I'd love to hear about is how to stress with the sellers, how much did pricing move before you decided to buy the assets? If any color on what the market looks like in pricing? Sure, it's mad. I'll speak to that one. So again, just taking a step back here, we sold $445 million worth of assets this year, including one, our last Dispo, which we'll close at the end, close next week.

Last year or so.

We're at a pretty modest level of starts volume relative to our kind of.

Long run capacity and averages and that's a response to what we're seeing in the market but.

Don't think we would view that as a <unk>.

Significant level.

Got it and then just secondly on expenses you know they've come in a little bit better than what you originally guided but still kind of elevated and you know six plus range. Just as you think about the puts and takes are into next year.

James Feldman: And those were kind of a blended better pricing earlier in the year, softer pricing later in the year. We bought three assets for about $275 million, all in the last 60 days. Those cap rates were more like mid-forres, and I would say in no cases were the seller distressed. One of those cases we did assume some debt, which probably gave a little boost to the price. And all of those assets, if they were to price in today's market, would certainly price at a higher cap rate than that.

How do you maybe see expenses trending you know what might be a little bit better and and what overall might be still headwinds into next year.

Yes, Steve it's Sean I can take that one.

I mean, we do expect 2024 to be another somewhat elevated year, primarily due to a few factors that I can touch on one I mentioned earlier property taxes.

Which is about 35% of our expense structure would you expect it to grow at an elevated rate to the exploration of those tax abatement programs that I mentioned previously.

The pilot burden in 2020 for the burnt off there is relatively similar to 2023.

Before we see it begin to step down in 2025.

James Feldman: I don't know how much higher, but same with the Dispo, and again, what happened is we pivoted to being a net seller of assets, so we sell first, and in many cases we're holding some of those proceeds for $10.31 exchange, and that's informing kind of our appetite on the buy side. So we were net sellers of $200 million, or really more like $230 million after you factor in the assumed debt in terms of the cash proceeds, we realized from it.

Utilities, which is about 12% of the expense structure.

The continued implementation of our Avalon connect offering which is a.

Profitable endeavor.

We're expecting kind of $25 million of incremental NOI from that program, but it is a burden on opex growth as it's being implemented.

We do expect that to be continuing through 2024, as well and then two other sort of pressure points really are gonna be insurance, even though it's only 5% of opex.

James Feldman: The other thing I'd say is when you think about what we bought versus what we sold, it is a good illustration of what we're doing with our portfolio allocation. We sold the four assets out of our established regions. They were on average 25 years old. We sold them in an average price of 450,000 a unit, and the average rents on those assets was $3,300 a month. The three assets we bought were in Dallas and in the greater Charlotte area.

Still a difficult market, we will be trying to mitigate that pressure through the use of our captive and other strategies to help offset are relative to market growth rate, but it's still may be able to elevated relative to sort of normal trends.

And then the last one is the repairs and maintenance.

And legal costs, which I mentioned earlier as a result of continuing to move out sort of the the nonpaying residents and puts pressure on turn costs legal on eviction costs et cetera. Some of that'll be offset by continued benefits from the initiatives, particularly on the payroll side of things.

James Feldman: In all three cases, there are assets where we are able to add value through our operating platform. In many cases, it's part of getting to operating scale in those regions, so we think that while the cap rates are mid-floor, the yield is more like a five. Between some value add, we're doing a little bit of light value add with washer dryers and some hard surface flooring, but a lot of it's just bringing it on to our operating platform as we get economies of scale in those regions.

But certainly it won't be able to offset all of those other macro trends that we see occurring and 24 similar to 'twenty three.

So we're not not that maybe you put words words in your mouth, but it sounds like the six three and I'm going to call. It a run rate, but it doesn't sound like there's a lot of nonrecurring that would really burned down it sounds like expenses could be kind of in that ballpark for next year, maybe a little bit better but.

James Feldman: And those three assets on average are seven years old. We paid on average 245,000 a door, which is below today's replacement cost, as Ben mentioned, and average rent of $1,700. So much more affordable price point, which we think has a much better growth profile.

Elevated I guess relative to history.

Yes, I think the elevated relative to history is the operative statement, there I think thats appropriate and maybe a little bit of relief in some areas like in utilities, we should have some better contracts and 24 relative to 'twenty three but we still do have the Avalon and connect offering again, it's profitable but are moving through the year. So.

Matt Birenbaum: Okay, thank you for that. I mean, MAA commented this morning that they're seeing, you know, developers cut rent so that they can get occupancy up and get access ready for sale if they're having debt maturities. So I guess sticking with kind of the distress line of questioning, I mean, do you think that's coming your way in either in your expansion markets? And then similarly, as you think about the SIP book over the next few years, I know you mentioned 400 million, but if you think this environment helps you accelerate that and do you have a view on maybe what you could do over the next 12 months?

I think your phrase is generally in the ballpark.

Okay. Thanks.

Yes.

Our next question comes from Connor Mitchell with Piper Sandler. Please proceed with your question.

Hey, good afternoon, thanks for the time.

Matt Birenbaum: And what kind of yield? Jamie, it's been, I'll step in. We're not seeing distress at this point. We do expect there to be some dislocation that comes through the system. And on the buying side, I'm a couple of different areas in which we're hunting. One is what Matt talked about, places where we can be adding to the density of our portfolio assets nearby other assets, places where we can add incremental value by bringing the operating initiative activity over to our acquisition.

So my first question.

Guys talked about the stress deals and the environment is a little bit. So I guess I was just wondering when do you guys approach distressed deal to taking over private deals.

