Q4 2023 AvalonBay Communities Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Avalon. Fourth Quarter 2023, Ernest Cox.
Good morning, ladies and gentlemen, and welcome to Avalonbay communities fourth 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. You may enter the question and answer queue at any time during this call by pressing star one.
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Jason Reilley: You may begin your call now. Well, thank you, Operator, and welcome to AvalonBay Communities' fourth 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 release, as well as in the company's Form 10-K and Form 10-Q filed with the SEC. As usual, this press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms that may be used in today's discussion. The attachment is also available on our website at www.
Your host for today's conference call is Mr. Jason Reilley, Vice President of Investor Relations. Mr. Riley you may begin your conference.
Jason Reilley: Well, thank you operator, and welcome to Avalonbay communities fourth 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 afternoons.
Jason Reilley: Press release as well as in the company's Form 10-K, and Form 10-Q filed with the SEC as usual. This press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available on our website at www Dot Avalon Bay Dot com forward slash.
Jason Reilley: AvalonBay.com forward slashes 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 Schall, CEO and President of AvalonBay Communities, for his remarks.
Jason Reilley: Earnings and we encourage you to refer to this information during the review of our operating result financial performance and with that I'll turn the call over to Ben Shaw CEO and president of Avalonbay communities for his remarks.
Benjamin W. Schall: Thank you, Jason. I'm joined today by Kevin O'Shea, our CFO, Matt Bierenbaum, our Chief Investment Officer, and Sean Breslin, our Chief Operating Officer. We'd like to start by thanking our 3,000 AvalonBay associates for delivering exceptional results in 2023. Your efforts and dedication are what make it happen, and your commitment to our purpose and culture makes us who we are as an organization. Thank
Ben Shaw: Thank you Jason I'm joined today by Kevin O'shea, our CFO, Matt Berenbaum, our Chief investment Officer, and Sean Breslin, Our Chief operating officer, we'd like to start by thanking our 3000 Avalon Bay associates for delivering exceptional results in 2023 your efforts and dedication are what make it happen and your commitment.
Ben Shaw: To our purpose and culture makes us who we are as an organization. Thank you.
Benjamin W. Schall: As a brief recap of last year, as shown on slide four, we achieved 8.6% core FFO growth for the year, a testament to our ability to grow earnings through unique internal and external drivers. Through the proactive management of our assets, same store revenue ended the year up 6.3%, and NOI increased by 6.2%. For external growth, our developments underway continue to outperform with 575 million completions across six projects, delivering outside stabilized yields of 7.1%. We're particularly proud of the results from our operating model transformation, where we are delivering enhanced value to customers and driving meaningful efficiencies.
Ben Shaw: As a brief recap on last year as shown on slide four we achieved eight 6% core <unk> growth for the year, a testament to our ability to grow earnings through unique internal and external drivers.
Through the proactive management of our assets same store revenue ended the year up six 3% and NOI increased by six 2%.
Ben Shaw: Our external growth our developments underway continued to outperform with $575 million of completions across six projects delivering outsized stabilized yields of seven 1%.
Ben Shaw: We're particularly proud of the results from our operating model transformation, where we are delivering enhanced value to customers and driving meaningful efficiencies as highlighted on slide five our operating initiatives exceeded expectations in 2023, delivering $19 million of incremental annual NOI to the bottom line, which was $7 million or almost.
Benjamin W. Schall: As highlighted on slide five, our operating initiatives exceeded expectations in 2023, delivering $19 million of incremental annual NOI to the bottom line, which was $7 million or almost 60% higher than anticipated. Moving to slide six on capital allocation, we remain nimble in 2023, having shifted to being a net seller during the year with four dispositions from our established regions for $445 million. 275 million, of which we redeployed into acquisitions in our expansion region. We also started $800 million of profitable new development during the year, including $300 million of starts in the fourth quarter at an initial projected yield of 6.7%. We will also continue to build our structured investment business this year, in which we provide preferred equity or mezzanine loans to third parties for new multifamily construction.
Ben Shaw: 60% higher than anticipated.
Ben Shaw: Moving to slide six and capital allocation remain nimble in 2023, having shifted to being a net seller during the year with four dispositions from our established regions for $445 million.
Ben Shaw: $275 million, which we'd redeployed into acquisitions in our expansion regions.
Ben Shaw: We also started $800 million of profitable new development during the year, including $300 million of starts in the fourth quarter at an initial projected yield of six 7%.
Ben Shaw: We also continue to build our structured investment business. This year in which we provide preferred equity or mezzanine loans to third parties for new multifamily construction.
Benjamin W. Schall: We're well positioned to underwrite this business given our development and construction expertise and our live proprietary data. And we're fortunate to be building this book of business in today's environment, reflecting today's rates and asset values. The commitments we made in 2022 and 2023, which now total $192 million, are set to deliver an uplift in earnings this year and going forward. Our balance sheet is as strong as it has ever been, with the key metrics summarized on slide seven, providing strength as we manage the business and flexibility as we consider creative opportunities that may arise during 2024. Among a set of peers with strong balance sheets, we continue to experience some of the tightest credit spreads among all REITs, providing a meaningful financial advantage.
Ben Shaw: We are well positioned to underwrite this business, given our development and construction expertise and our live proprietary data and.
Ben Shaw: And we're fortunate to be building this book of business in todays environment, reflecting today's rates and asset values. The commitments. We made in 2022, and 2023, which now totaled $192 million are set to deliver an uplift in earnings this year and going forward.
Ben Shaw: Our balance sheet is as strong as it has ever been with.
Ben Shaw: With our key metrics summarized on slide seven providing strength as we manage the business and flexibility as we consider accretive opportunities that may arise during 2024.
Ben Shaw: Amongst that appears with strong balance sheets, we continue to experience some of the tightest credit spreads among all Reits, providing a meaningful financial advantage.
Benjamin W. Schall: Slide 8 highlights our strategic focus areas for 2024. These focus areas draw upon our foundational strengths as an organization, while also recognizing our commitment to continue to evolve and the areas we are confident will drive superior growth over a multi-year period. Front and center are the next steps in our operating model transformation. At our investor day, we raised our target for incremental annual NOI to come from our operating initiatives to $80 million. 55 million of NOI from Horizon 1 and 25 million from Horizon 2.
Ben Shaw: Slide eight highlights our strategic focus areas for 2024 these focus areas draw upon our foundational strengths as an organization. While also recognizing our commitment to continue to evolve and are areas. We are confident will drive superior growth over a multi year period.
Ben Shaw: Front and center are the next steps in our operating model transformation at our Investor Day, we raised our target for incremental annual NOI to come from our operating initiatives to $80 million $55 million of NOI from horizon, one and $25 million from horizon two.
Benjamin W. Schall: Second, we will continue to drive differentiated growth through our development and construction leadership. The near-term focus is on the execution of our projects underway, ensuring they deliver outsized value for shareholders. And while New Start economics are challenging in certain of our markets, this is the type of environment in which we've typically found some of our most attractive development opportunities. Third, as a continued multi-year approach, we have set a target of shifting 80% of the portfolio to the suburbs, from 70% today, and we have set a target of having 25% of our portfolio in our expansion regions, meaningfully from 8% today. And given the cooling of fundamentals in the Sun Belt, we believe we can make this transition on a more attractive basis than we were able to a couple of years ago.
Ben Shaw: Second we will continue to drive differentiated growth from our development and construction leadership.
Ben Shaw: The near term focus is on execution of our projects underway and sharing may deliver outsized value for shareholders.
Ben Shaw: And while new start economics are challenging in certain of our markets. This is the type of environment in which we typically found some of our most attractive development opportunities.
Ben Shaw: Third as a continued multiyear approach we have set a target of shifting 80% of the portfolio to the suburbs from 70% today and set a target of having 25% of our portfolio and our expansion regions.
Ben Shaw: Meaningfully from 8% today.
Ben Shaw: And given the cooling of fundamentals in the Sunbelt. We believe we can make this transition at a more attractive basis. Then we were able to a couple of years ago.
Benjamin W. Schall: We're also making significant and very creative investments in the existing portfolio this year, ranging from apartment renovations to the creation of new accelerated dwelling units, or ADUs, in certain markets. Finally, and as a follow-up to my comments about our balance sheet, we are confident that there will be opportunities for us to both utilize our balance sheet capacity and bring our strategic capabilities to bear, be it operational, development, or by utilizing our scale to generate value for shareholders. As we assess the year ahead and move to slide 9, our baseline expectation is for a slowing economic environment this year. As we have done in the past, we start with consensus estimates from the National Association for Business Economics, or NABE, which forecasts positive but very modest job growth in 2024 of 55,000 jobs per month. This muted growth tempers housing demand, while other factors such as rent versus own economics should serve as a balance to apartment demand, particularly in our established regions, where it is now $2,500 per month more expensive to buy than to rent.
Ben Shaw: We're also making significant and very accretive investments in the existing portfolio. This year ranging from apartment renovations to the creation of new accelerated dwelling units or <unk> to use in certain markets.
Ben Shaw: Finally, and as a follow up to my comments about our balance sheet. We are confident that there will be opportunities for us to both utilize our balance sheet capacity and bring street sweeper and bring our strategic capabilities to bear be it operational development or by utilizing our scale to generate value for shareholders.
As we assess the year ahead and moving to slide nine our baseline expectation is for a slowing economic environment. This year.
Ben Shaw: As we have in the past we start with consensus estimates from the National Association for business, economics, or nabe, which forecast positive, but very modest job growth in 2020 for a 55000 jobs per month.
Ben Shaw: This muted growth tempers housing demand, while other factors such as rent versus own economics should serve as a balance to apartment demand, particularly in our established regions, where it is now $2500 per month more expensive to buy them to rent.
Benjamin W. Schall: Nevertheless, given mixed signals and what we believe is higher uncertainty in the economy and capital markets, our approach is to remain nimble and be ready to proactively adjust based on how 2024 evolves. In an environment of uncertainty, one known factor is new multifamily supply. In our established regions, we expect new apartment deliveries of 1.6% of existing stock in 2024 and expect this figure to further decline to 1.4% in 2025. Importantly, these figures are in line with historical averages for these coastal markets.
Ben Shaw: Nevertheless, given mixed signals in what we believe is higher uncertainty in the economy and capital markets. Our approach is to remain nimble and be ready to proactively adjust based on how 2024 evolves.
Ben Shaw: In an environment of uncertainty one known factor is new multifamily supply.
Ben Shaw: And our established regions, we expect new apartment deliveries of one 6% of existing stock in 2024.
Ben Shaw: And expect this figure to further declined to one 4% in 2025.
Importantly, these figures are in line with historical averages for these coastal markets.
Ben Shaw: And this is quite a contrast with supply dynamics in the sunbelt, which will have twice the level of supply and this elevated supply dynamic in the sunbelt is expected to continue at least through 2025 simply a function of the reality that it generally takes two plus years to complete and stabilize our new development project.
Benjamin W. Schall: And so as we assess 2024, we expect to be relatively well positioned given the stable demand and limited supply outlook in our established regions but are forecasting a slower year of growth. I'll now turn it to Kevin to provide an overview of our guidance for the year and the building blocks of earnings growth. Thanks, Ben.
Ben Shaw: And so as we assess 2024, we expect to be relatively well positioned given the stable demand and limited supply outlook in our established regions, but are forecasting a slower year of growth.
Ben Shaw: I'll now turn it to Kevin to provide an overview of our guidance for the year and the building blocks of earnings growth. Thanks, Dan on Slide 11, we provide our operating and financial outlook for 2024.
Kevin O'shea: On slide 11, we provide our Operating and Financial Outlook for 2024. For the year, using the midpoint of guidance, we expect 1.4% growth in core FFO per share, driven by our same-store portfolio and by stabilizing lease-up communities, partially offset by the impact of capital markets and transaction activity, as well as by slightly higher overhead. At our same store residential portfolio, we expect revenue growth of 2.6% and NOI growth of 1.25% for the year. And for our capital plan, we anticipate total capital uses of $1.4 billion in 2024, consisting of $1.1 billion in investment spend and $300 million in debt maturity. For our capital sources, we expect to benefit from nearly $400 million in projected free cash flow after dividends and to source $850 million in new capital, which we currently assume will be unsecured debt issued later this year.
Kevin O'shea: For the year using the midpoint of guidance, we expect one 4% growth in core <unk> per share driven by our same store portfolio and by stabilizing lease up communities, partially offset by the impact of capital markets and transaction activity as well as by slightly higher overhead costs.
Kevin O'shea: And our same store residential portfolio, we expect revenue growth of two 6% and NOI growth of 1.25% for the year.
Kevin O'shea: And for our capital plan, we anticipate total capital uses of $1 4 billion in 2024, consisting of $1 $1 billion in investment spend and $300 million in debt maturities.
For our capital sources, we expect to benefit from nearly $40 million in projected free cash flow after dividends and to <unk> $850 million in new capital, which.
Kevin O'shea: Which we currently assume will be unsecured debt issued later this year.
Kevin O'shea: In this regard thanks to our balance sheet strength, and our a minus and <unk> III credit rating, we enjoy attractively priced debt today at around 5% on a 10 year unsecured debt that we can invest in development yielding in the mid six range.
