Q2 2024 AvalonBay Communities Inc Earnings Call
Operator: Good morning, ladies and gentlemen, and welcome to Avalon Bay Communities' second quarter 2024 earnings conference. At this time, all participants are on a listen-only basis. 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 conference by pressing star star 1. If your question has been answered or you wish to remove yourself, you may press star two.
Speaker Change: Good morning, ladies and gentlemen, and welcome to Avalon Bay Community's second quarter 2024 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.
Speaker Change: You may enter the question and answer queue at any time during this conference by pressing star 1.
Operator: If you're using a speakerphone, please lift the handset before asking your question. And we ask that you refrain from typing and have your cell phones turned off during the question period. Your host for today's conference is Mr. Jason Reilley, Vice President of Investor Relations. Mr. Reilley, you may begin your conference. Thank you, Paul.
Speaker Change: If your question has been answered or you wish to remove yourself from the queue, you may press star 2. If you are using a speakerphone, please lift the handset before asking your question, and we ask that you refrain from typing and having your cell phones turned off during the question and answer session.
Speaker Change: Your host for today's conference is Mr. Jason Reilley, Vice President of Investor Relations. Mr. Reilley, you may begin your conference call.
Jason Reilley: And welcome to AvalonBay Communities' second quarter 2024 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, the press release includes 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.
Jason Reilley: Thank you, Paul, and welcome to Avalon Bay Community's second quarter 2024 earnings conference call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risk and uncertainties associated with forward-looking statements, and actual results may differ materially.
Speaker Change: There's 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.
Speaker Change: As usual, the 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.
Speaker Change: The attachment is also available on our website at www.avalonbay.com forward slash earnings and we encourage you to refer to this information during the review of our operating results and financial performance.
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 Shaw, CEO and President of AvalonBay Communities, for his remarks. Thanks Jason, and thank you everyone for joining us today.
Speaker Change: And with that, I'll turn the call over to Ben Schall, CEO and President of Avalon Bay Communities for his remarks. Ben?
Benjamin Schall: I'm here with Kevin O'Shea, our Chief Financial Officer, Sean Breslin, our Chief Operating Officer, and Matt Birenbaum, our Chief Investment Officer. I will start by emphasizing a number of key themes that are top of mind and that we believe are important drivers of our continued outperformance and then turn it over to Kevin, Sean, and Matt to go deeper. As usual, we will reference our investor presentation, starting on page four, as we proceed through our prepared remarks.
Ben Schall: Thanks Jason and thank you everyone for joining us today. I'm here with Kevin O'Shea, our Chief Financial Officer, Sean Breslin, our Chief Operating Officer, and Matthew Birenbaum, our Chief Investment Officer.
Speaker Change: I will start by emphasizing a number of key themes that are top of mind and that we believe are important drivers of our continued outperformance, and then turn it to Kevin, Sean, and Matt to go deeper.
Speaker Change: As usual, we will reference our investor presentation, starting on page four, as we proceed through our prepared remarks.
Benjamin Schall: Our operating momentum continued in the second quarter, with us exceeding revenue expectations and also successfully managing operating expenses. Based on this momentum, we further raised our guidance for the year and are projecting sector-leading full-year core FFO and same-store revenue growth among our closest peers. Our operating momentum through the first half of the year has been driven by better-than-expected demand, with our core renter, the knowledge-based worker, in a relatively strong position right now.
Speaker Change: Our operating momentum continued in the second quarter, with us exceeding revenue expectations and also successfully managing operating expenses lower.
Speaker Change: Based on this momentum, we've further raised our guidance for the year and are projecting sector-leading full-year core FFO and same-store revenue growth among our closest peers.
Speaker Change: Our operating momentum through the first half of the year has been driven by better-than-expected demand, with our core renter, the knowledge-based worker, in a relatively strong position right now.