How do you how does it compare for the underwriting of those deals versus your internal underwriting what are your assumptions similar or do you guys have to make a lot of adjustments that may be also that can relate to the S&P program. You were discussing earlier about how you underwrite those has been the case you have to take over projects.

Matt Birenbaum: So that's very much top of mind. Another potential pool and we've been staying close to potential opportunities here are deals and lease up that maybe are coming up against near term loan maturities. What we've been seeing there today is situations where equity capital is putting more equity into those deals, effectively recapitalizing them and or lenders who are agreeing to extend out those loans. And so what you're finding is borrowers and lenders are agreeing to say, I'll extend it out, you get the step up in the interest rate, not going to be a lot of cash flow generated off the asset, but better to extend there, get the asset fully lease, then monetize it, at least for the types of assets in the markets that we're looking to acquire in.

I guess I can I can try and take that one.

It's Ed.

We underwrite everything more or less the same which is we develop our own view of what we think the NOI is going to be.

And where we think the asset value would be.

And so in the SAP frequently almost always the sponsor will provide a projection of NOI that we think is overly optimistic and again, we have a lot of data that we can leverage to do good underwriting in these programs and the fact that we own and operate assets and have real rent rolls and everything else.

And all of these markets is one reason why we think that this is an appropriate place for us to invest in a prudent way and.

Matt Birenbaum: Now that won't be the case, right, for all types of equity, there's going to be equity that doesn't have the ability to put in more capital and it won't be the case for all types of lenders, right, there's only certain proposal lenders that can extend out. So it's an area that we are staying close to quickly on kind of two other areas of opportunity, one on the land side. So our developers, as Matt talked about today, are actively reworking our existing pipeline, recutting deals, re-striking deals.

And leverage our capabilities and our proprietary data so we get their underwriting we kind of I won't say, if you throw in the trash, but we do our own underwriting and based on that we come up with our own view of where we think the NOI would be for that asset very similar to if it was announced that we were developing and then we build in a margin of safety on that when we think about.

Matt Birenbaum: We're also out looking for new land opportunities and in the current capital environment and our expectations for what that capital environment will be over the next year, we expect to see opportunities there. Apparently, there's going to be less competition from merchant builders in those markets. So it will be selective, but that could be a fruitful area. And then the third area of opportunity is providing capital to the third party developers, and we have two programs there, DFT and SIP, will be selective.

How high were willing to lend in the capital stack under the expectation that again, we're going to be paid back out of an asset sale in the backend.

And but we are prepared to step in at our lender basis and have the view that if we have to step in at our lender basis, because they can't pay us back that would not be a bad outcome for us from an investment point of view the basis, we would be in that asset. So there are some assets. We just wouldn't lend on because we wouldn't be prepared we wouldn't want to own them really under almost at any price.

So that's one of our screens in the Sop.

As it relates to acquisitions or development, it's kind of the same.

Just look at where we think the deal should underwrite and based on that we'll formulate a view of what we think is worse and make an offer and see if we can tie it up.

Matt Birenbaum: But for sure, we're in terms of the quality of sponsor that's approaching us, the quality of the real estate that they have under control and the return profile, those deals, all of that is enhanced in this environment. And so that's another place that we can deploy capital creatively. So on the SIP, do you have a sense of how much you can deploy over the next year or so? So on the SIP, we have a target of building that book of business up to 300 to 500 million over a couple of year period.

Hey, Scott, maybe just add one thing on this.

I'm not sure. This is exactly where we're going but we do try to apply what we think is sort of a market based underwriting given our standards.

Matt was mentioning earlier, we may be buying a deal of what we think is a.

I'll pick a number 45555 cap, but when we bring it on our operating platform. We made use of $50 $60 70 basis points from our own sort of operating platform, we would not underwrite the benefit of it being on our platform and have that reflected in the value of the asset it would be based on sort of a standalone asset.

Matt Birenbaum: Given the financing markets, it is tough for deals to pencil, but there are some that do. We are very selective, these are deals we're underwriting not to own them, but to be comfortable owning them if we need to. And in places where we can get a 13% return, we think that's a pretty attractive source of capital. So it's an area of focus. I wouldn't necessarily say it's an area we're looking to accelerate activity. We want to build that book up in a measured way over the next couple of years.

Matt Birenbaum: Okay, great. Thank you.

With sort of market based underwriting with our scrutiny of it if that's where you're going.

Yes, I appreciate that that's great color.

And then my second question and I apologize if you guys already mentioned this but.

How much of the improved earnings outlook is driven by developments versus operations.

Yeah.

I mean in terms of kind of Youre talking about the.

Michael Goldsmith: Our next question comes from Michael Goldsmith with UBS. Please proceed with your question.

Third quarter update relative to the mid year, we forecast view of a page in our earnings release that we'll detail that for you.

Michael Goldsmith: Good afternoon. Thanks a lot for taking my question. My first question is on customer behavior. You know, you probably will call it on traffic. A percentage of people listen to move out to buy homes and just if you're seeing anything about residents doubling up and related to that I believe seems like a long time ago, but November December of 2022 is particularly weak and then it rebounded in early in 2023. So how are you thinking about the last three months?

And it is on.

Page five and.

And you can see there that as you'll recall omni.

You're re forecast for core <unk> for the year was $10 56.

It is now $10.

63 <unk>.

So a <unk> increase if you kind of go down the line. There you can see that <unk> comes from improved same store residential revenue a penny from improved same store residential opex and then theres some puts and takes in terms of overhead and other debt.