Kevin O'shea: In this regard, thanks to our balance sheet strength and our A- and A3 credit ratings, we enjoy attractively priced debt today at around 5% on a 10-year unsecured debt that we can invest in development yielding in the mid-six range to support future earnings growth. We also project drawing upon $175 million of the $400 million in unrestricted cash on hand at year-end 2023, resulting in projected unrestricted cash at the end of this year of about $225 million.
Kevin O'shea: To support future earnings growth.
Kevin O'shea: We also protect drawing upon $175 million of the $400 million in unrestricted cash on hand at year end 2023.
Kevin O'shea: Resulting in projected unrestricted cash at the end of this year of about $225 million.
Kevin O'shea: On slide 12, we illustrate the components of our expected one 4% growth in core <unk> per share.
Kevin O'shea: We expect <unk> 15 per share earnings growth to come from NOI growth and our same store and redevelopment portfolios.
Kevin O'shea: On slide 12, we illustrate the components of our expected 1.4% growth in core FFO per share. We expect $0.15 per share of earnings growth to come from NOI growth in our same store redevelopment portfolios. And we expect another $0.36 per share of earnings growth from communities undergoing lease up in their development and other stabilized portfolios. Partially offsetting these sources of growth is a $0.29 impact from capital markets and transaction activity.
Kevin O'shea: And we expect another 36 per share earnings growth from communities undergoing lease up in our development and other stabilized portfolios.
Kevin O'shea: Partially offsetting these sources of growth is a 29 impact from capital markets and transaction activity.
Included within this estimate is <unk> <unk> impact from lower interest income in 2024 from having higher cash balances through our due to our early settlement of our equity forward in April 2023, and <unk> <unk>.
Kevin O'shea: Impact from increased share count between the two.
Kevin O'shea: And with that summary of our outlook I will turn it over to Sean to discuss our operating business.
Sean J. Breslin: Alright, Thanks, Kevin.
Sean J. Breslin: Included within this estimate is a $0.12 impact from lower interest income in 2024 from having higher cash balances due to our early settlement of our equity forward in April 2023 and a $0.05 impact from an increased share count between the years. And with that summary of our outlook, I'll turn it over to Sean to discuss our operating business. All right, thanks, Kevin. Turning to slide 13.
Sean J. Breslin: Turning to slide 13, three primary drivers will support same store revenue growth in 2024.
Sean J. Breslin: First embedded rent roll aggressive growth of 1%.
Sean J. Breslin: Approximately 50 basis points from where it was at the end of Q3, 2023, which is consistent with historical trends plus incremental lease rate growth throughout the year.
Sean J. Breslin: Second an outsized contribution of roughly 80 basis points from the projected 13% increase in other rental revenue, which is derived from our operating initiatives.
Sean J. Breslin: Three primary drivers will support same store revenue growth in 2024. First, Embedded Rent Roll Growth of 1%, down approximately 50 basis points from where it was at the end of Q3 2023, which is consistent with historical trends, plus incremental lease rate growth throughout the year. Second, an outsized contribution of roughly 80 basis points from the projected 13% increase in other rental revenue, which is derived from our operating initiatives. And third, about a 60 basis point improvement in underlying bad debt from residents, from 2.4% in 2023 to an expected 1.8% in 2024. The cumulative growth from those three primary drivers is expected to be partially offset by a 30-basis point headwind from the projected $6 million year-over-year reduction in rent relief and a modest drag from net concessions and economic occupancy.
Sean J. Breslin: And third about a 60 basis point improvement in underlying bad debt from residents from two 4% in 2023 to an expected one 8% in 2024.
Cumulative growth from those three primary drivers is expected to be partially offset by a 30 basis point headwind from the projected $6 million year over year reduction of rent relief and a modest drag from net concessions and economic occupancy.
Sean J. Breslin: To provide a little more detail on underlying bad debt trends from residents or expecting a 60 basis point improvement year over year, our forecast reflects an underlying bad debt rate of roughly one 6% at year end 2024.
Sean J. Breslin: So more than double our historical pre COVID-19 right.
Sean J. Breslin: Moving to slide 14, we expect revenue growth in our established regions to be more than double that of our expansion regions, which is primarily a function of the substantially lower level of new supply and.
Sean J. Breslin: In the established regions.
Sean J. Breslin: And within our established regions, we expect better demand supply fundamentals on the east coast as compared to the West coast.
Sean J. Breslin: To provide a little more detail on underlying bad debt trends from residents, while we're expecting a 60 basis point improvement year over year, our forecast reflects an underlying bad debt rate of roughly 1.6% at year-end 2024. Moving to slide 14, we expect revenue growth in our established regions to be more than double that of our expansion regions, which is primarily a function of the substantially lower level of new supply in the established regions. And within our established regions, we expect better demand and supply fundamentals on the East Coast as compared to the West Coast. Southern California is expected to produce the strongest same-store revenue growth, which is primarily the result of a substantial improvement in underlying bad debt on a year-over-year basis.
Sean J. Breslin: Southern California is expected to produce the strongest same store revenue growth, which is primarily the result of a substantial improvement in underlying bad debt on a year over year basis.
Sean J. Breslin: Transitioning to slide 15 to address our operating model transformation, we're tremendously proud of our team's focus and efforts over the last couple of years, which have produced approximately $27 million in incremental NOI.
Sean J. Breslin: We expect to recognize that another roughly $9 million benefit in our consolidated portfolio during 2024.
Sean J. Breslin: The key drivers in 2024 include Avalon connect our bulk Internet and managed Wi Fi deployments, along with smart access features.
Sean J. Breslin: In addition, we expect an incremental benefit from our shift to a new organizational model, which reflects neighborhood staffing supported by centralized teams.
Sean J. Breslin: Transitioning to slide 15 to address our operating model transformation, we're tremendously proud of our team's focus and efforts over the last couple years, which have produced approximately $27 million in incremental NOI. We expect to recognize another roughly $9 million benefit in our consolidated portfolio during 2024. The key drivers for 2024 include Avalon Connect, our bulk internet and managed Wi-Fi deployments, along with smart access features.
Sean J. Breslin: While we have specific plans for 2024, our focus in these areas and others will continue to deliver additional value for associates residents and shareholders for years to come.
Sean J. Breslin: Turning to slide 16 to address our same store operating expense outlook.
Sean J. Breslin: Expect roughly 340 basis points of organic expense growth.
Sean J. Breslin: Another approximately 140 basis points from profitable operating initiatives.
Sean J. Breslin: And roughly 75 basis points from the exploration of various tax development programs in the portfolio, primarily in New York City.
As it relates to our initiatives to 140 basis point increase is driven by a 170 basis points from our Avalon connect offering, which I mentioned earlier, partially offset by reductions in payroll.
Sean J. Breslin: In addition, we expect an incremental benefit from our shift to a new organizational model, which reflects neighborhood staffing supported by a centralized team. While we have specific plans for 2024, our focus in these areas and others will continue to deliver additional value for associates, residents, and shareholders for years to come. Turn to slide 16 to address our SAMHSA Operating Expense Outlook.
Sean J. Breslin: As I have noted in the past the deployment of our Avalon connect offering which will ultimately enhance portfolio NOI by more than $30 million will pressure expense growth during the deployment period.
Sean J. Breslin: We expect to be fully deployed by the end of 2024, so the operating expense impact will diminish materially as we move into 2025.
Sean J. Breslin: We expect roughly 340 basis points of organic expense growth, another approximately 140 basis points from profitable operating initiatives, and roughly 75 basis points from the expiration of various tax abatement programs in the portfolio, primarily in New York City. As it relates to our initiatives, the 140 basis point increase is driven by 170 basis points from our Avalon Connect offering, which I mentioned earlier, partially offset by reductions in payroll. As I've noted in the past, the deployment of our Avalon Connect offering, which will ultimately enhance portfolio NOI by more than $30 million, will pressure expense growth during the deployment period, which we expect to be fully deployed by the end of 2024.
Sean J. Breslin: So now I'll turn it over to Matt to address our capital allocation activity, Matt Alright, great. Thanks, Sean turning to slide 17.
Matthew H. Birenbaum: We are planning another year of accretive activity across all of our various investment platforms in 2024.
Matthew H. Birenbaum: We expect to break ground on seven new developments, representing $870 million of investment at a weighted average yield in the mid 6% range.
So our <unk> business by another $75 million with rates on new originations in excess of 12%.
Matthew H. Birenbaum: And expand our investments in our existing portfolio that we discussed a bit at our Investor day, where we see opportunity to further increase our activity to roughly 100 million at yields of roughly 10%.
Matthew H. Birenbaum: In the investment sales market activity levels are still low, but most market participants do you expect a gradual increase in transactions as the year progresses.
Matthew H. Birenbaum: Our plan is to access this market as part of our portfolio management strategy selling assets in our established regions and redeploying that capital into acquisitions and our expansion regions. We.
Sean J. Breslin: So the operating expense impact will diminish materially as we move into 2025. So now I'll turn it over to Matt to address our capital allocation activity. Matt
Matthew H. Birenbaum: We expect this activity to be roughly neutral on both the volume and return basis buying and selling in equal amounts in an equivalent yields.
Matthew H. Birenbaum: All right. Great. Thanks, Sean. Turning to slide 17.
Matthew H. Birenbaum: As Ben mentioned the dynamics of this trading activity look to be more favorable in 'twenty forward than they might have been in the recent past as some short term operating challenges in our targeted expansion regions may present, the opportunity to acquire assets significantly below replacement cost.
Matthew H. Birenbaum: Planning another year of creative activity across all of our various investment platforms in 2024, we expect to break ground on seven new developments representing $870 million of investment at a weighted average yield in the mid 6% range. Grow our SIP business by another $75 million, with rates on new originations in excess of 12%, and expand our investments in our existing portfolio, which we discussed a bit at our Investor Day, where we see opportunity to further increase our activity to roughly $100 million at yields of roughly 10%. In the investment sales market, activity levels are still low, but most market participants do expect a gradual increase in transactions as the year progresses. Our plan is to access this market as part of our Portfolio Management Strategy, selling assets in our established regions and redeploying that capital into acquisitions in our expansion regions. We expect this activity to be roughly neutral on both a volume and return basis, buying and selling equal amounts and an equivalent yield.
Matthew H. Birenbaum: Of course, the market for all of our investment activities is highly dynamic and we are prepared to pivot and adjust our plan in response to potential changes in the macro environment as the year evolves.
Matthew H. Birenbaum: Turning to our existing development underway slide 18 details the impressive results that continued to be generated by our current lease ups. The four development communities that had active leasing in Q4 are delivering rents $260 per month or eight 4% above our initial underwriting which is translating into a 20 basis point increase in yield.
Matthew H. Birenbaum: As a reminder, in general the rents we quote on our developments our current market rents as of the time, we break ground and we do not trend or update these rents until we achieve significant actual leasing velocity close to completion of the project.
Matthew H. Birenbaum: While market rents certainly didn't grow as much in 2023 as in prior years. There is still some lift to come when we mark the rents to market on the $855 million of lease ups, we expect to open throughout the course of 2024.
Matthew H. Birenbaum: We estimate this increase at roughly 5% based on where market rents are today at these specific communities, which would provide those deals with about 30 basis points of increased yield as well and with that I'll turn it over to Ed to wrap things up.
Matthew H. Birenbaum: As Ben mentioned, the dynamics of this trading activity look to be more favorable in 2024 than they might have been in the recent past, as some short-term operating challenges in our targeted expansion regions may present the opportunity to acquire assets significantly below replacement costs. Of course, the market for all of our investment activities is highly dynamic, and we are prepared to pivot and adjust our plan in response to potential changes in the macro environment as the year evolves. Turning to our existing development underway, slide 18 details the impressive results that continue to be generated by our currently subject.
Ed: Slide 19 provides our key takeaways.
Ed: We were very pleased with our execution in 2023 and expect to continue to be relatively well positioned in a year of slower growth in 2024, we.
We will continue to evolve and execute against our strategic focus areas, including harvesting tangible benefits from the investments we are making in the transformation of our operating model.
Ed: And on the capital front, we will remain nimble adjusting to the environment as it unfolds, while also being on the lookout and ready to take advantage of accretive opportunities that may present themselves. This year opportunities, where we can utilize our leading balance sheet and draw upon our unique strategic capabilities and with that I'll turn it to the operator to open the line for questions.
Speaker Change: Thank you we will now be conducting our question and answer session.
Speaker Change: Our first question comes from the line of Jamie Feldman with Wells Fargo. Please proceed with your question.
Matthew H. Birenbaum: Four development communities that had active leasing in Q4 are delivering rents of $260 per month, or 8.4% above our initial underwriting, which is translating into a 20 basis point increase in yield. As a reminder, in general, the rents we quote on our developments are current market rents as of the time we break ground, and we do not trend or update these rents until we achieve significant actual leasing velocity close to completion of the project. While market rents certainly didn't grow as much in 2023 as in prior years, there is still some lift to come when we mark the rents to market on the $855 million of lease ups we expect to open throughout the course of 2024. We estimate this increase at roughly 5% based on where market rents are today in these specific communities, which would provide those deals with about 30 basis points of increased yield as well. And with that, I'll turn it over to Ben to wrap things up.
Great. Thank you good afternoon, so I'd like to go back to slide 14, and I was hoping you could talk us through what your blended rent outlook. It looks like in each of these regions are broken out by these regions and then if you could talk about how you think it might be different in the first half versus the back half of the year, just given the pace of that.