Benjamin Schall: Sectors of the economy that encompass our core customers are at effectively full employment with stable job and income prospects. We also continue to benefit from customers' strong tilt toward renting versus buying a home, given the lack of for-sale inventory and affordability.
Speaker Change: sectors of the economy that encompass our core customer are at effectively full employment with stable job and income prospects.
Speaker Change: We also continue to benefit from customers' strong tilt towards renting versus buying a home, given the lack of for-sale inventory and unaffordability.
Benjamin Schall: And finally, as expected, we continue to benefit from the low levels of new supply in our suburban coastal markets, a dynamic that should continue to benefit our portfolio versus most of the rest of the sector for another 12 to 18 months at least. Our strong internal growth is also being fueled by our continued progress with our operating model transformation. As we detailed at our Investor Day last November, our collective set of initiatives, from our investments in technology and centralization to our reimagined operating neighborhoods, are driving meaningful operating efficiencies and allowing us to drive healthy increases in ancillary revenue streams.
Speaker Change: And finally, as expected, we continue to benefit from the low levels of new supply in our suburban coastal markets, a dynamic that should continue to benefit our portfolio versus most of the rest of the sector for another 12 to 18 months at least.
Speaker Change: Our strong internal growth is also being fueled by our continued progress with our operating model transformation.
Speaker Change: As we detailed at our Investor Day last November, our collective set of initiatives, from our investments in technology and centralization to our reimagined operating neighborhoods, are driving meaningful operating efficiencies and allowing us to drive healthy increases in ancillary revenue streams.
Benjamin Schall: We're on track with these operating initiatives for 2024, with a strong runway of future earnings growth ahead of us. Importantly, we're also increasingly tapping these operating capabilities to drive outsized yield and returns on new developments and acquisitions.
Speaker Change: We're on track with these operating initiatives for 2024 with a strong runway of future earnings growth ahead of us.
Speaker Change: Importantly, we're also increasingly tapping these operating capabilities to drive outsized yields and returns on new developments and acquisitions.
Benjamin Schall: Further to that point, our platform is uniquely positioned to continue to drive incremental earnings growth and value creation from our external investment activity. Our development, underway, continues to outperform. During the quarter, we completed three new development communities and an impressive initial stabilized yield of 7.7%, as noted on slide five. We are also increasingly more optimistic about new development, adding two additional developments to this year's starts for a total just north of $1 billion. We're underwriting mid-6% yields on this set of new projects, well within our strike zone of having 100 to 150 basis points of spread relative to market cap rates and our cost of borrowing.
Speaker Change: Further to that point, our platform is uniquely positioned to continue to drive incremental earnings growth and value creation from our external investment activity.
Speaker Change: Our development is underway, continue to outperform.
Speaker Change: During the quarter, we completed three new development communities at an impressive initial stabilized yield of 7.7%, as noted on slide 5.
Speaker Change: We are also incrementally more optimistic about new development, adding two additional developments to this year's starts for a total just north of $1 billion.
Speaker Change: We're underwriting mid-6% yields on this set of new projects, well within our strike zone of having 100 to 150 basis points of spread relative to market cap rates and our cost of borrowing.
Benjamin Schall: And as the final differentiator that I'll highlight up front, we continue to actively reposition our portfolio for superior longer-term growth, heading from 70% suburban to 80% and 8% of our portfolio in our expansion regions to 25%. We believe we are now moving into a more attractive environment to execute on this repositioning, particularly with the froth in rents and cap rates off in our Sunvale expansion region. We're also tailing our portfolio and our expansion markets with lower density and lower price point assets at an attractive base.
Speaker Change: And as the final differentiator that I'll highlight up front, we continue to actively reposition our portfolio for superior, longer-term growth, heading from 70% suburban to 80% and 8% of our portfolio in our expansion regions to 25%.
Speaker Change: We believe we are now moving into a more attractive environment to execute on this repositioning, particularly with the froth in rents and cap rates off in our SunBelt expansion regions.