Michael Goldsmith: Do you expect the trajectory to repeat as it did last year or should we see some better growth in the fourth quarter here on the easier comparisons? Thank you. Michael, it's Sean. I'll take those. So in terms of customer behavior, I'd say that the trends we've seen this year have remained relatively consistent. As I mentioned earlier in response to a question in my prepare remarks, move out to purchase a home is well, well below long term averages, sub 10% and has been below there for some time now.

The additional two cents there.

Yeah.

I appreciate it all for me thank you.

Thanks.

Our next question is from Brad Heffern with RBC capital markets. Please proceed with your question.

Yes. Thanks, So you guys reported a negative 80 basis point, new lease spread in October I'm curious how that compares to normal for this time of year and just generally how things are progressing versus the normal pre COVID-19 seasonality.

Michael Goldsmith: So not surprising given. Everything you're experiencing in the single family for sale market, terms of run up and values and rates and now the slowing market, etc. People not terribly inclined to purchase a home and renting is not only more affordable, but if you sort of risk off mode, you may not want to consider it anyways. There's nothing else notable I would say in terms of customer behavior at this point in time.

Yes, Brad.

Good question I don't know if theres a normal per se for October, but generally what I would describe for.

Rent growth throughout the year as a typical seasonal bell curve.

We typically see rents run up from January to July or August 7% range or so.

Average year.

Then they decelerate down by 4% to 5%.

Michael Goldsmith: As you noted the year of year comp does get easier as we proceed further into Q4. So a little bit of that as I mentioned in October is a relates to the up thick and rent change in the mid Atlantic Denver and Seattle regions. And we do expect rent change to somewhat stabilize as we look at November and December. And while it won't be anything that's super terrific in terms of a significant rebound as an example, it should be more stable than what we experienced last year based on what we know today. Thanks for that.

For this year, if you look at it sort of on average point to point from January through year end, you might see effective market rent growth in the two 5% range somewhere in that ballpark.

And what I would say in general about what we've seen in the back half of this year is slightly less seasonality across most markets.

With one exception being northern California that has been.

More seasonal than normal.

Relative to its history.

Okay got it and then I think in the prepared remarks, you talked about hard costs and said that you're not really seeing cost savings and did you expect to see them. When they actually start going can you give us some color on where you think real hard costs in real life has actually gone.

Michael Goldsmith: And my follow up question is related to taxes in New York City tax board offers a significant factor in the real estate tax. What's the expected impact going forward? And how should we think about real estate tax with the expansion markets versus the coastal markets? Yeah, good question. Is your relates to property taxes, which are about 35% of our expense structure? We do expect another elevated year of tax pressure in 2024.

Sure, Brian It's Matt I guess I'll speak to that a little bit it is very <unk>.

Regional so.

Where we've seen hard costs come down say compared to this time last year.

We've seen it a little bit here in the mid Atlantic maybe 5% we've seen it in Boston, maybe to a little bit more significant degree 5% to 10%.

Michael Goldsmith: Most of it related to the expiration of those tax payment programs that we experienced this year. And the level impact next year will be relatively similar to 2023. As it relates to tax rate or just tax growth in the Sunbelt or our expansion regions versus the established regions independent of the expression of those tax payment programs. It certainly would expect more pressure in the expansion regions than the Sunbelt in general, given the significant run-up and values that they have experienced over the last three years relative to the established regions.

And I think we are starting to see it in northern California.

It's just been very very soft.

For a while now we have not yet seen it in Seattle, we haven't yet seen it maybe a little bit in Austin, but costs went up so much there.

It's not I would say super meaningful yet so.

So we haven't necessarily seen it as much in the sunbelt markets yet Denver.

Southeast, Florida, but we think that it's coming there and I would caveat that by saying for us and others.

What I was saying before the best data is where you have a deal that's ready to go and you really can hard bid it and we don't have deals they were hard bidding in every region. At this very moment. So it's hard to tell until youre at that place, we're getting kind of discrete data points and where we have them. Its very helpful. Because we do think again kind of like with the rents that gives us a little bit of an informational advantage.

Michael Goldsmith: I think that's pretty clear. There's always a lag effect. So the question is just which market, which sub market, texture of section, etc. But certainly expect more pressure in those regions as compared to our established regions, which is still the majority of our portfolio. Thanks for that.

Michael Goldsmith: Good luck in the fourth quarter. Thank you.

I have a real sense for whats going on in real time, but.

Joshua Dennerlein: Our next question comes from Joshua Dennerlein with Bank of America. Please proceed with your question. Hey, is that better? I'm sorry. Really?

It really does vary based on the regional dynamics within each region.

Okay. Thank you.

Our next question comes from Rich Anderson with Wedbush. Please proceed with your question.

Good afternoon, just a question on expansion market and the process to getting in there.

The word was you staying flexible about an hour ago.

And I'm wondering.

Just the.

A methodical way by which youre growing their offer.

Is that.

What's the word keeping you informed I guess and allowing you to pivot one direction or another or if you had a chance to do it perfectly in one fell swoop and everyone would stand up and applaud the transaction. If you can get there all at once tomorrow would you do that sorry, how committed are you in a related part of that.

Question is how is the sunbelt performing.

Dave Sakwa: Why don't you dial back in and we'll get you back in the line. How's this guys? I'm sorry. The next question comes from Dave Sakwa with Evercore. Please proceed with your question. Thanks. I just want to circle back on the development. So are you guys planning development starts in the fourth quarter or is it up in the air? It's not like Matt, you had some things that would pencil on that high six, maybe seven range, but I'm just not sure if you actually were starting anything in the fourth quarter. And if we think about 24 starts, would those most likely be back half waited to give yourself some time to kind of see how the economy plays out here?