Speaker Change: Apply coming online.
Yes, Jamie this is Sean.
Sean J. Breslin: Why don't I give you the sort of blended rent change we expect across the portfolio.
Sean J. Breslin: For the year.
Sean J. Breslin: We can talk about all of the individual regions. That's a lot of data we might want to do that offline, but in terms of the broader portfolio. Our expectation is to deliver rent change of roughly 2% in 2024, which would reflect renewals at roughly 4% and new move ins at essentially <unk>.
Sean J. Breslin: And as it relates to the first half versus the second half. If you think back to 2023, where we achieved three 4% rent change a good portion of that rent changed stronger portion was in the first half of the year. So we do expect to see some acceleration in rent change all else being equal in the.
Benjamin W. Schall: We were very pleased with our execution in 2023 and expect to continue to be relatively well positioned in a year of slower growth in 2024. We will continue to evolve and execute against our strategic focus areas, including harvesting tangible benefits from the investments we are making in the transformation of our operating model. And on the capital front, we will remain nimble, adjusting to the environment as it unfolds, while also being on the lookout for and ready to take advantage of accretive opportunities that may present themselves this year, opportunities where we can utilize our leading balance sheet and draw upon our unique strategic capabilities. With that, I'll turn it to the operator to open the line for questions. Thank you.
Sean J. Breslin: Second half of 2024 relative to the first half.
Sean J. Breslin: Assuming the obviously the economic environment is consistent with our expectations.
Speaker Change: Okay. Thank you for that.
Speaker Change: And then we appreciate the detailed buildup to your revenue and your expense side, but as you think about each of those buckets I mean, where do you think there is the most variability.
Speaker Change: Do you have the most opportunity to maybe push a little more where do you think you could pull back maybe on the spending side.
As to by the time year end rolls around.
Operator: We will now be conducting our question and answer session. Our first question comes from the line. Nick Feldman with Wells Fargo. Please proceed with your question. Good afternoon.
Speaker Change: Yes, no good question.
Speaker Change: Taking them in the two pieces on the revenue side, obviously, a significant driver is the macroeconomic environment.
Speaker Change: And we provided and Ben referred to some of our assumptions. So we are expecting a slowdown given the roughly $2 7 million jobs that were produced in 2023 as compared to the current expectation for 'twenty for being close to 700000. So that's outside our control, but obviously, we are well positioned to the extent things.
James Colin Feldman: So I'd like to go back to slide 14. And I was hoping you could talk us through what your blended rent outlook looks like in each of these regions, or broken up by these regions. And then you could talk about how you.
Operator: Please see the complete disclaimer at https://sites.google.com. Yeah, this is Sean. I want to give you the sort of blended rent change we expect across the portfolio for the year. So that we can talk about all the individual regions, that's a lot of data; we might want to do that offline. But in terms of the broader portfolio, our expectation is to deliver a rent change of roughly 2% in 2024, which would reflect renewals at roughly 4% and new move-ins at essentially flat. And as it relates to the first half versus the second half, if you think back to 2023, where we achieved 3.4% rent change, a good portion of that rent change, a stronger portion was in the first half of the year. So we do expect to see some acceleration and rent change, all else being equal, in the second half of 2024 relative to the first half. You know, assuming that the economic environment is obviously consistent with our expectations. Okay, thank you for that.
Speaker Change: Is accelerating and we think we're also well positioned somewhat defensively given our portfolio if things deteriorate. So outside of that I'd say, what we would see is a more substantial improvement in bad debt would certainly be a tailwind.
Speaker Change: Over the last several months bad debt rate from residents has sort of flattened out a bit and primarily as a result.
Speaker Change: What's been happening in the court system.
Speaker Change: Residents that are behind getting free legal advice and things of that sort. So we started to see greater improvement in the court system in places like the Greater New York region and parts of the mid Atlantic et cetera that would certainly give us a significant benefit.
Speaker Change: Side of just the macroeconomic view on whether we are able to push rents harder or softer and the environment on the expense side you had a good portion of it is baked in terms of what we have there is about two thirds of it.
Speaker Change: The expected year over year increase was driven by.
Speaker Change: Number one utilities, which is really where our Avalon connect offering comes through and Thats a pretty embedded program. We're on plan, we expect that to be where we thought it would be property taxes. There is a portion of that related to the pilots, but obviously to the extent assessments come in at different levels or rates.
Folio during the year that would certainly help us out the rest of it.
Speaker Change: It's kind of ins and outs in different areas.
Sean J. Breslin: And then, you know, we appreciate the detailed build-up to your revenue and your expense side. But as you think about each of those buckets, I mean, where do you think there's the most variability? Where do you have the most opportunity to maybe push a little more?
So I wouldn't expect a significant shift but there are modest shifts from line item in the line item that might move around with payroll benefits and things like that.
Speaker Change: Okay very helpful. I guess lots to keep our eye on thank you.
Speaker Change: Our next question comes from the line of Adam Kramer with Morgan Stanley. Please proceed with your question.
Sean J. Breslin: Where do you think, you know, you could pull back maybe on the spending side just to, you know, by the time your end rolls are out? Yeah, no, good question. Taking them in the two pieces on the revenue side, obviously, you know, a significant driver is the macroeconomic environment. And we provided, and Ben referred to, some of our assumptions. So we are expecting a slowdown given, you know, the roughly 2.7 million jobs that will be produced in 2023 as compared to the current expectation for 24, being close to 700,000. So that's outside our control.
Adam Kramer: Hey, guys. Thanks for the time, just wondering in terms of kind of.
Adam Kramer: It kind of puts and takes behind 70 million of development starts.
Adam Kramer: Just kind of what could maybe drive that to the high end what would cause you to maybe pull back and pushed some of that out to 2045, and if you think about kind of timing during the year, what's kind of the view on new starts in terms of when they generally take place over the course of the year.
Adam Kramer: Hey, sure Adam This is Matt.
Matthew H. Birenbaum: As it relates to the pace of development starts across the year. It is more back half loaded I don't think that we maybe have any starts in Q1 or maybe one so.
Sean J. Breslin: But obviously, we're well positioned to the extent things accelerate, and we think we're also well positioned, somewhat defensively given our portfolio, if things deteriorate. So outside of that, I'd say what we would see is a more substantial improvement in bad debt would certainly be a tailwind. Over the last several months, the bad debt rate from residents has sort of flattened out a bit, primarily as a result of what's been happening in the court system. You know, residents that are behind getting pre-legal advice and things of that sort.
Matthew H. Birenbaum: We'll see how that develops across the course of the year.
Matthew H. Birenbaum: It really is idiosyncratic, though based on the timing permits buyout of various projects.
Matthew H. Birenbaum: The things that might cause it to ramp up or down is really just changes to the deal economics.
Matthew H. Birenbaum: If rents accelerate or or.
Matthew H. Birenbaum: Degrade more quickly than we expect in any particular, submarket, where we're planning to start a deal or if hard cost surprise us either to the good or bad that could cause us to either pull some deals forward and start more or Conversely pushed some deals further out.
Sean J. Breslin: So we started to see greater improvement in the court system in places like, you know, the greater New York region, parts of the mid Atlantic, etc. That would certainly give us a significant benefit outside of just the macroeconomic view and whether we were able to push rents harder or softer in the environment. On the expense side, you know, a good portion of it is baked in terms of what we have. There are about two-thirds of it are expected year over year increases driven by number one utilities, which is really where our Avalon Connect offering comes through. And that's a pretty embedded program.
Speaker Change: Yes, Adam just Ben just to reiterate some of our key themes from prior conversations and we remained very focused on the spread between our development yields and underlying market cap rates right thats the value, we create and we need to be appropriately compensated for the development risk and then the other component is obviously where we're.
Speaker Change: Raising the capital both the source of it and the cost of that capital. So those are the higher level elements that we triangulate around and then there is the deal specifics that Matt referred to.
Speaker Change: Great. Thanks, guys and then just on the January like term effective rent change I guess, the new the new rents specifically.
Sean J. Breslin: We're on plan. We expect that to be where we thought it would be, you know, property taxes. There's a portion of that related to the pilots.
Speaker Change: Not asking you for kind of each of your markets individually, but just at a high level. If you could split I don't know if you want to kind of go through west coast versus East coast.
Sean J. Breslin: But obviously, to the extent assessments come in at different levels or rates throughout the portfolio during the year, that would certainly help us out. The rest of it, you know, is kind of ins and outs in different areas. And so I wouldn't expect a significant shift, but there are modest shifts from line item to line item that might move around with, you know, payroll benefits and things like that. Okay, yeah, very helpful. I guess we have lots to keep our eye on. Thank you.
Versus versus kind of sunbelt, maybe just kind of general trends breaking down that January new lease number I think would be helpful.
Speaker Change: Yes, why don't I give it to you by coast. So on the East coast, we're trending sort of in that low 2% range.
Speaker Change: The West Coast was modestly positive about 50 basis points and the expansion regions essentially flat.
Speaker Change: Great. Thanks, guys.
Speaker Change: Okay.
Speaker Change: Thank you. Our next question comes from the line of Austin <unk>.
James Colin Feldman: Our next question. On the line is Adam Kramer with Morgan Stanley. Hey guys, thanks for the time.
Austin: <unk> with Keybanc capital markets.
Adam Kramer: Just wondering in terms of kind of...?? www.thevenusproject.com,,,,,,,,, Hey, Adam, this is Matt. As it relates to the pace of development starts across the year, it is more back half loaded. I don't think that we maybe have any starts in Q1 or maybe one.
Austin: With your question.
Austin: Great. Thanks, Good afternoon, everybody Sean I appreciate the same store revenue growth guidance breakout between the established in expansion markets.
Austin: You referenced that that's primarily supply.
Driving the delta between those two projections, but I guess, if you remove some of the bad debt improvement some of the other initiatives and just focus more so on that lease rate growth piece, how did those two regions stack up versus one another.
Matthew H. Birenbaum: So, you know, we'll see how that develops across the course of the year. It really is idiosyncratic, though, based on the timing, permits, and buyout of various projects. So, you know, the things that might cause it to ramp up or down are really just changes to the deal economics. For example, if rents accelerate or degrade more quickly than we expect in any particular submarket where we're planning to start a deal, or if hard costs surprise us either for the good or the bad, that could cause us to either pull some deals forward and start more or, conversely, push some deals further out. Yeah, Adam, just to Ben, just to reiterate some of our key themes from prior conversations.
Speaker Change: Yes, I mean, probably the best way to look at it as a referring you back to the slide deck.
Speaker Change: We show the revenue composition there.
First I mean, what I would say is that reflects.
Speaker Change: More than 90% of our portfolio coming from the established regions.
Speaker Change: At this point.
Speaker Change: But in terms of just broader demand supply fundamentals, we definitely expect much better performance out of our established regions generally speaking.
Speaker Change: The one question that we have I would say that we think we reflected appropriately.
Speaker Change: <unk> is in northern California.
Benjamin W. Schall: And we remain very focused on the spread between our development yields and underlying market cap rates, right, that's the value we create, and we need to be appropriately compensated for the development risk. And then the other component is obviously where we're raising the capital, both the source of it and the cost of that capital. So those are the higher-level elements that we triangulate around.
Speaker Change: All of which has been weaker for us recently.
Speaker Change: It's just a question of how the job environment unfolds, we think we've modeled that appropriately, but if you look at that slide you can kind of see what's happening in northern California.
Speaker Change: Benefiting nearly as much southern California in terms of the pad that contribution so I think on par, it's a little more reflective of apples to apples.
Speaker Change: With our expansion region. So overall advanced supply much better than the established regions, maybe a little bit of a question around northern Cal.
Adam Kramer: And then there's the deal specifics that Matt mentioned. Great, thanks, guys. And just on the January, like term effective rent change, I guess the new rent specifically, and not asking me for kind of each of your markets individually, maybe just at a high level, if you could split, I don't know if you want to kind of go through West Coast versus East Coast, versus versus kind of Sunbelt, maybe just kind of general trends breaking down that James, Yeah, I want to give it to you by coast. So on the East Coast, we're trending sort of in that low 2% range. The West Coast was modestly positive, about 50 basis points, and the expansion regions were essentially flat. Great Thanks, guys. All right, next.
Speaker Change: And then just just focused on kind of the urban versus suburban you continue to kind of talk about the strategic focus of shifting into more suburban.
Speaker Change: Markets and sort of preferred.
Speaker Change: Incremental investment there so what's sort of the expectation for lease rate growth. When you when you look at those two.
Speaker Change: Urban versus suburban for the year. Thank you.
Speaker Change: Yes, we haven't broken it out between urban and suburban in terms of the forecast I can tell you in Q4.
Speaker Change: We certainly saw better growth of our out of our suburban portfolio.
Speaker Change: Which was about 200 basis points to urban portfolio was essentially flat.
Speaker Change: I did provide sort of the breakout in January as well as from eastern West, but in terms of urban suburban we've not traditionally broken that out.
Speaker Change: Look at it.
Speaker Change: On a blended basis as I mentioned before it was 2%.
Speaker Change: As you think across the markets, it's really kind of market specific as more of a driver than urban suburban in many cases. So for example in the New York Metro area, we're expecting better growth out of the city and Northern New Jersey less growth really in Westchester Long Island Central Jersey.