Speaker Change: We're also tailing our portfolio and our expansion markets with lower density and lower price point assets at an attractive basis.
Benjamin Schall: At the bottom of page 5, $500 million of the $900 million of capital raised year to date has been from asset sales at an average cap rate of 5.1%, which we are then reallocating into acquisitions in our expansion market. The remaining $400 million was our prior unsecured debt deal with an effective rate of 5.05%, including the benefits of swaps we had in place, highlighting our relative cost-to-capital advantage.
Speaker Change: At the bottom of page 5, $500 million of the $900 million of capital raised year-to-date has been from asset sales at an average cap rate of 5.1%, which we are then reallocating into acquisitions in our expansion markets.
Speaker Change: The remaining $400 million was our prior unsecured debt deal with an effective rate of 5.05%, including the benefits of swaps we had in place, highlighting our relative cost-to-capital advantage.
Benjamin Schall: Before turning it over to Kevin to discuss our updated guidance, let me touch on a couple of the details of our Q2 results. Page 6 provides the detail of our $0.09 Core FFO Outperformance in Q2, broken down by category. And please take note that two cents of this nine cents outperformance was timing-related and costs we expect to incur in the second half of the year.
Speaker Change: Before turning it to Kevin to discuss our updated guidance, let me touch on a couple of the details of our Q2 results.
Kevin: Page 6 provides the detail of our $0.09 core FFO outperformance in Q2, broken down by category. And please take note that $0.02 of this $0.09 outperformance was timing related and costs we expect to incur in the second half of the year.
Benjamin Schall: Slide seven zooms closer in on our Q2 revenue outperformance, with better than expected outcomes on lease rates, occupancy, and other rental revenue, partially offset by bad debt staying more elevated than we had hoped. Other than bad debt, our revenue momentum was strong, which is a nice segue to Kevin to discuss our updated and increased guidance for the year.
Kevin O'shea: Then, turning to slide seven, you will see our updated 2024 full-year financial and operating outlook. Based on our performance to date and our expectations for the remainder of the year, we are raising our projection for full-year core FFO per share by 11 cents to $11.02 per share. This represents a year-over-year growth rate of 3.7%, which is a healthy 100 basis points increase relative to our outlook in April and a 220-basis point increase relative to our January outlook.
Kevin: Slide 7 zooms closer in on our Q2 revenue outperformance with better than expected outcomes on lease rates, occupancy, and other rental revenue partially offset by bad debt staying more elevated than we had hoped.
Kevin: Other than bad debt, our revenue momentum was strong, which is a nice segue to Kevin to discuss our updated and increased guidance for the year. Kevin?
Kevin: Ben, turn to slide 7. You will see our updated 2024 full-year financial and operating outlook.
Kevin: Based on our performance to date and our expectations for the remainder of the year, we are raising our projection for full year core FFO per share by 11 cents.
Kevin: to $11.02 per share.
Kevin: This represents a year-over-year growth rate of 3.7% which is a healthy 100 basis point increase relative to our outlook in April and a 220 basis point increase relative to our January outlook.
Kevin O'shea: We are also favorably adjusting our expectations for four-year same-store revenue, operating expense, and NOI growth. We now expect revenue growth of 3.5% and SAMHSA or NOI growth of 2.9% in 2024, which are favorable increases of 40 basis points and 80 basis points, respectively, relative to our prior outlook in April. Lastly, our midyear reforecast includes a strong increase in new development starts of nearly $200 million to just over a billion dollars in new starts in 2024. Matt will provide additional details on this activity in a few moments.
Kevin: We're also favorably adjusting our expectations for four-year same-store revenue, operating expense, and NOI growth.
Kevin: We now expect revenue growth of 3.5% and SAMHSA NOI growth of 2.9% in 2024, which are favorable increases of 40 basis points and 80 basis points respectively, relative to our prior outlook in April.