Not so much relative to the urban.

Coastal areas, where everyone knows that but how is it performing relative to your expectations and is it getting is it is it even more interesting to you even though it's underperforming relative to other areas of the country at the present time.

Hey, rich it's Ben.

Let me make a couple of comments first in terms of our long term framework of moving 25% of our portfolio to our expansion markets that remains our primary drivers of that one the recognition that our core customer our knowledge base worker is in a more dispersed set of markets and <unk>.

Dave Sakwa: Yes, Steve. Yeah, we may well start a deal in the fourth quarter. You know, that would be on similar economics to the Q3 starts. Again, we're 95% match funded on development underway today. So, you know, if we have deals that we think makes sense, we think we do have some room there. So I wouldn't be surprised if we, you know, if we have a similar level start activity in Q4 to Q3, maybe, you know, whether it's one or two deals, I don't know.

We can take what we do well bring it to those markets in order to generate incremental value for our shareholders.

In terms of pacing and timing.

We are seeing softness we're starting to see some dislocation.

Our expansion regions and we see it as a potential opportunity.

It's an opportunity to potentially buying assets below replacement cost, which we've started to do.

Dave Sakwa: When we think about 24, I think you're probably right. It probably is more back half waited based on kind of how the capital markets evolve and kind of our access to and pricing of new capital that would fund that business. But, you know, we've been in a, again, for us, if we track to roughly 800 million and starts this year, or maybe a little bit under that, that would be a pretty light year for us and certainly lighter than what we expected going into the year, which was the same last year.

Then a development market that maybe has less players in it or players that don't have the same access to capital or the same cost of capital that we do to be able to selectively step into some attractive development opportunities there.

There could be you fast forward I don't think its today, where we'd be looking to accelerate our movement, given where our cost of capital is but there could be an environment at some point over the next couple of years, where something more substantial does present itself.

And that could make the accurate at that point would be the right risk adjusted return.

Dave Sakwa: So, you know, we're at a pretty modest level of starting relative to our kind of long run capacity and averages. And, you know, that's a response to what we're seeing in the markets. But, you know, I don't think we would view that as a, you know, significant level.

So it's on our radar, we're continuing to grow through our own development through acquisitions and funding of third party developers and we'll keep our eyes out for larger opportunities as well okay.

Follow up question is to Kevin perhaps.

Sean Breslin: Got it. And then, just secondly on expenses, you know, they've come in a little bit better than what you originally guided, but still kind of elevated in, you know, sixth plus range. Just as you think about the puts and takes into next year, you know, how do you maybe see expenses trending, you know, what might be a little bit better and what overall might be still headwinds.

The $4 one times leverage target of five to six I mean, how do you ever get to that target anytime soon given the rate environment and maybe one way is.

Debt assumption, which was a part of a transaction you mentioned earlier.

Is there any.

Realistic lift to four one in this environment or could there be transactions here and there where you add debt at reasonable cost through your transaction activities.

Sean Breslin: [inaudible] next year. Yes, Steve, it's Sean. I can take that one. I mean, we do expect 2024 to be another somewhat elevated year, primarily due to a few factors I can touch on. One, I mentioned earlier property taxes, which is about 35% of our expense structure. We do expect it to grow at an elevated rate through the expiration of those tax evaporation programs that I mentioned previously. The pilot burden in 2024, the burn off there is relatively similar to 2023, before we see it begin to step down in 2025.

Sure Rich again, it's Kevin.

I appreciate the comment it's an interesting question, we discuss and debate internally here.

As you point out we are 4.1 times net debt to EBITDA Levered <unk>.

Relative to a 5% to six times target range, which is sort of a.

It's been a long term target range that we've had for more than a decade, which speaks to sort of a normalized environment.

If you look at the $4 one times, it's benefited from cash if the cash went there we'd be kind of a mid fours.

Sean Breslin: Utility is which is about 12% of the expense structure, you know, the continued implementation of our Avalon Connect offering, which is a profitable endeavor. You know, we're expecting a kind of 25 million of incremental and a lot from that program, but it is a burden on off-ex growth as it's being implemented. And we do expect that to be continuing through 2024 as well. And then two other sort of pressure points really are going to be insurance, even though it's only 5% of off-ex.

Just as a further contextual comment but more broadly if you look back at the last four years or so I don't think anyone would agree we've been in a normalized environment from the pandemic and its effects as it's moved through and as you think about how things have played out. This year. We are at that low four times leverage level in part because.

Of our capital decisions over the last few years and this year's capital plan, where we've essentially we will have paid off about $750 million of debt this year and brought in about $750 million of.

Sean Breslin: It's still a difficult market. We'll be trying to mitigate that pressure through the use of our captive and other strategies to help offset a relative to market growth rate, but it's still maybe able to elevate a relative to sort of normal trends. And then the last one is the repairs and maintenance and legal costs, which I mentioned earlier as a result of continuing to move out sort of the non-paying residents and puts pressure on turn costs, legal and eviction costs, et cetera.

New and recycled equity from the equity forward in the net disposition activity that's deleveraging and.

And not necessarily reflective of a normal year, but.

So this wouldn't have been our capital plan in normally but it has proven to be the right capital plan for this year.

And what that does is it gives us financial flexibility to deal with an uncertain and volatile capital markets environment.