Sean J. Breslin: I mean, probably the best way to look at it is to refer you back to the slide that we showed the revenue decomposition there. And first, I would say is that reflects, you know, more than 90% of our portfolio coming from the established region. At this point, but in terms of just broader demand and supply fundamentals, we definitely expect much better performance out of our established regions, generally speaking. The one question that we have, I'd say, that we think we reflected appropriately is in Northern California, which has been weaker for us recently. And I think it's just a question of how the job environment unfolds.
Speaker Change: If you go to the mid Atlantic, it's very different or expect a challenged growth in the district.
Speaker Change: Better growth in northern Virginia, and suburban Maryland on.
Speaker Change: On the West Coast. Unfortunately, we don't have a lot in urban Seattle that urban Seattle is pretty rough right now I would say more of our north and east side portfolio is performing much better.
And then generally down in the Bay area I think we're all familiar with the challenges in San Francisco, We certainly expect it to lag and a similar theme in <unk> I think you have to kind of go through each market individually to look at it.
Sean J. Breslin: We think we've modeled that appropriately. But if you look at that slide, you can kind of see what's happening in Northern California. It is not benefiting nearly as much as Southern California in terms of the bad debt contribution.
Speaker Change: As you hopefully some color by region.
Speaker Change: Do you think that 200 basis points in the fourth quarter as a decent proxy for what.
Speaker Change: What you see moving forward in that.
Speaker Change: Medium term.
Speaker Change: Yes, I wouldn't extrapolate that going forward right at this point.
Speaker Change: I think it's a good point for where we were in Q4, we do expect based on what I. Just said, there's a lot of these suburban markets will hold up better than some of the specific regions, but I wouldn't necessarily count on it being a 200 basis points spread as you move through the full year.
Sean J. Breslin: So I think on par, it's a little more reflective of apples to apples with our expansion region. So overall, demand and supply are much better in the established regions. Maybe a little bit of a question around Northern California.
Speaker Change: Okay. It sounds like seasonality is a little bit of effect. Thank you.
Sean J. Breslin: Yeah, we haven't broken it out between urban and suburban in terms of the forecast, but I can tell you in Q4, we certainly saw better growth out of our suburban portfolio, which was about 200 basis points. The urban portfolio was essentially flat.
Speaker Change: Alright.
Speaker Change: Thank you. Our next question comes from the line of Wolfe with Citi. Please proceed with your question.
Wolfe: Hey, thanks.
Wolfe: At your Investor Day, you gave an estimate of around 175 basis points of annual earnings contribution from your development pipeline I was hoping you could just give an estimate for.
Sean J. Breslin: I did provide sort of the breakout in January as well from east and west. But in terms of urban-suburban, we've not traditionally broken that out. If you look at it on a blended basis, as I mentioned before, it was 2%. You know, if you think across the markets, it's really kind of market-specific is more the driver than urban-suburban in many cases. So for example, in the York Metro area, we're expecting better growth out of this city and northern New Jersey, with less growth really in Westchester, Long Island, and Central Jersey. If you go to the Mid-Atlantic, it's very different.
Wolfe: The contribution this year and if there's anything that might be influencing more this year versus a typical year.
Wolfe: Can you kind of be maybe a bigger contribution in 2025 as you lease up the <unk>.
Wolfe: Communities that are delivering.
Wolfe: Yes sure Eric This is Kevin it's a good question and perhaps one we're spending a little bit of time on upfront I'll give you the punch line and give you a couple of ways to think about the earnings accretion this year from development undergoing lease up that produces.
Sean J. Breslin: We're expecting challenged growth in the district but better growth in northern Virginia and suburban Maryland. You know, on the West Coast, fortunately, we don't have a lot in urban Seattle, but urban Seattle is pretty rough right now, I would say. More of our north-end, east-side portfolio is performing much better, and then generally down in the Bay Area, we're all familiar with the challenges in San Francisco; we certainly expect it to lag and a similar theme in LA, so I think you have to kind of go through each market individually to look at it, but that gives you hopefully some color by region. I probably wouldn't extrapolate that going forward right at this point. I think it's a good kind of point for where we were in Q4.
An estimate of about 18 of accretion per share this year give or take which equates to about 170 basis points of earnings growth in 'twenty four.
Wolfe: It's consistent with the typical level of earnings growth, we get from development in most years and in line with the 150 to 200 basis points.
Wolfe: Earnings contribution to growth that we outlined at Investor Day last November.
Wolfe: So maybe just before we begin a couple of.
Wolfe: Contextual comments, which won't surprise you, but it might be helpful. Just for.
Wolfe: For the broader audience.
Wolfe: First as you know when you look at our investment and capital activity. We do have a broad set of investment uses even if developments our primary use of capital and we have multiple sources of capital. So as a result since cash is fungible attributing specific capital sources to the specific capital uses to isolated discrete earnings impact in a period over period basis.
Sean J. Breslin: We do expect, based on what I just said, a lot of these suburban markets will hold up better in some of these specific regions. But I wouldn't necessarily count on it being a 200 basis point spread as you move through the full. Thank you. Our next question comes from the line of Eric Wolfe with Citi. Hey, thanks.
Wolfe: <unk> is making some reasonable estimates and assumptions.
Eric Wolfe: I think at your investor day, you gave an estimate of around 175 basis points of annual earnings contribution from your development pipeline. I was hoping you could just give an estimate for the contribution this year. And if there's just anything that might be influencing more this year versus a typical year, and if it's just going to kind of be maybe a bigger contribution in 2025, as you lease up the communities that are delivering. Yeah, sure. Eric, this is Kevin.
Wolfe: Second as you know since we substantially match fund our development starts with long term capital when we start those projects when we started.
Wolfe: The $1 $6 billion or so of projects under lease of two to three years ago. The reality is that we sourced much of that capital two to three two to three years ago.
Third when you kind of look go back and look at the capital we've raised over the last say three years, you would find that to fund the whole business. We raised $2 1 billion at a blended initial cost of two 9% and 21 $1 5 billion in 2022 at a blended initial cost of four 1%.
Kevin O'shea: It's a good question and one we're spending a little bit of time on. Up front, I'll give you the punchline and give you a couple of ways to think about the earnings accretion this year from development undergoing lease up that produces an estimate of about 18 cents of accretion per share this year, give or take, which equates to about 170 basis points of earnings growth in 24, which is consistent with the typical level of earnings growth we get from development in most years and in line with the 150 to 200 basis So maybe just before we get a couple of contextual comments, which won't surprise you but might be helpful just for the broader audience.
Wolfe: And $1 $4 billion last year to blend initial cost of four 6%. So some portion of the capital in those prior years was used to fund the $1 6 billion that began lease up last year and is being leased up this year as well obviously, we have another 250 <unk>. That's in the plan for this year at kind of roughly around.
Wolfe: 5%.
Wolfe: On cost of capital, which is relevant as you look at sort of earnings growth and so forth for your modeling purposes, but.
Wolfe: And the reality is that capital isn't going to be source to pay for the development is already completed and in lease up.
Wolfe: And so as you look at the $1 6 billion in lease up that currently is around at a yield of about 6% and if you just conservatively just look at this from an economic point of view, which is sort of the first way to look at this and say you had $1 $6 billion development at a 6% yield and say it was funded with some.
Kevin O'shea: First, as you know, when you look at our investment and capital activity, we do have a broad set of investment uses, even if developments are the primary use of capital, and we have multiple sources of capital. So as a result, since cash is fungible, attributing specific capital sources to specific capital uses to isolate a discrete earnings impact on a period-over-period basis requires making some reasonable estimates and assumptions.
Wolfe: A portion of the capital that $3 billion. So the raised over the last two years at call of an average four 4% initial cost you've got about 160 basis points of spread accretion on that development.
Wolfe: Which translates into about $25 5 million of annualized profit or about 18 cents of annualized growth, which in turn equates to about 170 basis points of earnings growth on last year's core <unk>.
Kevin O'shea: Second, as you know, since we substantially match fund our development starts with long-term capital when we start those projects, and we started the $1.6 billion or so of projects under lease two to three years ago, the reality is that we sourced much of that capital two to three years ago. So third, when you kind of go back and look at the capital we've raised over the last few years and $1.4 billion last year to blend an initial cost of 4.6%. So some portion of the capital in those prior years was used to fund the $1.6 billion that began leasing up last year and is being leased up this year as well. Obviously, we have another 850 that's in the plan for this year at kind of roughly around a 5% cost of capital, which is relevant as you look at sort of earnings growth and so forth for your modeling purposes. And the reality is that capital isn't going to be sourced to pay for the development that's already completed in lease up.
Wolfe: <unk> is kind of losing that way in reality is that the lease up profitability starting to feather in last year and this year, but thats, probably the best way to look at the earnings contribution from the lease up activity underway by.
Wolfe: By matching it with the capital that we likely applied to it.
Wolfe: But if youre looking instead, it <unk> impact on a specific calendar year basis. This year for example against last year and Youre looking at the 29 of headwinds that we call out on slide 12.
Wolfe: From our capital markets transaction activity in our earnings deck.
Wolfe: Certainly that may be a little bit longer conversation happy to take it offline with you or anyone else, but I think the short answer there is about 29 cents you can probably attribute about 18 cents of that to funding our investment activity. After you subtract the 12.
Wolfe: Associated with the lower interest income this year ignore the <unk> from the ESI P activity and then take the <unk> 11 cents of financing and refinancing costs and describe say seven cents of that to the refinancing of $600 million of debt last year and the balance of <unk> to investment activity.
Kevin O'shea: And so, you know, as you look at the $1.6 billion in lease up, that currently is around a yield of about 6%. And if you just conservatively just look at this and from an economic point of view, which is sort of the first way to look at this, and say you have $1.6 billion development at a 6% yield, and say it was funded with some, portion of the capital, the $3 billion or so that we raised over the last two years at call an average 4.4% initial cost, you've got about 160 basis points of spread accretion on that development, which, you know, translates into about $25.5 million of annualized profit or about 18 cents of annualized growth, which in turn equates to about 170 basis points of earnings growth on last year's core FFO.
Wolfe: What you are left with to drive that 18 is about five from share count flat from <unk> activity <unk> from lower capitalized interest expense and then <unk> 11.
Wolfe: Of refinancing costs and financing costs that you see there in that slide so that's the way another way to get at the 18th that can give you a sense of comfort that the one way or another what youre looking at is about 150 to 200 basis points of earnings growth contribution for lease up activity. This year.
Speaker Change: Okay. That's helpful. And then I guess, just a quick one on <unk>.
Speaker Change: Capitalized interest guidance it looks like based on your guidance the construction progress through development balances going down by like $200 million taken.
Kevin O'shea: The reality is kind of using that way, and the reality is that the lease-up profitability started to feather in last year and this year, but that's probably the best way to look at the earnings contribution from the lease-up activity underway by matching it with the capital that we likely applied to it. But if you're looking instead at the earnings impact on a specific calendar year basis this year, for example, against last year, and you're looking at the 29 cents of headwind that we call out on slide 12 from our capital markets transaction activity in our earnings deck, certainly that may be a little bit longer conversation, happy to take it offline with you or anyone else, but I think the short answer there is of that 29 cents, you can probably attribute about 18 cents of that to funding our investment activity after you subtract the 12 cents associated with the lower interest income this year, ignore the 8 cents from the SIP activity, and then take the 11 cents of financing and refinancing costs and ascribe, say, 7 cents of that to the refinancing of $600 million of debt last year and the balance of 4 cents to investment activity.
Speaker Change: Whats kind of interesting is divided by your weighted average interest rate to get to that but.
Speaker Change: Is that the right way to think about it and then I guess why would that balance be going down it seems like spending in <unk>.
Speaker Change: All right a little bit this year, yes.
Speaker Change: Yes, no I think that is the right way to look at it I don't know the exact number but we have capitalized interest rate interest expense going down by <unk> <unk>.
Speaker Change: Which is about $5 million year over year, and it's at a blended capitalized interest rate of three 5%. So I think it is going down by a couple hundred million dollars and the reality is we have this is the natural ebb and flow of construction in progress we have more completions this year than deals entering new construction, so that will oscillate over time.
It creates a little bit of a period over period volatility and the capitalized interest expense calculation, but thats just the nature of that we don't we start projects. When they are ready to go not in a completely constant <unk>, even ratable basis over the course of the year and Theres a little of CIP decline from 23 moving into 'twenty four.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: Thank you. Our next question comes from the line of Steve <unk> with Evercore. Please proceed with your question.
Kevin O'shea: So what you're left with to derive that 18 cents is about 5 cents from the share account, 5 cents from net dispo activity, 4 cents from lower capitalized interest expense, and then 4 cents of the 11 cents of refinancing costs and financing costs that you see there in that slide. So that's the way, another way to get at the 18 cents that can give you a sense of comfort that, one way or another, what you're looking at is about 150 to 200 basis points of earnings growth contribution from lease up activity this year. Okay, that's helpful. Maybe I guess just a quick one on...
Steve: Yes. Thanks. Good afternoon first just on the clarification I think at the Investor Day, you had talked about an earn in of about one 5%.
Steve: Now Youre talking about <unk> of 1% is the different strictly just moving from like a September 30th for Q3 to Q4 or is there something else that kind of went on and that's that.
Speaker Change: Yes, that's pretty much it see if you think about it a lot of our growth comes through the first nine months of the year, including short term premiums and other activity that happens in Q2, excuse me Q2, and Q3 and then traditionally uncertainty celebrates as you go through Q4 Atlanta January.