Kevin: Lastly, our mid-year reforecast includes a strong increase in new development starts of nearly 200 million dollars to just over a billion dollars of new starts in 2024. Matt will provide additional details on this activity in a few moments.
Kevin O'shea: Slide 8 highlights the drivers of the $0.11 increase to our full-year projected core FFO per share midpoint relative to our April outlook. Encouragingly, and importantly, strong performance within the same store portfolio is driving most of the increase. In addition, we are benefiting from outperformance at our lease up community. These amounts are partially offset by other items, including minor adjustments in capital markets activity and overhead.
Matt: Slide 8 highlights the drivers of the 11-cent increase to our full-year projected core FFO per share midpoint relative to our April outlook.
Matt: Encouragingly and importantly, strong performance within the same store portfolio driving most of the increase.
Matt: In addition, we are benefiting from outperformance at our lease-up communities.
Matt: These amounts are partially offset by other items, including minor adjustments in capital market activity and overhead.
Matt: Slide 9 provides a roadmap from our second quarter core FFO per share to a third quarter projected core FFO per share midpoint.
Kevin O'shea: Slide nine provides a roadmap from our second quarter core FFO per share to our third quarter projected core FFO per share midpoint. Looking at the components of this sequential quarterly change, we expect revenue growth from the same store portfolio and NOI contributions from lease activity and other stabilized communities to drive 8 cents of sequential core FFO per share growth. These contributions will be affected by a combination of higher same-store operating expense growth in the third quarter, which we expect will increase about 6% on a year-over-year basis.
Matt: Looking at the components of this sequential quarterly change, we expect revenue growth from the same store portfolio and NOI contributions from lease activity and other stabilized communities to drive eight cents of sequential core FFO per share growth.
Matt: These contributions will be affected by a combination of higher same-store operating expense growth in the third quarter, which we expect will increase about 6% on a year-over-year basis.
Kevin O'shea: Adjustments in Capital Markets and Transaction Market Activities, which are primarily driven by recent net disposition activity in the last month, consistent with our Sell First and Buy Later transaction strategy, and by adjustments and overhead expenses. In the fourth quarter, we expect reduced same-store operating expense growth. And for full year 2024, we now expect same store operating expense growth of 4.8%, which is a 60 basis point decrease from our April outlook and an 80 basis point decrease from our January outlook.
Matt: adjustments in capital markets and transaction market activities which are primarily driven by recent net disposition activity in the last month consistent with our sell first and buy later transaction strategy and by adjustments and overhead expenses.
Matt: In the fourth quarter, we expect reduced same-store operating expense growth.
Matt: And for full year 2024, we now expect same-store operating expense growth of 4.8%, which is a 60 basis point decrease from our April outlook and an 80 basis point decrease from our January outlook.
Kevin O'shea: Based on our performance to date and a projected core FFO per share midpoint for the third quarter, the implied projected core FFO per share midpoint for the fourth quarter is $2.84 per share. Notably, this strong sequential growth in Q4 is primarily driven by our growth from our same-store portfolio and our lease-up communities during the fourth quarter. I will now turn the call over to Sean.
Matt: Based on our performance to date, and our projected core FFO per share midpoint for the third quarter, the implied projected core FFO per share midpoint for the fourth quarter is $2.84 per share.
Sean: Notably, this strong sequential growth in Q4 is primarily driven by our growth from our same-store portfolio and our lease-up communities during the fourth quarter. I will now turn the call over to Sean.
Sean Breslin: All right, thanks, Kevin. Turning to slide 10, key portfolio indicators were strong during Q2 and were also a good start in Q3. In Chart 1, turnover remains well below historical norms, in part supported by a lower level of move-outs to purchase a home. In Q2 specifically, turnover was down 600 basis points a year over year, or roughly 12%, and was lower than last year in every region. Lower turnover supported relatively stable occupancy and drove higher rent change as we moved through the quarter. Black-term effective rent change increased from 3.2% in April to 4% in June before moderating into the high 3% range during July.