Sean Breslin: Some of that will be offset by continued benefits from the initiatives, particularly on the payroll side of things, but, you know, certainly won't be able to offset all those other macro trends that we'd see occurring in 24 similar to 23.

Liquidity and strength to deal with.

An environment, where we may wish to be patient in terms of additional capital formation, given the recent rise and debt rates and I guess to the point that you are getting at it also gives us leverage capacity.

Sean Breslin: So, not to maybe put words in your mouth, Sean, but it sounds like the 6-3, I don't want to call it a run rate, but it doesn't sound like there's a lot of non-recurring that would really burn down. It sounds like expenses could be kind of in that ballpark for next year, maybe a little bit better, but elevated, I guess, relative to history. Yeah, I think the elevated relative to history is the operative statement there.

To the extent, we wish to seize upon certain investment opportunities whether they are in our established markets or in our expansion markets that we view as attractive where we can bring the strength of our balance sheet to bear and potentially.

Sean Breslin: I think that's appropriate. There may be a little bit of relief in some areas, like in utilities. We should have some better contracts in 24 relative to 23, but we still do have the avalanche connect offering, again, as profitable, but moving through the year. So, I think your phrase is generally in the ballpark.

Rely on a greater than normal level of debt that may be attractive relative to those opportunities and leaned into the balance sheet and generate some growth in that regard. So we're certainly willing and able to get to that five to six times leverage in the right circumstances I will note that there is sometimes when we've gotten there and less than desirable circumstances, such as three years.

Sean Breslin: Okay, thanks.

And the pandemic win.

We actually were five four times net debt to Levered Libre.

In Q3 of 2020, but thats sort of preparing the balance sheet for a downturn. So given where we are it's a low leverage level, but we think its appropriate lease so.

Connor Mitchell: Yep. Our next question comes from Connor Mitchell with Piper Samler. Please proceed with your question. Hey, good afternoon. Thanks for the time. So, my first question, you guys talked about the stress deals and the environment a little bit. So, I guess I was just wondering, when you guys approach the stress deals and taking over private deals, how do you, how does it compare for the underwriting of those deals versus your internal underwriting, the assumption similar, or do you guys have to make a lot of adjustments? And maybe also, that can relate to the FIP program you were discussing earlier about how you underwrite those in the case you have to take over projects.

Because it gives us strength to deal with potential challenges that could happen ahead as well as strength to deal with potential opportunities that we hope will be in front of us.

Okay, great color, thanks very much.

Our next question comes from Handel St Juste with Mizuho. Please proceed with your question.

Hey, good afternoon, Thanks for taking my question.

I appreciate the color earlier on the renewals for October November color on October new lease rates.

But I didn't catch if you did not provide them your expectations for new lease rates into the yearend. So maybe some color there and.

Matt Birenbaum: I guess I can try and take that one. We underwrite everything more or less the same, which is, you know, we develop our own view of what we think the NILI is going to be and where we think the asset value would be. And so, in the SIP, frequently, almost always, the sponsor will provide a projection of NILI that we think is overly optimistic. And, you know, again, we have a lot of data that we can leverage to do good underwriting in these programs.

Then what would that imply.

For a full year 'twenty for earn it.

Yes, it's Sean just I didnt provide specific insight into.

The expectation for new move in lease rates.

In Q4, the one data point, we did provide is that renewal offers went out of the 6% range and similar to what we've been seeing in the last few months I would expect.

Matt Birenbaum: And the fact that we own and operate assets and have real rep roles and everything else in all of these markets is one reason why we think that this is an appropriate place for us to invest in a prudent way and leverage our capabilities and our proprietary data. So, we get their underwriting, we kind of, I won't say we throw in the trash, but we do our own underwriting. And based on that, we come up with our own view of where we think the NILI would be for that asset very similar to if it was an asset we were developing.

To set I'll sort of call. It 150 to 200 basis points solution off of that so.

The 4% range, maybe four in a quarter.

One thing to keep in mind that I mentioned earlier as the comps do get a little bit easier in November and December and that's why and in markets like the mid Atlantic Denver, and Seattle, you saw an uptick in rent change in October.

So all else being equal, we expect sort of a relatively I'll call. It stable glide path through year end.

Matt Birenbaum: And then we build in a margin of safety on that when we think about how high we're willing to lend in the capitals back under the expectation that, again, we're going to be paid back out of an asset sale on the back end. And, but we are prepared to step in at our lender basis and have the view that if we have to step in at our lender basis because they can pay us back, that would not be a bad outcome for us from an investment point of view the basis we would be in in that asset.

As it relates to lease rates.

The earn and we provided kind of a snapshot of the Arab earn in on the.

On the slides that we presented our posted last night at about a point and a half my.

My expectation based on what I know today is that may soften a little bit between now and year end.

But haven't necessarily put a number to it yet.

Thanks for that.

Matt Birenbaum: So, there's some assets we just wouldn't lend on because we wouldn't be prepared, we wouldn't want to own them really under almost at any price. So, that's one of our screens in the SIP. As it relates to acquisitions or development, it's kind of the same. We'll just look at where we think the deal should underwrite and based on that, we'll formulate a view of what we think is worse and make an offer and see if we can tie it up.

Can you give us an update on the loss to lease in the portfolio, perhaps worth highest and Lewis.

Yes that was posted on the slide as well, we recorded loss to lease roughly 2%.

Led by the East Coast markets North of two and then West coast, an expansion regions trailing roughly a point and a half at around 70 basis points and expansion regions.