Kevin O'shea: The Capitalized Interest Guidance, and it looks like, based on your guidance, the construction progress or development balance is going down by, like, $200 million. I'm just taking, you know, what the kind of interest is divided by your weighted average interest rate to get to that. But is that the right way to think about it? And I guess why would that balance be going down if it seems like spending is accelerating a little bit? Yeah, no; I think that is the right way to look at it. I don't know the exact number, but we have the capitalized interest rate, and interest expense going down by four cents, which is about $5 million a year.
Speaker Change: Okay, and maybe one for Matt on the development you talked about the 870 and the mid sixes.
Speaker Change: It looks like about a third of the starts are going to be in your expansion markets. So just how are you sort of sizing that up just given kind of the supply issues that we're facing in many of the expansion markets today and.
Speaker Change: You have also benefited from basically conservative underwriting with no increase in rent, but rent growth is obviously slowing so.
Speaker Change: I guess does the mid sixes provide much upside going forward if rent growth is relatively flat over the next couple of years.
Kevin O'shea: And it's at a blended capitalized interest rate of three and a half percent. So I think it is going to go down by a couple hundred million dollars. And the reality is we have, and this is the natural ebb and flow of construction in progress. We have more completions this year than deals entering new construction. So that will oscillate over time, and it creates a little bit of period over period volatility in the capitalized interest expense calculation. But that's just the nature of that.
Speaker Change: Yeah, Hey, Steve.
I would say.
Speaker Change: And as I've kind of mentioned in my prepared remarks.
Speaker Change: There may be less upside.
Speaker Change: Historically, if you look back over a long period of time, we tend to deliver yields that are 20 to 30 basis points higher than what our initial underwriting is because we don't trend now in the last few years when rents were rising in double digit rates in 2021 and 'twenty two.
Kevin O'shea: We start projects when they're ready to go, not on a completely constant, even rateable basis over the course of the years. And there's a little bit of CIP decline from 23 moving into 24. Thank you. Next question comes from the line of Steve Sakwa: First, I think at Investor Day you talked about it. [inaudible] Yeah, that's pretty much it, Steve.
Speaker Change: 2030 basis points is more like 70 or 80.
Speaker Change: But thats why now when you look at say the deals leasing up this year.
Speaker Change: They will have some of that wind at their back, but it's probably back to that kind of 20 to 30 basis points that is more typical.
Speaker Change: And that's why we feel like there is an adequate margin of safety in there because we're starting them on today's economics with that 100 to 150 basis points spread to current cap rates that had been referenced so the two deals we're talking about an expansion regions or the third of the starts this year in the plan happened to be in North Carolina I think one.
Stephen Thomas Sakwa: If you think about it, a lot of our growth comes through the first nine months of the year, including short-term premiums and other activity that happens in Q3, Q2 and Q3, and then, traditionally, it sort of decelerates as you go through Q4 and land in January. Okay, and maybe one for Matt on the development.
Speaker Change: As in Raleigh, Durham, and one is in the Charlotte area and.
Speaker Change: So you have seen rent market rents in those markets decline a little bit.
Speaker Change: In 'twenty three so based on today's rents.
Speaker Change: There is more supply coming there, there's obviously strong demand here and we're investing over the long term. These are 20 year investments but.
Stephen Thomas Sakwa: I think about a third of the, How are you sort of sizing that up, just given kind of the supply issues that we're facing in many of the expansion markets? You've also been a, I guess, you know, does the mid-sixes provide much upside going forward, you know, if rent growth is relatively flat? Yeah, hey, Steve.
Speaker Change: I would say.
That margin of safety would suggest that if you start those next year. They are not going to be in lease up for a year and a half two years. After that we feel pretty confident that we'll be able to hit our NOI numbers.
Speaker Change: Not until we get a little bit of lift.
Speaker Change: The other part Steve I'd add to that as you think about this cohort of projects.
Speaker Change: Starts are definitely coming down this year for financing reasons economic reasons, but deals that we can make sense of and that we can capitalize on appropriate way have the potential to open up into a pretty nice pocket pretty nice window. When you look out three years from now so tough to forecast a lot of other variables in there and as you said, we're conservative in underwriting based on today's environment, but.
Matthew H. Birenbaum: I would say, and as I kind of mentioned in my prepared remarks, there may be less upside. You know, historically, if you look back over a long period of time, we tend to deliver yields that are 20 to 30 basis points higher than what our initial underwriting is because we don't trend. Now, in the last two years, you know, when rents were rising and double-digit rates in 2021 and 22, that 20, 30 basis points was more like 70 or 80. But that's why now when you look at, say, the deals leasing up this year, you know, they'll have some of that wind at their backs, but it's probably back to that kind of 20 to 30 basis points that's more typical.
Speaker Change: We do keep that in mind as well.
Speaker Change: And just a quick clarification. The 870 is that mostly back half weighted you think in terms of start to the deliveries are kind of more late 25, maybe even into 'twenty six.
Speaker Change: Yes, that's accurate Steve.
Speaker Change: Okay, great. Thanks.
Speaker Change: Thank you. Our next question comes from the line of John Kim with BMO Capital markets. Please proceed with your question.
Matthew H. Birenbaum: And that's why, you know, we feel like there's an adequate margin of safety in there because we're starting them on today's economics with that 100 to 150 basis points spread to current cap rates that Ben referenced. So the two deals we're talking about in expansion regions, or the third of the starts this year in the plan, happen to be in North Carolina. I think one is in Raleigh-Durham and one is in the Charlotte area.
Thank you.
John P. Kim: I'm a little bit confused on the earn in.
Question. So I guess my first question is can you just.
John P. Kim: Let us know how you define that.
John P. Kim: non-GAAP measure, it's a relatively new metric within this industry, but I thought that the earn in was.
John P. Kim: Kind of locked in at the end of the year on leases you signed last year and what that contributes to revenue growth. This year that doesn't really equate back of that.
Matthew H. Birenbaum: And so you have seen rents, market rents in those markets, decline a little bit in 23. So based on today's rents, you know, there is more supply coming there. There's obviously strong demand, too, and we're investing over the long term. These are, you know, 20-year investments.
John P. Kim: Lease growth rates didn't really change during the fourth quarter. So yes.
John P. Kim: Yes.
Questioning how you how you define that.
Matthew H. Birenbaum: But I would say, you know, that margin of safety would suggest that if you start those next year, they're not going to be in lease up for a year and a half, two years after that. We feel pretty confident that we'll be able to hit our NOI numbers, if not still get a little bit of lift. The part Steve I'd add to that is you think about this cohort of projects. Starts are definitely coming down this year for financing reasons, economic reasons, but deals that we can make sense of and that we can capitalize in an appropriate way have the potential to open up into a pretty nice pocket, pretty nice window when you look out three years from now. So, tough to forecast a lot of other variables in there, and as you said, we're conservative and underwriting based on today's environment, but we do keep that in mind as well. Just a quick clarification, the 870, is that mostly the back half?
Speaker Change: Yes, John I think it is noted on the slide but just to be specific when you start the year reflects the essentially the rent roll our growth potential as a common term.
Speaker Change: For the month of January relative to the average gross potential or rent roll that we had in place for 2023.
Speaker Change: So as I mentioned earlier in response to Steve's question, we tend to realize.
Speaker Change: A substantial portion if not all of your <unk>.
Speaker Change: <unk> growth in the first nine months of the year or so.
Speaker Change: Accelerates in the spring peaks in the summer and then starts to come down in the fall as a result.
Speaker Change: Not only decelerating like term rent change, but the mix from unlike term rent change, where you burn off short term premiums and other things. So essentially in Q4, you don't really see.
Sequentially, if you think about it any material growth occur during.
Stephen Thomas Sakwa: [inaudible] Yeah, that's accurate, Steve. Our next question comes from the line of John. Thank you. I'm a little bit confused on the Ernan question.
Speaker Change: During that period of time, so you might have eight or nine months that youre up kind of an average of a point and a half because we're talking about in the last two to three months is closer to zero and that's how you get closer to kind of a low ones, but we can certainly walk you through it in more detail offline if you like.
John P. Kim: So I guess my first question is, can you please let us know how you define that? It's obviously a non-gap measure. It's a relatively new metric within this industry, but I thought that the earn-in was, [inaudible] Yeah, I'm just questioning how you define it. I think it's footnoted on the slide, but just to be specific, when you start the year, it reflects the essentially the rent roll or gross potential, a common term, for the month of January relative to the average gross potential or rent roll that we had in place for 2023. So, as I mentioned earlier, in response to Steve's question, we tend to realize, you know, .......
Speaker Change: Yeah, absolutely I think.
Speaker Change: Your peers don't define it the same way so it's worth delving into a little bit bumpier than offline.
Speaker Change: A timing issue.
Speaker Change: We described the point and a half is kind of where we were a spot basis.
Speaker Change: The end of Q3, I know some companies sort of estimate where they think they might be in January and provide that information on their calls we tend to provide on a spot basis.
Speaker Change: Okay.
Speaker Change: My second question is on your initiatives, including Avalon connect.
Speaker Change: And the capital spend you have on that.
Speaker Change: How much of that do you expense versus capitalize.
Capitalized.
Sean J. Breslin: Rental growth in the first, you know, nine months of the year or so, it accelerates in the spring, peaks in the summer, and then starts to come down in the fall as a result of not only decelerating like-term rent change but the mix from unlike-term rent change, where you burn off short-term premiums and other things. So essentially, Q4, you don't really see sequentially, if you think about it, any material growth occurring during that period of time. So you might have eight or nine months where you're up kind of an average of a point and a half, like we were talking about, and the last two to three months are closer to zero, and that's how you get closer to kind of the low ones. But we can certainly walk you through it in more detail offline if you like.
Speaker Change: For Avalon connect specifically.
Speaker Change: Costs associated with those programs are essentially 100% expense.
Okay great.
Speaker Change: Great. Thank you.
Speaker Change: Yes.
Speaker Change: Thank you. Our next question comes from the line of Josh Jennings.
Josh Jennings: <unk> with Bank of America. Please proceed with your question.
Josh Jennings: Yeah, Hey, guys I appreciate all the color on how the Avalon connect flows through the same store expenses this year.
Josh Jennings: Can you remind us how it is going to flow through the revenue line item this year and what kind of ramp you're assuming.
Josh Jennings: Yes.
Speaker Change: Josh what I would do is refer you back to the slide on the revenue composition and contribution.
Speaker Change: 80 basis points from other rental revenue.
Speaker Change: Almost all of it not all of it almost all of it is related to Avalon connect driving other rental revenue up there is also increase in trust fees and other things that are happening.
But most of that increase is related to Avalon connect.
Sean J. Breslin: Yeah, absolutely. I think your peers don't define it the same way, so it's worth delving into a little bit. I'll do that offline.
Speaker Change: Sure I guess, maybe on a quarterly basis, because it looks like <unk>.
Speaker Change: Big uptick and then it kind of drops off so just kind of.
Speaker Change: I'm trying to figure out like the quarterly cadence.
Speaker Change: Yes, why don't we get back to you on that is supposed to go on a quarter by quarter on the call. If that's okay, we'll ramp up as we move through the year for sure.
Sean J. Breslin: It's also probably a timing issue. We described the point and a half as kind of where we were on a spot basis at the end of Q3. I know some companies sort of estimate where they think they might be in January and provide that information on their calls. But we didn't provide them with a spot.
Speaker Change: Essentially what happens is think about it is mirroring lease explorations, because we push that throughout the apartment level as leases expire. So that's the way probably to think about how we'll bleed through quarter to quarter at a high level.
Speaker Change: Okay. Okay. That's helpful and then.
Sean J. Breslin: My second question is on your initiatives, including Avalon Connect. And the capital spend you have on that, how much of that do you expense versus capitalize? For Avalon Connect specifically, the costs associated with those programs are essentially 100% expense.
Speaker Change: Maybe just a.
Speaker Change: I'm curious on a breakdown for expense growth kind of like due to sub components like utilities R&M.
Sean J. Breslin: Great, thank you. Yeah, hey guys, appreciate all the color on how the Avalon, can you remind us how it's going to flow through the revenue line item this year and what kind of ramp you're expecting? Yeah, Josh, what I would do is refer you back to the slide on the revenue decomposition and that contribution of 80 basis points from other rental revenue, almost all of it, not all of it, but almost all of it is related to Avalon Connect driving other rental revenue up. There's also increasing trash fees and other things that are happening. But most of that increase is related to Avalon Connect. Sorry, I guess maybe on a quarterly basis because it looks like one key you have a big uptick and then it kind of drops off so, try to figure out like the quarterly numbers, Yeah, why don't we get back to you on that, as opposed to going quarter by quarter on the call, if that's okay. We'll ramp it up as we move through the year, for sure.
Speaker Change: Could you provide just like your underlying projections for that.
Speaker Change: Yes, why don't I give you some high level commentary since it's a lot of categories to go through.
Speaker Change: On the call but.
Speaker Change: Sort of a high level of things to think about here.
Property taxes.
Speaker Change: Overall, we're expecting year over year growth sort of in the mid 4% range a substantial portion of that is being driven by the phase out of property tax abatement programs as I mentioned in my prepared remarks.