Sean: All right, thanks Kevin. Turning to slide 10, key portfolio indicators were strong during Q2 and were also a good start in Q3.
Sean: In chart one, turnover remains well below historical norms, in part supported by a lower level of move-outs to purchase a home. In Q2 specifically, turnover was down 600 basis points a year over year, or roughly 12%, and was lower than last year in every region.
Sean: Lower turnover supported relatively stable occupancy and drove higher rent change as we moved through the quarter. Black-term effective rent change increased from 3.2% in April to 4% in June before moderating into the high 3% range during July.
Sean Breslin: As expected, our East Coast regions delivered the strongest rent change in Q2, at 4.2%, with our Mid-Atlantic portfolio leading the way at roughly 5.5%. Our Northern Virginia and Suburban Maryland assets continue to demonstrate strong momentum. But the District of Columbia is still lagging due to weaker demand, which is in part due to the federal government's return to office policies, and ongoing supply, which is projected to be roughly 4% of existing inventory this year before declining to approximately 2.5% in 2025.
Sean: As expected, our East Coast regions deliver the strongest rent change in Q2 at 4.2%, with our Mid-Atlantic portfolio leading the way at roughly 5.5%.
Sean: of Northern Virginia and Suburban Maryland assets continue to demonstrate strong momentum.
Sean: But the District of Columbia is still lagging due to weaker demand, which is in part due to the federal government's return to the office policies, and ongoing supply, which is projected to be roughly 4% of existing inventory this year, before declining to approximately 2.5% in 2025.
Sean Breslin: Our Boston portfolio, which represents high quality assets in predominantly supply protected suburban submarkets, saw rent change in the high fours during the quarter. New supply in Boston has declined from the low 2% range a year ago to roughly 1.5% this year and is expected to decline to just above 1% next year, with urban supply projected to be substantially higher than suburban supply. Assuming a relatively stable demand environment, the outlook for our suburban Boston portfolio remains quite positive.
Sean: Our Boston portfolio, which represents high-quality assets in predominantly supply-protected suburban submarkets, produced rent change in the high fours during the quarter.
Sean: New supply in Boston has declined from the low 2% range a year ago to roughly 1.5% this year and is expected to decline to just above 1% next year, with urban supply projected to be substantially higher than suburban supply.
Sean: Assuming a relatively static demand environment, the outlook for our suburban Boston portfolio remains quite positive.
Sean Breslin: The Metro New York, New Jersey portfolio, two-thirds of which is diversified across various suburban submarkets in Westchester, Long Island, and Central and Northern New Jersey, delivered 4% rent change during the quarter. Recently, the strongest growth has occurred across the various submarkets in New York City, northern New Jersey, and Long Island. Some of the more distant locations in central New Jersey have lagged as employers increase their in-office workday requirements in the city.
Sean: The Metro New York, New Jersey portfolio, two-thirds of which is diversified across various suburban sub-markets in Westchester, Long Island, and Central and Northern New Jersey, delivered 4% rent change during the quarter.
Sean: Recently the strongest growth has occurred across the various sub-markets in New York City, northern New Jersey, and Long Island.
Sean: Some of the more distant locations in central New Jersey have lagged as employers increase their in-office workday requirements in the city.
Sean Breslin: The West Coast established regions produce rent change in the 3% range. Our Seattle portfolio, which is primarily located in the east side and north end submarkets, led the way with 6% rent change during the quarter. While there are some pockets of new supply in select suburban submarkets, most notably Redmond, most of the new inventory is concentrated in urban submarkets and is not competitive with our portfolio. On the demand front, major employers like Microsoft and Amazon requiring more in-person work have supported the increased demand we've experienced throughout the first half of the year. Northern and Southern California lag Seattle with rain change in the mid 2% range.