Matt Birenbaum: You got to meet me with your head one thing on this. This is exactly where you were going, but we do try to apply what we think is sort of a market based underwriting given our standards. Matt was mentioning earlier, we may be buying a deal of what we think is a pick a number of four and a half cap, five and a half cap. But when we bring it on our operating platform, we made use of 50, 60, 70 basis points from our own sort of operating platform.

Okay. Thank you and then last one and policy if you already touched on this but are there any markets.

You commented that you're seeing an acceleration in concessions or perhaps more aggressive lease up for merchant developers.

Yeah. The one market I mentioned, a couple of times earlier that has been softening of our recently is northern California.

Most notably San Francisco, but to a lesser extent San Jose as well.

Matt Birenbaum: We would not underwrite the benefit of it being on our platform and have that reflected in the value of the asset. It would be based on sort of a standalone asset with the sort of market based underwriting with our scrutiny of it if that's where you're going.

Okay. Thank you.

Uh huh.

As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad, one moment, while we poll for questions.

Matt Birenbaum: Yeah, I appreciate that. That's a great color.

Sean Breslin: And then my second question and apologies if you guys have already mentioned this, but how much of the improved earnings outlook is driven by developments versus operations? I mean, in terms of Conner, you're talking about the third quarter update relative to the mid-year report cast. If you have a page in our earnings release that will detail that for you, and it is on page five, and you can see there that, you know, as you recall, our mid-year report cast for Core FFO for the year was $10.56.

Our next question comes from Anthony Powell with Barclays. Please proceed with your question.

Hi, Good afternoon, I guess a question on the expansion reason last week 70 basis points, which is.

Maybe better than you would think given all the concern about supply growth in some of these markets alright, if any one market driving that positive off lease and do you think expansion markets could be a positive contributor to your same store revenue growth next year.

Yes, good question.

I would say what.

Whereas coming from for the most part is a blend of southeast Florida and.

We've experienced.

A little bit that's going to be coming online in the Texas market.

Sean Breslin: It's now $10.63, so a $7.00 increase needs to kind of go down the line there. You can see that four cents comes from improved same-store residential revenue, a penny from improved same-store residential op-ex. And then there's some puts and takes in terms of overhead and other that get you the additional two cents there. Thank you.

Where it's a more challenged environment is in Charlotte.

Which as you may have noted the expansion region rent change was negative that is effective with the Charlotte market three assets in the south end of Charlotte.

There's a lot of supply coming online there is a great sub market, we love the sub market. When we bought the assets. We knew there would be a fair amount of supply in the first two or three years of ownership, which is what we're experiencing today, but we believe we acquired them at good values.

Brad Heffern: Our next question is from Brad Heffern with RBC Capital Markets. Please proceed with your question. Yeah, thanks. So you guys reported the negative 80 basis point newly spread in October. I'm curious how that compares to normal for this time of year and just generally how things are progressing versus the normal pre-COVID seasonality. Yeah, Brad, good question. I don't know that there's a normal per se for October, but generally what I would describe for rent growth throughout the year is that it's a typical seasonal bell curve.

It's probably a little too early to tell you what 'twenty 'twenty four is going to look like they're specifically, but anything thats coming through will probably be.

Texas, and maybe a little bit in southeast, Florida, and really not much of anything.

It might be even being a gain to lease situation in Charlotte.

Alright, thank you.

Sure.

Our next question comes from Joshua <unk> with Bank of America. Please proceed with your question.

Hey, guys I'm back hopefully you can hear me now.

Brad Heffern: We typically see rents run up from January to July or August, they're seven percent rangers average year. And then they decelerate down by four or five percent. For this year, if you look at it sort of on average point to point from January through year and you might see effective market rent growth in the two and a half percent range, you know, some run that ballpark. And what I would say in general about what we've seen in the back half of this year is slightly less seasonality across most markets with one exception being Northern California that has been more seasonal than normal relative to its history.

Oh.

Yes.

Okay. Good. So just my question I just was curious because it looks like you're underwriting the new new starts at a mid sixes, but you're achieving call. It mid sevens on your stuff in current lease up just kind of what would get us up to that mid sevens going forward or is there just some kind of element of conservatism built in.

Yes, Josh it's Matt.

So the way, we underwrite as we don't trend anything so.

The reason why the current lease ups are exceeding pro forma by so much by 90 basis points.

I mean, it's basically it's got to be one of two things, it's either rent growth between the time, we started construction in the time, we leased it up which that is what it is in the current situation.

Brad Heffern: Okay, got it. And then I think in the prepared remarks, you talked about hard costs and said that you're not really seeing cost savings and dids, but you expect to see them when they actually start going. Can you give some color where you think real hard costs and real life is actually going? Sure, but it's mad. I guess I'll speak to that a little bit. It is very regional. So where we've seen hard costs come down, say compared to this time last year.

In some cases, we were just too conservative in our initial underwriting and.

Even without market rent growth the offering that we put out there got a bigger premium to the comps than what we had underwritten because we're pretty conservative in general so.

When you think about the deals we're starting now and you ask where are they going to stabilize two to three years from now when they lease up the reason why they might outperform we might get a little bit of hard cost savings Thats certainly possible based on what I was saying, although we tend to buy it out pretty quickly.

Brad Heffern: We've seen it a little bit here in the mid-Atlantic, maybe five percent. We've seen it in Boston, maybe to a little bit more significant degree, five to 10 percent. And I think we are starting to see it in Northern California, where it's just been very, very soft for a while now. We have not yet seen it in Seattle. We haven't yet seen it. Maybe a little bit in Austin, but costs went up so much there that, you know, it's not, I would say, super meaningful yet.