Speaker Change: Insurance, we are expecting another year of kind of double digit growth in insurance, given what's happening in the market.
Speaker Change: Which we can certainly talk about if you like.
Speaker Change: As it relates to utilities Avalon connect I just mentioned.
Speaker Change: We're expecting utilities as a category to be sort of in the low double digit range and again almost all of that is related to Avalon connect.
Speaker Change: Core utilities are actually quite modest in terms of growth rate.
Joshua Dennerlein: And essentially, what happens is think about it as mirroring lease expirations because we push that through at the apartment level as leases expire. So that's the way, probably, to think about how we'll bleed through quarter to quarter at a high level. Okay, okay. That's helpful.
Speaker Change: A couple of others, maybe to mention are on the payroll side.
Speaker Change: We've essentially got a merit increase of 4% that's about 90% of payroll benefits are going up about 6%. So those two combined.
Speaker Change: 420 basis points, but we're picking up about 100 basis points from our payroll reductions so that will net out in the low threes.
Sean J. Breslin: And then, um, let me just, uh, I'm curious about a breakdown for expense growth, kind of... Subcomponents like Utilities, R&M, could you provide... Underlying projections for that? Yeah, why don't I give you some high-level commentary, since that's a lot of categories to go through on the call, but sort of high-level things to think about here. Property taxes.
Speaker Change: And then the only other thing of note I would say really that's a little unusual is that our office operations category.
Speaker Change: It's accounting for 2025 basis points of total expense growth really related to legal on eviction costs that were somewhat elevated last year, we expect them to be elevated a little bit more this year.
Speaker Change: As we continue to process people, who are non paying residents. So those are some sort of high level comments hopefully those are helpful. Yes.
Joshua Dennerlein: Overall, we're expecting year over year growth sort of in the mid 4% range, a substantial portion of that is being driven by the phase out of property tax abatement programs, as I mentioned in my prepared remarks. Insurance, we are expecting another year of kind of double-digit growth in insurance given what's happening in the market, which, you know, we can certainly talk about if you like. As it relates to utilities, Avalon Connect, I just mentioned, we're expecting utilities as a category to be sort of in a low double-digit range. And again, almost all of that is related to Avalon Connect. Core utilities are actually quite modest in terms of growth rate. And a couple others maybe to mention are, on the payroll side, you know, we've essentially got a merit increase of 4%. That's about 90% of payroll. Benefits are going up about 6%. So those two together are 4 and 20 basis points.
Speaker Change: Super helpful. Thank you.
Speaker Change: Yes.
Speaker Change: Thank you. Our next question comes from the line of Brad Heffern with RBC capital markets. Please proceed with your question.
Brad Heffern: Yeah. Thanks can you just talk about how the start of the year is look so far versus the kind of normal trends for demand rent growth off the seasonal trough et cetera.
Brad Heffern: Okay.
Brad Heffern: Yes, happy to take that one Brad I mean pretty much consistent with what we've outlined in terms of our outlook.
Speaker Change: And I would say relative to historical norms for January growth is modestly below sort of if you look at the.
Brad Heffern: The change in asking rent in the month of January say, four or five years pre COVID-19 as compared to this January asking rents are trending up just at a slightly lower growth rate.
Sean J. Breslin: But we're picking up about 100 basis points from our payroll reductions, so that will net out in the low threes. And then the only other thing of note, I would say, really, that's a little unusual, is that in our office operations category, it's accounting for 20 to 25 basis points of total expense growth, really related to legal and eviction costs that were somewhat elevated last year. We expect them to be elevated a little bit more this year as we continue to process people who are non-paying residents. So those are some sort of high-level comments. Hopefully, those are helpful.
Speaker Change: Okay got it and then I know you get the blends already but I was curious if you could give the underlying assumption for market rent growth across the portfolio and 24.
Speaker Change: Yes, we are expecting average asking rent growth throughout the year to be sort of in that two and a quarter to two 5% range and actual rent change in the portfolio to be roughly 2%.
Speaker Change: Okay.
Speaker Change: Okay. Thank you.
Uh huh.
Speaker Change: Thank you. Our next question comes from the line of Michael Goldsmith with UBS.
Michael Jason Bilerman: Please proceed with your question.
Michael Jason Bilerman: Good afternoon, and thanks, a lot for taking my question.
Michael Jason Bilerman: You use a macro scenario for me Mike.
Michael Jason Bilerman: It seems like 1% GDP growth and 55000 jobs per month, how sensitive is the rent growth to kind of your underlying macro forecast like said another way.
Bradley Barrett Heffern: Yeah, super helpful. Thank you, Yep. Thank you. Our next question comes from the line of Brad Heffern with RBC Capital Markets. Yeah, thanks, everybody. Can you talk about how the start of the year has looked so far versus the kind of normal trends for demand, rent growth off the seasonal trough, etc.? Yes, happy to take that one, Brad.
Michael Jason Bilerman: If the economy is badger how.
Michael Jason Bilerman: How much more growth can you get in the in 2024. Thank you.
Michael Jason Bilerman: Yes, Michael this is Sean a.
Sean J. Breslin: A little bit of a complex answer to that because it depends on a lot of assumptions things you would think about or how significant how significantly different is that from our baseline forecast in terms of job and wage growth.
Bradley Barrett Heffern: I mean, pretty much consistent with what we've outlined in terms of our outlook. And I would say, relative to historical norms for January growth, it's modestly below, say, the change in asking rent in the month of January, say for five years before COVID as compared to this January, asking rents are trending up just at a slightly lower growth rate. Okay.
And where does it occur and when does that occur. So if we see acceleration, but it happens.
Sean J. Breslin: <unk>.
Sean J. Breslin: Doesn't do a lot for us because we will have signed leases through.
Sean J. Breslin: Through July offers are out for August September October in some markets.
Bradley Barrett Heffern: And then I know you've got the blends already, but I was curious if you could give the underlying assumption for market rent growth across the portfolio in 24. Yeah, we're expecting average asking rent growth throughout the year to be sort of in that two and a quarter to two and a half percent range, and actual rent change in the portfolio to be roughly 2%. Okay, thank you. Thank you. Our next question comes from the line of Michael Goldsmith with UBS. Please proceed. Good afternoon,
Sean J. Breslin: So I would say it probably helps you as a better set up for 2025, if you saw that happen in the second half of the year. If we saw a significant acceleration in the macro environment.
In the next 60 days as an example, we forecasted that should play out better for us as we get into peak leasing season. I think you just have to remember that and silver market move in to market kind of 30 days before they've even as an example, but those renewal offers are in most markets from a regulatory standpoint, they're out 60 to 90.
Sean J. Breslin: Days in advance.
And once it's out youre, not going back and saying.
Speaker Change: Oh, Im sorry, im going to change and move it up.
Speaker Change: Got it.
Speaker Change: Helpful. And then just based on current conditions, how far along do you think.
Michael Goldsmith: Thanks a lot for taking my question. You have a macro scenario from the, [inaudible] in 2020. Michael, this is Sean. A little bit of a complex answer to that, because it depends on a lot of assumptions, the things you would think about are how significant, how significantly different is it from our baseline forecast in terms of job and wage growth? And where does it occur? And when does it occur?
Speaker Change: We are in this post COVID-19 recovery.
Speaker Change: Southern California, and Seattle regions.
Speaker Change: Yes, good question.
Talk about it in the context of maybe rent basis.
Speaker Change: I would say northern California is still a long ways to go.
Speaker Change: We have rents that are essentially asking rents today that are down roughly 10% up from sort of pre COVID-19 peak levels.
Sean J. Breslin: So if we see Acceleration, but it happens in August, doesn't do a lot for us because we will have signed leases through July; offers are out for August, September, and October in some markets. So I would say it probably helps you as a better setup for 2025. If you saw that happen in the second half of the year, we saw a significant acceleration in the macro environment. In the next 60 days, as an example, beyond what we forecasted, that should play out better for us. As we get into peak leasing season, I think you just have to remember that it's still remarkably easy to move in to market, you know, kind of 30 days before they move in, as an example. But those renewal offers, in most markets, from a regulatory standpoint, they're out 60 to 90 days in advance. And once it's out, you're not going back and saying,
Speaker Change: That's primarily driven by San Francisco being 12%, 13% below P. Quiches.
Speaker Change: That's a pretty significant number and what I would say is that well I think we're seeing some green shoots in San Francisco in terms of what's happening with I'll say AI as an example.
Speaker Change: There's a long ways to go in terms of beginning in the sort of quality of the built environment at a place where people are comfortable office leaders business leaders kind of calling people back to the office and our people wanted to migrate to the city.
Speaker Change: And be able to feel comfortable with what they are doing so I would say there is a lag there how long that takes to play out I think these things take a fair bit of time. When you are talking about quality of life issues crime issues things of that sort. So I don't think this is necessarily a couple of quarter type of issue I think it is.
Michael Goldsmith: Oops, sorry, I'm going to change the rent and move it up. Got it. That's helpful. And then, just based on current conditions, how far along are you... We are in this post-COVID recovery in Northern California and Seattle. Yeah, good question. When I talk about it in the context of maybe rent basis, I would say Northern California. So, a long way to go. We have rents that are essentially asking rents today that are down roughly 10% from sort of pre-COVID peak levels. That's primarily driven by San Francisco being 12-13% below peak, which is... You know, that's a pretty significant number. And what I would say is that, well, I think we're seeing some green shoots in San Francisco in terms of what's happening with, you know, say, AI as an example.
Several quarters.
On the political will of what happens to actually see it sort of trend the right direction for us in a more meaningful way.
Speaker Change: In terms of Seattle.
Speaker Change: Couple of things to think about as it relates to Seattle, Seattle rent levels for us are up about 8% from pre Covid peak levels, but it is a very bifurcated market. The urban core of Seattle, whether it's quite downtown South Lake Union in cap Hill et cetera are much more challenged because of not.
Speaker Change: The quality of life issues that I've mentioned.
Speaker Change: San Francisco also in play there, but there is a meaningful amount of supply being delivered more than 24, then was delivered in 2023, which will compound the issue versus if Europe, mainly suburban north and east side, you are much more well positioned that's where majority of our assets are.
Michael Goldsmith: You know, there's a long way to go in terms of getting the sort of quality of the built environment in a place where people are comfortable, office leaders, business leaders, kind of calling people back to the office, and or people wanting to migrate to the city and be able to feel so comfortable with what they're doing. So I'd say there is a lag there, in terms of how long it takes to play out.
And Seattle.
Speaker Change: Thank you very much.
Speaker Change: Okay.
Speaker Change: Thank you. Our next question comes from the line of Richard Anderson with Wedbush. Please proceed with your question.
Speaker Change: Thanks.
Richard Anderson: Good afternoon.
Sean J. Breslin: I think these things take a fair bit of time when you're talking about quality of life issues, crime issues, things of that sort. So I don't think this is necessarily a couple of quarters type of issue. I think it's several quarters, depending on the political will of what happens to actually see it sort of trend in the right direction for us in a more meaningful way.
Richard Anderson: Sort of an open ended question, but.
Richard Anderson: See if you can get a response out of your New York Community Bank yesterday had its debacle.
Richard Anderson: Former signature bank both of them had multifamily as part of their problem in terms of loan losses and whatnot.
Sean J. Breslin: In terms of Seattle, I think there are a couple things to think about as it relates to Seattle. Seattle rent levels for us are up about 8% from pre-COVID peak levels, but it is a very bifurcated market. The urban core of Seattle, whether it's right downtown, stuff like Union, Capitol, etc., is much more challenged because of not only the quality of life issues that I mentioned that you have in San Francisco also in play there, but there is a meaningful amount of supply being delivered in 24 than was delivered in 2023, which will compound the issue versus if you're mainly suburban, north end, east side, you're much more well-positioned. Thank you very much.
Richard Anderson: We have to distinguish between rent regulated and market rate, but still in the rent regulated is really what's causing the problem, but im curious if youre seeing anything new on the ground from your point of view.
Speaker Change: Perhaps this creates business.
Speaker Change: Growth opportunities for you, but are there operating disruptions that are happening in neighboring assets as a result of all this just sort of better operating behaviors.
Speaker Change: Kind of a distressed situation are you seeing anything along those lines that we should be concerned about from.
Speaker Change: From this banking perspective lending perspective.
Speaker Change: Hey, rich.
Rich: We're not seeing significant distress in the system.
Richard Charles Anderson: Thank you. Our next question comes from the line of Richard Anderson. Unknown Speaker.
Rich: There obviously is the potential wave of maturities that's being highlighted by folks.
Benjamin W. Schall: Thanks. Good afternoon, Sort of an open-ended question, but see if you can get a response out of you. New York Community Bank yesterday had its debacle. Former Signature Bank and First Union National Bank both of them had multifamily as part of their problem in terms of, you know, losses and whatnot. I think we have to distinguish between rent regulated and market rate, but still, the rent regulated is really what's causing the problem. But I'm curious if you're seeing anything new on the ground from your point of view. Perhaps this creates business, you know, sort of growth opportunities for you, but are there operating disruptions that are happening in neighboring assets as a result of all this just sort of bad operating behavior? A kind of distressed situation
Rich: For the most part at least in our markets and assets that we are spending time in and around we're seeing lenders agreed to extend out loans, we're seeing equity step in and put up more capital now.