Sean: The West Coast established regions produce rent change in the 3% range. Our Seattle portfolio, which is primarily located in east side and north end submarkets, led the way with 6% rent change during the quarter.
Sean: While there are some pockets of new supply in select suburban submarkets, most notably Redmond, most of the new inventory is concentrated in urban submarkets and is not competitive with our portfolio.
Sean: On the demand front, major employers like Microsoft and Amazon requiring more in-person work have supported the increased demand we've experienced throughout the first half of the year.
Speaker Change: Northern and Southern California lag Seattle with rain change in the mid 2% range.
Sean Breslin: In Northern California, we had better momentum in San Francisco and San Jose with 3.2% and 4% rent change, respectively, during Q2. However, the East Bay remained soft with a rent change of 50 basis points during the quarter. Given new supplies projected to be below 1% of stock across the major markets in Northern California for this year and next year, trends could continue to improve in the near future to the extent we realize a modestly stronger level of demand. Moving down to Southern California, Orange County produced the strongest rent change at 4.2%, followed by San Diego roughly 3%, and LA in the 2% range.
Speaker Change: In Northern California, we had better momentum in San Francisco and San Jose, with 3.2% and 4% rent change respectively during Q2. However, the East Bay remained soft with rent change of 50 basis points during the quarter.
Speaker Change: Given new supplies projected to be below 1% of stock across the major markets in Northern California for this year and next year, trends could continue to improve in the near future to the extent we realize a modestly stronger level of demand.
Speaker Change: Moving down to Southern California, Orange County produced the strongest rent change at 4.2% followed by San Diego roughly 3% and LA in the 2% range.
Sean Breslin: Orange County and San Diego have been healthy markets here to date, but performance across the various submarkets in L.A. has been choppy and highly correlated with the volume of inventory returning to the submarkets from non-paying residents. As it relates to bad debt, which is depicted in chart 4 on slide 10, while we're encouraged with the year-to-day trend and underlying bad debt across our same-store portfolio, results were We're still expecting bad debt to average roughly 1.7% for the full year 2024, at approximately a 60 basis point improvement from 2023.
Speaker Change: Orange County and San Diego have been healthy markets year to date but performance across the various sub markets in LA has been choppy and highly correlated with the volume of inventory returning to the sub market from non-paying residents.
Speaker Change: As it relates to bad debt, which is depicted in chart 4 on slide 10, while we're encouraged with the year-to-day trend and underlying bad debt across our same-store portfolio, results were choppy during the second quarter.
Speaker Change: We're still expecting bad debt to average roughly 1.7% for the full year 2024, at approximately 60 basis point improvement from 2023.
Sean Breslin: As we've stated previously, pre-pandemic bad debt for our portfolio is 50 to 70 basis points. So to the extent we reach that level, we'll realize an incremental $25 million in revenue or more over the next several quarters. Transitioning to slide 11, we now expect same-store revenue growth of 3.5% for 2024, an increase of 40 basis points from our most recent outlook. The increased outlook is primarily driven by stronger lease rates, lower turnover, and stronger occupancy in the first half of the year allowed us to achieve higher rental rates than originally anticipated, a trend we expect to continue.
Speaker Change: As we've stated previously, pre-pandemic bad debt for our portfolio was 50 to 70 basis points. So to the extent we reach that level, we'll realize an incremental of $25 million in revenue or more over the next several quarters.
Speaker Change: Transitioning to slide 11 to address our updated revenue outlook for the year, we now expect same-store revenue growth of 3.5% for 2024, an increase of 40 basis points from our most recent outlook.
Speaker Change: The increased outlook is primarily driven by stronger lease rates, as lower turnover and stronger occupancy in the first half of the year allowed us to achieve higher rental rates than originally anticipated, a trend we expect to continue.
Sean Breslin: We now expect like-term effective rent change in the 3% range for the full year 2024, up roughly 100 basis points from the 2% level we expected at the beginning of the year. We realize 3% rent change in the first half of the year and expect to produce similar performance in the second half.