Or it could be rent left between now and then.

Or it could be just.

A more favorable response from the market. So on average over the long run we tend to outperform by more like 20 to 30 basis points.

That's pretty consistent but it will vary based on where we are in the cycle.

Okay interesting and then.

I'm not sure if I missed it but did you guys disclose October occupancy I know you put out the rate growth.

Brad Heffern: So we haven't necessarily seen it as much in the sunbelt markets yet, Denver, Southeast Florida, but we think that it's coming there. And I would caveat that by saying for us and others, that's what I was saying before. The best data is where you have a deal that's ready to go and you really can hard-bid it. And we don't have deals that we're hard-bidding in every region at this very moment. So it's hard to tell until you're at that place that we're getting kind of discrete data points.

Okay.

I don't believe we did but we're trending at the same general range in terms of economic occupancy kind of in the 95, 7% range or so.

Brad Heffern: And where we have them, it's very helpful because we do think, again, kind of like with the rents, that gives us a little bit of an informational advantage to have a real sense for what's going on in real time. But it really does vary based on the regional dynamics within each region. Okay, thank you.

Okay. Thanks, guys I appreciate the time.

Take care.

We have reached the end of the question and answer session I would now like to turn the call back over to bench all for closing comments.

Thank you and thank you everyone for joining US today, we look forward to connecting further with you in November talk soon.

This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.

Yeah.

Rich Anderson: Our next question comes from Rich Anderson with Legbush. Please proceed with your question. Thanks, good afternoon. It's the question on expansion market in the process, to get in there. The word was used staying flexible about an hour ago.

Ben Schall: And I'm wondering, you know, does the methodical way by which you're growing there offer you, is that, what's the word, keeping you informed, I guess, and allowing you to pivot one direction or another, where if you had a chance to do it perfectly in one fell swoop and everyone would stand up and applaud the transaction if you could get there all at once tomorrow, would you do that? So how committed are you?

Ben Schall: And a related part of that question is, how is the Sunbelt performing not so much relative to the urban coastal areas, where everyone knows that, but how is it performing relative to your expectations, and is it getting, is it, is it even more interesting to you, even though it's under performing relative to other areas of the country at the present time?

Ben Schall: Hey, Rich, it's been, let me make a couple of comments first in terms of our long term framework of moving 25% of our portfolio to our expansion markets, that remains primary drivers of that. One, the recognition that our core customer, our knowledge based worker is in a more dispersed set of markets. And second, we can take what we do well, bring it to those markets in order to generate incremental value for shareholders.

Ben Schall: In terms of pacing and timing, we are seeing softness, we're starting to see some dislocation in our expansion regions, and we see it as a potential opportunity. It's an opportunity potentially buying assets below replacement cost, which we've started to do. And in a development market that maybe has less players in it, or players that don't have the same access to capital, or the same cost to capital that we do, to be able to selectively step into some attractive development opportunities there.

Ben Schall: There could be, you fast forward, I don't think it's today, we'll be looking to accelerate our movement given where our cost to capital is, but there could be an environment at some point over the next couple of years where something more substantial does present itself, and that could make the, I could at that point be the right risk adjusted return decision. So it's on our radar, we're continuing to grow through our own development through acquisitions and funding of third party developers, and we'll keep our eyes out for large opportunities as well.

Kevin: Okay, follow up question is to Kevin, perhaps the 4.1 times leverage the target of five to six. I mean, how do you ever get to that target anytime soon given the rate environment, and maybe one way is, you know, dead assumption, which was a part of a transaction you mentioned earlier. Is there any realistic lift to 4.1 in this environment, or could there be transactions here and there, where you had debt at reasonable cost through your transaction activities?

Kevin: Thanks. Sure, Rich, again, Kevin, so appreciate the comment. It's an interesting question, we discussed in debate internally here. As you point out, we are 4.1 times net debt to be able to leverage relative to a five to six times target range, which is sort of a, you know, it's been a long term target range that we've had for more than a decade, which speaks to sort of normalized environment. If you look at the 4.1 times, it's, you know, benefited from cash.

Kevin: If the cash weren't there, we'd be kind of in midfords just as a further contextual comment, but more broadly, if you look back at the last four years or so, I don't think anyone would agree. We've been in a normalized environment from the pandemic, and it's a fact says it's moved through. And as you think about how things have played out this year, we are at that low for, you know, times leverage level in part because of our capital decisions over the last few years.

Kevin: And this year's capital plan, where we've essentially will have paid off about $750 million a debt this year and brought in about $750 million of new and recycled equity from the equity forward and the net disposition activity. That's the leveraging and not necessarily reflective of a normal year, but this wouldn't have been our capital plan normally, but it has proven to be the right capital plan for this year. And what that does is it gives us financial flexibility to deal with an uncertain and bold capital market environment, liquidity and strength to deal with the, you know, an environment where we may wish to be patient in terms of additional capital formation, given the recent rise and debt rates.

Kevin: And I guess to the point that you're getting at it also gives us leverage capacity to the extent we wish to fees upon certain investment opportunities, whether they are in our established markets or in our expansion markets that we view as attractive, where we can bring the strength of our balance sheet to bear and potentially, you know, rely on a greater than normal level of debt that may be attractive relative to those opportunities and lean into the balance sheet and generate some growth. And that regards, so we are certainly willing and able to get to that five to six times leverage in the right circumstances.