Rich: Now not all debt providers and equity providers are able to do that so that does create the potential for some dislocation, but we're not we're not necessarily seeing in of size I'd say, we are preparing to be ready to take advantage of it but not seeing it at this point.
Rich: Operationally the theme I would take you to as you look back over those.
Rich: Most last cycle, the last decade world of capital being homogeneous capital is flowing to all types of players and generally has fallen at a similar cost all types of players and so as we think about positioning going forward. There is an element of thinking about how we take advantage or step in opportunities for assets that are being operated by.
Richard Charles Anderson: Are you seeing anything along those lines that we should be concerned about from, you know, from this banking perspective, from the lending perspective? Rich, we are not seeing significant distress in the system. You know, obviously, there obviously is the potential wave of maturities that's being highlighted by folks. For the most part, at least in our markets and the assets that we're spending time in and around, we're seeing lenders agree to extend loans, and we're seeing equity step in and put up more capital. Now, not all debt providers and equity providers are able to do that, so that does create the potential for some dislocation, but we're not necessarily seeing it in scale.
Rich: Less sophisticated players players with less scale and I'll kind of add on the theme of as we're thinking about the opportunity set out there. It is a combination of both places where we can bring our balance sheet, the bear and bring our strategic capabilities to bear and we've spent a lot of time on our operating model transformation and it's got two impacts it.
Rich: One it helps us drive internal growth, but we're also bringing those operational capabilities to our external growth.
Speaker Change: Great great color, thanks, and.
Benjamin W. Schall: I'd say we're preparing to be ready to take advantage of it, but not seeing it at this point. Operationally, you know, the theme I would take you to is look back over this last cycle, the last decade, the world of capital being homogeneous, capital is flowing to all types of players, and generally is flowing at a similar cost to all types of players. And so as we think about positioning going forward, there is an element of thinking about how we take advantage of or step into opportunities for assets that are being operated by less sophisticated players, players with less scale. And I'll kind of end on the theme of how as we're thinking about the opportunity set out there, it is a combination of both places where we can bring our balance sheet to bear and bring our strategic capabilities to bear. And we're spending a lot of time on our operating model transformation. It's got two impacts. It's one, it helps us drive internal growth, but we're also bringing those operational capabilities to our external growth. Great, great color.
Speaker Change: Second question for me.
Speaker Change: Mentioned and we all know <unk> the amount of supply in the sunbelt versus your established regions and yet you are still predicting.
Speaker Change: Positive revenue growth in Europe more in your expansion markets.
Speaker Change: And I think it was said January new lease rent growth in the Sunbelt is flat not even negative maybe I got that wrong, but nonetheless, it sounds resilient from a dollars perspective, despite the supply.
Speaker Change: Is that a good way to look at it relatively resilient I should say and or are you thinking about 2025 could be materially worse in the sunbelt as sort of the supply picture builds on itself.
Speaker Change: And it starts to impact revenue maybe to a greater degree next year versus this year is that the way you kind of think about the sunbelt today.
Richard Charles Anderson: Thanks, Ben. Second question for me, you mentioned, and we all know 2x the amount of supply in the Sunbelt versus your established regions. And yet, you're still predicting positive revenue growth in your expansion markets. And I think it was said that January new lease rent growth in the Sunbelt is flat, not even negative. Maybe I got that wrong.
Speaker Change: Yes, rich this is Sean one way kind of parse the conversation into our portfolio versus a sunbelt more broadly.
Sean J. Breslin: What I indicated for our expansion regions in January is that blended rent change is essentially flat.
Sean J. Breslin: If you were to parse that swing between move ins and renewals.
Sean J. Breslin: You would see is that new move ins are negative and the expansion regions down about 150 basis points.
Richard Charles Anderson: But nonetheless, it sounds resilient from a dollar's perspective, despite the supply. Is that a good way to look at it? Relatively resilient, I should say.
Sean J. Breslin: As compare to kind of low to mid 3% sort of renewals.
Richard Charles Anderson: And or are you thinking, well, 2025 could be materially worse in the Sunbelt as the supply picture builds on itself and starts to impact revenue, maybe to a greater degree next year versus this year? Is that the way you kind of think about the Sunbelt today? Yeah, Rich. This is Sean.
Sean J. Breslin: What I would tell you is that primarily driven by.
Sean J. Breslin: Some assets that we own in Charlotte in the south than there are three assets that we acquired in that market a couple of years ago.
Sean J. Breslin: At a time, where we love the environment create long term neighborhood, but we knew there was a fair amount of supply come in sort of underwrote. It that way, we're seeing the impact of that supply currently and as opposed to say Denver, where most of the pain and suffering is in the sort of urban core much more significant pan suffer given the volume of <unk>.
Sean J. Breslin: But why don't we kind of parse the conversation into our portfolio versus the Sunbelt more broadly? What I indicated for our expansion regions in January is that blended rent change is essentially flat. If you were to parse that between move-ins and renewals, what you would see is that new move-ins are negative in the expansion region, down about 150 basis points, as compared to kind of a low to mid 3% sort of
Sean J. Breslin: <unk> as compared to a broadly distributed portfolio across the suburban markets. So our portfolio you kind of really.
Sean J. Breslin: A lot of assets you really have to look region by region to understand at what I would say more broadly about the sunbelt, though is certainly when do you think about negative rent change playing through and what it does to revenue and NOI.
Sean J. Breslin: What I would tell you is that it's primarily driven by some assets that we own in Charlotte in the South End. There are three assets that we acquired in that market a couple of years ago at a time when we loved the environment, a great long-term neighborhood, but we knew there was a fair amount of supply coming, sort of underwrote it that way. We're seeing the impact of that supply currently as opposed to, say, Denver, where most of the pain and suffering is in the sort of urban core, much more significant pain and suffering given the volume of supply as compared to our broadly distributed portfolio across the suburban market. So our portfolio, you kind of really, not a lot of assets.
Sean J. Breslin: The first thing that typically happens when you get into a much more competitive environment as people are starting to have weaker occupancy we saw that happen in 2023 in terms of the leg down in occupancy both in our established regions in the sunbelt, but much more significant in the sunbelt.
Sean J. Breslin: That starts translating to much heavier discounting in terms of where people are marketing their rents to try and occupy those units because some runs better than none that's what we've started to see in the last few months here and would expect that to continue as you roll through 2024 as those leases expire so the most significant impact on both.
Sean J. Breslin: You really have to look region by region to understand it. What I would say more broadly about the Sunbelt, though, is certainly when you think about negative rent changes playing out and what they do to revenue and NOI, the first thing that typically happens when you get into a much more competitive environment is that people are starting to have weaker occupancy. We saw that happen in 2018.
Sean J. Breslin: Revenue in NOI would likely be.
Sean J. Breslin: All else being equal 2025, as you roll all of those leases through the rent roll to that lower market rent.
Sean J. Breslin: That's probably going to see the most pronounced impact would be our view.
Speaker Change: Yep sounds good okay. Thanks very much.
Speaker Change: Yes.
Speaker Change: Thank you. Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Sean J. Breslin: In terms of the leg down and occupancy, both in our established regions in the Sun Belt, but much more significant in the Sun Belt. [inaudible] That starts translating to much heavier discounting in terms of where people are marking their rents to try and occupy those units because some rents are better than none. That's what we've started to see in the last few months here and would expect that to continue as you roll through 2024 as those leases expire. So the most significant impact on both revenue and NOI would likely be, all else being equal, in 2025 as you roll all those leases through the rent roll to that lower market rent. That's probably where you're going to see the most pronounced impact, our... Yep, sounds good. Okay, thanks very much.
Alexander Goldfarb: Hey, good afternoon two questions.
Alexander Goldfarb: First maybe just continuing on with Rich's.
Alexander Goldfarb: Line of questioning as you guys look to the Sun belt. It looks like most of your product I think is more suburban. So is that is basically as you assess opportunities in the expansion markets are you really just looking only at suburban or are you looking at urban and what I mean by that is it seems that a number of the urban markets.
The sunbelt have the same issues that we have in the urban coastal cities meeting people don't necessarily need to live right next to the office or there may be light quality issues et cetera, whereas in the suburbs. It seems more fit for Avalon development model and also closer to recreation in sort of a.
Richard Charles Anderson: Thank you. Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question. Hey, good afternoon.
Alexander Goldfarb: Quote unquote easier lifestyle. If you will so just sort of curious how you're shaping out your sunbelt strategy of urban versus suburban.
Alexander David Goldfarb: Two questions. First, maybe just continuing on with Rich's line of questioning. As you guys look to the Sunbelt, it looks like most of your product, I think, is more suburban. So is that basically as you assess opportunities in the expansion markets, are you really just looking only at suburban? Or are you looking at urban?
Alexander Goldfarb: Sure Hey, Alex its Matt.
Generally tend to agree with you that we are very focused on.
Matthew H. Birenbaum: Suburban Submarkets, we're focused on our acquisition efforts on suburban Submarkets, which have less supply and our product. It is not priced at the very top of the market.
Matthew H. Birenbaum: And what I mean by that is, it seems that, you know, a number of the urban markets in the Sunbelt have the same issues that we have in the coastal cities, meaning people don't necessarily need to live right next to the office, or there may be life quality issues, etc. Whereas in the suburbs, it seems more fit for Avalon's development model and also closer to recreation and sort of a, you know, quote, unquote, easier, you know, lifestyle, if you will. So just sort of curious about how you're shaping out your Sunbelt strategy of urban versus suburban. Sure. Hey Alex, it's Matt.
Matthew H. Birenbaum: Because that's a price point, we can't really access through new development, and but we can access through acquisitions.
Matthew H. Birenbaum: And also we're also focused on garden product because it's simpler to operate and these are markets with higher property taxes, and therefore, lower operating margins and one thing that kind of helps counteract that a little bit as garden product, where at least you don't have some of the same operating cost overhang that you would have in and stay high rise assets. So.
Matthew H. Birenbaum: We are we are tending to favor suburban submarkets and I think when you look at the portfolio as we've got so far in the expansion regions. They are actually outperforming those markets as a whole because of the assets that we own in the Submarkets that we owned and Sean mentioned, maybe one of the bigger exceptions, which is the south end of Charlotte, but that those are almost the only urban assets we have.
Alexander David Goldfarb: I would generally tend to agree with you that we are very focused on suburban submarkets. We're focused on our acquisition efforts in suburban submarkets that have less supply and or product that is not priced at the very top of the market because that's a price point we can't really access through new development, but we can access through acquisitions. And also, we're also focused on garden products because they're simpler to operate in, and these are markets with higher property taxes and, therefore, lower operating margins. And one thing that kind of helps counteract that a little bit is the garden product, where at least you don't have some of the same operating cost overhang that you would have in, say, high-rise assets.
Matthew H. Birenbaum: Got so far that we bought so far any expansion regions.
Matthew H. Birenbaum: Okay and the second question is in the in the fourth quarter. It looks like you guys wrote off four development deals for $9 million in aggregate.
Matthew H. Birenbaum: Nothing changed in the pipeline that is the projects that are underway. So maybe just a little bit more color on it sounds like these deals were really in their infancy, but just maybe some color around what caused you to two to Scotch These deals and where they may have been located.
Matthew H. Birenbaum: Yeah sure Alex I mean.
We did have elevated write offs in 'twenty three in general and I think that's just a reflection of the fact that we have been.
Matthew H. Birenbaum: As we have been talking about adapting our pipeline to reflect the changes in the economic realities.
Matthew H. Birenbaum: So we are tending to favor suburban submarkets. And I think when you look at the portfolios we've got so far in the expansion regions, they are actually outperforming those markets as a whole because of the assets that we own and the submarkets that we own. And Sean mentioned maybe one of the bigger exceptions, which is the south end of Charlotte, but those are almost the only urban assets we've got so far that we've bought so far in the expansion. Okay, and the second question is, in the fourth quarter, looks like you guys wrote off development deals for 9 million in aggregate. But nothing changed in the pipeline, that is, the projects that are underway. So maybe just a little bit more color on it sounds like these deals were really in their infancy, but maybe some color around what caused you to, to, to scuff these deals and where they may have been located. Yeah, sure, Alex.
Matthew H. Birenbaum: As asset values have dropped and cap rates have increased so we're generally very focused on risk management, we keep a close eye on capitalized pursuit costs in every one of our deals and our risk management has actually been one of the keys to us being able to.
Matthew H. Birenbaum: Develop profitably across multiple cycles over our 30 year history as a public company 35.
Matthew H. Birenbaum: The write offs this past quarter actually there was one project in Denver actually was an urban Denver kind of getting back to your first point.
Matthew H. Birenbaum: The other one was a public private deal in California, and we've had a number of those were the.
Matthew H. Birenbaum: The economics have just changed sufficiently that we didn't necessarily see a path to in many cases, we are able to re cut the deal and get a path to a revised deal that does makes sense in those particular cases.
Matthew H. Birenbaum: That wasn't the case, so we had to let those go but I would also just taken a big step back here that if you look at our total book of development rights. We currently have land on the balance sheet of $199 million and we have another $67 million in capitalized pursuit costs, So thats $265 million in total and we're controlling.
Matthew H. Birenbaum: I mean, we did have elevated write-offs in 23 in general, and I think that's just a reflection of the fact that we have been, as we've been talking about, adapting our pipeline to reflect the changes in the economic realities, you know, as asset values have dropped and cap rates have increased. So, we're generally very focused on risk management. We keep a close eye on capitalized pursuit costs in every one of our deals, and our risk management has actually been one of the keys to us being able to develop profitably across multiple cycles over, you know, our 30 year history as a public company, 35. The write-offs this past quarter, actually, there was one project in Denver. Actually, it was in urban Denver, kind of getting back to your first point.
Matthew H. Birenbaum: <unk> to build about 11000 units.
Matthew H. Birenbaum: With that investment, which is pretty strong leverage on that pursuit capital and I think compares favorably to a lot of other both public and private players in the space.
Matthew H. Birenbaum: That's kind of where it sits today.
Matthew H. Birenbaum: I'd say that we've gotten through a lot of the.
Matthew H. Birenbaum: Deals that were under water and when we look at our pipeline going forward.
Matthew H. Birenbaum: We feel pretty good about it.
Thank you.
Speaker Change: As a reminder, if anyone has any questions now is your last chance to.
Matthew H. Birenbaum: The other one was a public-private deal in California. And we've had a number of those where, you know, the economics have just changed sufficiently that we didn't necessarily see a path to. In many cases, we are able to recut the deal and get a path to a revised deal that does make sense. In those particular cases, that wasn't the case.
Star one to join the queue to.
Speaker Change: To ask a question.
Speaker Change: And our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.
Linda Tsai: Hi, Thank you.
Linda Tsai: With new rent growth in January at negative one, 9%, how much more negative with that trend.
Matthew H. Birenbaum: So we had to let those go. But I would also just take a big step back here that if you look at our total book of development rights, we currently have land on the balance sheet for 199 million. And we have another 67 million in capitalized pursuit costs. So that's 265 million in total. And we're controlling the opportunity to build about 11,000 units with that investment, which is pretty strong leverage on that pursuit capital and, I think, you know, compares favorably to a lot of other both public and private players in the space. So that's kind of where it sits today, and I'd say that we've gotten through a lot of the deals that were underwater. And when we look at our pipeline going forward, you know, we feel pretty good about it. Thank you.
Linda Tsai: <unk> turned positive this year ending 24 flat.
Speaker Change: Yes, good question.
Linda Tsai: I would tell you is seasonally rents start to pick up in January rent growth typically accelerates asking rent growth process as you move through the spring and into the summer.
Linda Tsai: So typically what you would see as this was the sort of the low point of the year kind of December January and then things would improve from here.
Linda Tsai: Certainly I've mentioned, we're talking about getting to flat for the year. So we've got several months here, where it will continue to improve flatten out and then probably as we get to Q4, you would see it come back down slightly negative again, which is not uncommon in this kind of an environment. So you'll start to see sort of a <unk>.
Operator: And as a reminder, if you have any questions, please feel free to reach out to me. And our next question comes from the library. Hi, thank you.
Linda Tsai: Positive numbers as you get into Q2 and Q3.
Speaker Change: Thanks for that and then on Avalon connect with associated costs going away and revenues coming online.
Unknown Attendee: With new rent growth in January... Yeah, good question. What I would tell you is seasonally, you know, rents start to pick up in January, and rent growth typically accelerates, asking rent growth, this is, as you move through the spring and into the summer. So typically, what you would see is this would be sort of the low point of the year, kind of December, January, and then things would improve from here. So certainly, as I mentioned, we're talking about basically getting flat for the year. So, you know, we've got several months here where it will continue to improve, flatten out, and then probably as we get to Q4, you would see it come back down and go slightly negative again, which is not uncommon in this kind of an environment. So you start to see sort of positive numbers as you get into Q2 and Q3. We want to isolate the impact of that...
Speaker Change: Wanted to isolate the impact of that.
Speaker Change: Sure.
Speaker Change: Like how much would that benefit 'twenty five.
Speaker Change: So in high growth.
Speaker Change: Yes, we're not providing any guidance as it relates to 2025 at this point I did indicate what it was for <unk> four as it relates to revenue and the impact on Opex in my in my comments my prepared remarks.
Speaker Change: Thank you.
Speaker Change: And our next question comes from the line.
Speaker Change: <unk> <unk> with Mizuho Securities. Please proceed with your question.
Mizuho Securities: Hey, there good afternoon too.
Mizuho Securities: Two questions for me first is a follow up on the comments earlier in San Fran and Seattle.
Mizuho Securities: Can you outline what your blended rent expectations for those two markets are this year look like.
Mizuho Securities: Supply in Seattle was creeping over into.
And to the east side in Bellevue, where you have more.
Sean J. Breslin: , by Yeah, we're not providing any guidance as it relates to 2025. At this point, I did indicate what it was for 24 as it relates to revenue and the impact on OPEX in my comments, my prepared remarks. And our next question comes from the line of Haendel. Hey there, good afternoon.
Mizuho Securities: More relative exposure, while demand and pricing power still seems pretty decent in San Fran and maybe some color on the level of compression youre offering as well as what youre seeing competitive offer in those markets.
Mizuho Securities: Yeah. This is Sean we haven't provided the market level detail for.
<unk> 2024, but thank you for your some recent trend data if that's helpful.
Sean J. Breslin: Two questions from me. The first is a follow-up on your comments earlier in San Fran and Seattle. Can you outline what your blended rent expectations for those two markets are this year? Seattle is creeping over into the east side of Bellevue, where you have more relative exposure, while demand and pricing power still seem pretty elusive in San Francisco. Maybe some color on the level of concession, maybe some color on the level of concession, maybe some color on the level of your offering as well as what you've seen competitors offer in those markets. Yeah, Haendel, this is Sean.
Sean J. Breslin: So for Q4 of 2023 in Northern California overall.
Sean J. Breslin: Rent change was down two 8%.
Which is essentially down seven on new move ins.
And positive roughly two and a half on renewals in terms of Seattle.
Sean J. Breslin: Move ins were down about 200 basis points.
Sean J. Breslin: <unk> actually renewals were up about 200 basis points.
Sean J. Breslin: We haven't provided the market level detail for 2024, but I can give you some recent trend data, if that's helpful. So for Q4 of 2023, in Northern California, overall, the blended rent change was down, you know, 2.8%, which is essentially down seven on new move-ins and positive roughly two and a half on renewals. In terms of Seattle, new move-ins were down about 200 basis points. And actually, renewals were up about 200 basis points. I'm sorry, I misquoted that, but if it was blended at 200 basis points, it was down 1.9 on new move-ins and plus 5.9 on renewals.
Speaker Change: I'm sorry.
Speaker Change: This quarter that the blended was 200 basis points. It was down one nine on new move ins and.
Speaker Change: $5 nine on renewals and so we started to see a pickup in Seattle more recently again in the suburban kind of northeast East side Submarkets not downtown.
Speaker Change: Which has been positive as people coming back to work from Microsoft and Amazon in particular, having an impact on that.
Speaker Change: And what I would say is we are more optimistic as it relates to what we expect in Seattle, given our portfolio.
Sean J. Breslin: And so we started to see a pickup in Seattle more recently, again, in that suburban kind of northeast, east side sub-markets, not downtown, which has been positive, people coming back to work from Microsoft and Amazon, in particular, having an impact on that. And what I would say is we are more optimistic as it relates to what we expect in Seattle, given our portfolio in the Seattle market in 2024 as compared to Northern California, for the reasons I mentioned earlier. Any color on the impact of supply in Bellevue and any color on, Yeah, in terms of supply, Bellevue has actually been holding up quite well. I mean, most of our portfolio, if you think of it, we have North End. We have a pretty core portfolio in downtown Bellevue, and then also in Redmond. Redmond has actually been a little bit softer with supply as compared to Bellevue.
In the Seattle market in 2024, as compared to northern California for the reasons I mentioned earlier.
Speaker Change: Any color on the impact of supply in Bellevue and any color on the concessions.
Speaker Change: Yes in terms of the supply of Bellevue has actually been holding up quite well I mean, most of our portfolio you think of a north and we have a pretty core portfolio.
Speaker Change: Downtown Bellevue and then also in Redmond Redman has actually been a little bit softer was supplied as compared to Bellevue.
But I can tell you as it relates to concessions overall across the portfolio as most of the concessions that we experienced in Q4 more than 50% came from the combination of Seattle, and Northern California, more skewed to northern California for us relative to Seattle and it really is a submarket by Submarket discussion.
Speaker Change: I'd say, the most competitive sub markets in Seattle, our two to three months free and has urban core assets.
Sean J. Breslin: What I can tell you as it relates to concessions overall across the portfolio is that most of the concessions that we experienced in Q4, more than 50% came from the combination of Seattle and Northern California, more skewed to Northern California for us relative to Seattle. And it really is a sub-market by sub-market discussion. I'd say the most competitive sub-markets in Seattle are two to three months free, and that's for urban core assets. We've seen lease-up today, and they are really close competitors in the Bay Area. Maybe two months would be the high end in Q4 is what we've seen, and that's tapered a little bit in January, but pretty similar. So it really is a kind of sub market by sub market assessment as to what you should buy. I got it.
Speaker Change: In lease up.
Speaker Change: Today, <unk> really close competitors.
Speaker Change: In the Bay area, maybe two months would be the high end.
Speaker Change: In Q4, as what we've seen and Thats tapered a little bit of January but pretty similar.
Speaker Change: So it really is kind of submarket by Submarket assessment as to what you see.
Speaker Change: Got it thank you for that.
Last one just speak more enrollment.
Speaker Change: The transaction market I'm curious your.
Speaker Change: How would you characterize your conversation of late with potential.
Speaker Change: Sellers and their cap rate an IRR expectations.
Speaker Change: With some hopeful distinction between coastal in the Sunbelt I was that national multi housing this week as well and they seem to be still a fairly wide bid ask spread with by sticking to our guns and some waiting to sell.
Sean J. Breslin: Thank you for that. And last one, just speaking of. Transaction Market. I'm curious, you know, your, how do you characterize your, your conversation? of late with potential sellers and their cap rate hierarchy, with some hopeful distinction between Coastal and the Sunbelt, as well, and there seems to be still a fairly wide bid-ask spread with buyers sticking to their guns and some waiting to sell in the back half of this year and hoping that lower interest rates will continue. Color on Coastal Sure. Hey Hanzo, it's Matt.
Speaker Change: In the back half of this year, and hoping that lower interest rates would drop.
Speaker Change: Drive lower cap rate, so curious kind of how those conversations are going.
Speaker Change: Cap rate IRR expectations any color on coastal versus sunbelt.
Speaker Change: Sure Handouts, Matt.
Matthew H. Birenbaum: Yes, there is still I would agree there is still a pretty significant bid ask spread for many assets I mean, we tend to describe it as a market of haves and have nots and there are lots of assets that would fall into the have not category.
Matthew H. Birenbaum: Those are only going to transact if the cap rate is significantly north of that right and the buyer can get positive arbitrage and so that would be tertiary markets that would be some out of favor submarkets.
Matthew H. Birenbaum: Yeah, I would agree there's still a pretty significant bid-ask spread for many assets. I mean, we tend to describe it as a market of haves and have nots. And there are lots of assets that would fall into the have not category because those are only going to transact if the cap rate is significantly north of the debt rate and the buyer can get positive arbitrage, and so that would be tertiary markets. That would be some out-of-favor submarkets, and you know I don't know if it's so much coastal versus Sunbelt as it is kind of primary markets versus There's still plenty of interest in certain Sunbelt markets for sure, and the assets that are trading there are money that seems anxious to get going, and you know what we're hearing anyway is the cap rate now has to at least be in the fives, and there's some debate about what the year one underwriting is because, you know, some markets, obviously, NOI is starting to decline so that makes it a little tricky as well, but I would Maybe somewhere between five and five and a half.
Matthew H. Birenbaum: And.
Matthew H. Birenbaum: I don't know if its so much coastal versus sunbelt as it is kind of primary markets versus secondary tertiary markets in terms of that distinction. There is still plenty of interest in certain sunbelt markets for sure.
Matthew H. Birenbaum: The assets that are trading there is money that seems anxious to get going and what we're hearing anyway.
Matthew H. Birenbaum: Right now has to at least be in the fives.
Matthew H. Birenbaum: And there's some debate about what the year one underwriting is because some markets. Obviously NOI is starting to decline so that makes it a little tricky as well but.
Matthew H. Birenbaum: I would I would expect youre going to start to see some transactions get signed up here in the next two to three months at cap rates.
Matthew H. Birenbaum: Maybe somewhere between five and five five that's a pretty big range, but but again only for assets that are considered highly desirable.
Matthew H. Birenbaum: And we have reached the end of our question and answer any question and answer session I'll now turn the call back over to bench all four.
Matthew H. Birenbaum: Remarks.
Bench: Great well. Thank you everyone for joining us today, and we look forward to connecting with you over the coming months.
Matthew H. Birenbaum: That's a pretty big range, but again, only for assets that are considered highly desirable, and we have. Thank you for attending this session. I'll now turn the call back over to Ben Schall for... Great. Well, thank you everyone for joining us today and we look forward to connecting with you over the coming months. Thank you for your participation. This does conclude today's conference. You may disconnect your line.
Bench: Yes.
Speaker Change: Thank you for your participation. This concludes today's conference you may disconnect your lines at this time.
Speaker Change: Okay.
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Speaker Change: Oh.
Speaker Change: Okay.
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Speaker Change: Yeah.
Speaker Change: Okay.
Okay.