Kevin: I will note that there are sometimes when we've gotten there and less than desirable circumstances, such as three years ago in the pandemic, when we actually were 5.4 times net debt to leverage levita in Q3 of 2020, but that's sort of preparing the balance sheet for a downturn. So given where we are, it's a low leverage level, but we think it's appropriately so because it gives us strength to deal with potential challenges that could happen ahead as well as strength to deal with potential opportunities that we hope will be in front of us.

Kevin: Great. Great color.

Haendel Juste: Thanks very much. Our next question comes from Haendel Juste with Mizzouho. Please proceed with your question. Hey, good afternoon. Thanks for taking my question. I appreciate the color earlier on the renewals for October November, the color of October newly straight. But I didn't catch if you did provide them your expectations for newly straights into the year rent. So maybe some color there. And then what would that imply for a full year 24 earning?

Haendel Juste: Yeah, it's shown just I didn't provide specific insight into the expectation for a new move and lease rates in queue for the one data point we did provide is that renewal offer is went out to 6% range. And similar to what we've been seeing in the last few months, I would expect them to settle sort of in, call it 150. 250 to our basis points solution off of that. So, you know, kind of 4% range, maybe 4 and a quarter.

Haendel Juste: One thing to keep in mind that I mentioned earlier is to come to get a little bit easier in November and December. And that's why in, in March, like the mid-Atlantic, Denver and Seattle, you saw an uptick in rent change in October. So, all else being equal, we expect sort of relatively, I'll call it stable glide path through year in as it relates to lease rates. The earn-in, we provided kind of a snapshot of the earn-in on the slides that we presented are posted last night at about a point and a half.

Haendel Juste: My expectation based on what I know today is that may soften a little bit between now and year in, but haven't necessarily put a number to it yet. Can you give us an update on the loss of lease in the portfolio perhaps where it highs and lowest? Yeah, that was posted on the flood as well. We recorded loss to lease roughly 2%. Led by the East Coast Markets, North and two. And then West Coast and expansion regions, trailing here roughly a point and a half at around 70 basis points in the expansion regions.

Haendel Juste: Okay, thank you. And then last one, then probably if you're in touch on this, but at any market, I'd be commented that you're seeing an accelerated recent concession will perhaps more aggressive lease up for merchant developers. Yeah, the one market I mentioned a couple of times earlier that has been softening more recently is Northern California, most notably San Francisco, but to a lesser extent San Jose as well. Thank you. As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment while we pull for questions.

Anthony Powell: My next question comes from Anthony Powell with Barclays. Please proceed with your question. Hi, good afternoon. That's a question on the expansion region loss lease of 70 basis points, which is maybe better than you would think given a lot of concern about supply growth in some of these markets. Is anyone market driving that positive loss lease? And do you think expansive markets could be a positive? and the contributors to your team for revenue growth next year. Yeah, good question.

Anthony Powell: I'd say what we're is coming from for the most part is the blend of Southeast Florida and what we've experienced a little bit that's going to be coming online in the Texas market, where it's a more challenge environment is in Charlotte, which is you may have noted the expansion region, rent change is negative, that is effective with the Charlotte market, three assets in the south end of Charlotte, there's a lot of supply coming online there, it's a great sub market, we love the sub market, we bought the assets, we knew there'd be a fair amount of supply in the first two or three years of ownership, which is what we're experiencing today, but we believe we require them at good values. So it's quite a little too early to tell you what 2024 is going to look like there specifically, but anything that's coming through will probably be, you know, Texas and maybe a little bit in Southeast Florida and really not much of anything, and we might even be in a gang-dolley situation in Charlotte.

Anthony Powell: All right, thank you. Sure. Our next question comes from Joshua Denon with Bank of America. Please proceed with your question. Hey guys, I'm back, hopefully you can hear me now. Okay, good. So just my question, I just was curious because it looks like you're underwriting the new new starts at a mid-sixes, but you're achieving, call it mid-7s on your stuff and currently stuff, just kind of, what would get us up to that mid-7s going forward or is there just some kind of element of conservatism built in.

Anthony Powell: Yeah, Josh, it's mad. So the way we underwrite is we don't trend anything. So the reason why the currently subs are exceeding pro forma by so much by 90 basis points is, I mean, it's basically, it's got to be one of two things. It's either rent growth between the time we started construction and the time we leased it up, which that is what it is in the current situation. More in some cases, we were just too conservative in our initial underwriting and, you know, even without market rent growth, the offering that we put out there, you know, got a bigger premium to the comps than what we had underwritten because we're pretty conservative in general.

Anthony Powell: So when you think about the deals we're starting now and you ask where they're going to stabilize two to three years from now when they lease up, the reason why they might outperform, we might get a little bit of hard cost savings, that's certainly possible based on what I was saying, although we tend to buy it out pretty quickly, or it could be rent lift between now and then, or it could be, you know, just kind of a more favorable response from the market. So on average, over the long run, we tend to outperform by more like 20 to 30 basis points.

Anthony Powell: So, you know, that's pretty consistent, but it will vary based on where we are in the cycle. Okay, interesting. And then I'm not sure if I missed it, but did you guys disclose October occupancy? I need to put out the rate growth. I don't believe we did, but we're trending in same general range in terms of economic occupancy kind of in that 95-7 range or so. Ok, thanks guys. Appreciate the time. Take care.

Operator: We have reached the end of the question and answer session.

Ben Schall: I would now like to turn the call back over to Ben Schall for closing comments. Thank you and thank you everyone for joining us today.

Ben Schall: We look forward to connecting further with you in November.

Operator: Talk soon. This includes today's conference. You may disconnect your lines at this time and we thank you for your