Speaker Change: We now expect like-term effective rent change in the three percent range for the full year 2024, up roughly a hundred basis points from the 2% level we expected at the beginning of the year.
Speaker Change: We realize 3% rain change in the first half of the year and expect to produce similar performance in the second half.
Sean Breslin: We've seen rent change begin to moderate to start the third quarter and, consistent with seasonal norms, expected to decelerate through the back half of the year. They expect renewals in the mid 4% range for the balance of the year. So new move-ins average roughly one and a half percent.
Speaker Change: We've seen rent change begin to moderate to start the third quarter and, consistent with seasonal norms, expect it to decelerate through the back half of the year. We expect renewals in the mid-4% range for the balance of the year, while new move-ins average roughly 1.5%.
Sean Breslin: The near-term outlook for lease renewals remains healthy, with offers in the low 6% range for August and September. Moving to slide 12, you can see where we're projecting stronger revenue performance relative to our prior outlook. In our established regions, we're expecting substantially stronger growth in New England, the Mid-Atlantic, and the Pacific Northwest. We're expecting modestly better growth in New York, New Jersey, and almost no change in Northern and Southern California. In our expansion regions, Denver and Southeast Florida are expected to perform slightly better than we originally anticipated, but our other expansion regions of Dallas and Charlotte are expected to be weaker, primarily as a result of the continued challenging levels of new supply in those markets.
Speaker Change: The near-term outlook for lease renewals remains healthy, with offers in the low 6% range for August and September.
Speaker Change: Moving to slide 12, you can see where we're projecting stronger revenue performance relative to our prior outlook. In our established regions, we're expecting substantially stronger growth in New England, the Mid-Atlantic, and Pacific Northwest.
Speaker Change: We're expecting modestly better growth in New York, New Jersey, and almost no change in Northern and Southern California.
Speaker Change: In our expansion region, Denver and Southeast Florida are expected to perform slightly better than we originally anticipated, but our other expansion regions of Dallas and Charlotte are expected to be weaker, primarily as a result of the continued challenging levels of new supply in those markets.
Sean Breslin: And then finishing on slide 13, we're on track to realize roughly 10 million in incremental NOI from our operating initiatives in 2024. And you can see those results in our same store portfolio in two areas. First, the expected contribution from other rental revenue, which is projected to increase by 14% year over year. And second, highly constrained payroll costs, which have declined here today and are expected to grow at roughly 1% for 2024, which is well below the average merit increase of approximately 4%, and it's related to reproduction and the number of on-site physicians. These reductions relate to the enhanced efficiency of our teams, which is supported by our digital efforts and enabled by our new labor strategy.
Speaker Change: And then finishing on slide 13, we're on track to realize roughly 10 million of incremental NOI from our operating initiatives in 2024.
Speaker Change: You can see those results in our same store portfolio in two areas. First, the expected contribution from other rental revenue, which is projected to increase by 14% year-over-year.
Speaker Change: And second, highly constrained payroll costs, which have declined year-to-date and are expected to grow at roughly 1% for 2024, which is well below the average merit increase of approximately 4%, and is related to a reduction in the number of on-site positions.
Speaker Change: These reductions relate to the enhanced efficiency of our teams, which is supported by our digital efforts and enabled by our new labor strategy.
Sean Breslin: From a broader perspective, we're on track with the Horizon 1 and 2 financial objectives we communicated during our Investor Day last year, which reflect generating an incremental $80 million in ROI from our portfolio. In one year, in 2024, we expect to have achieved roughly $37 million of that $80 million, and look forward to producing the balance of it over the next few years. We'll continue to keep you informed about our efforts and achievements as we innovate further in the future. Now, I'll turn it over to Matt to address recent lease-up performance, development starts, and capital recycling activities. All right, great.
Speaker Change: From a broader perspective, we're on track with the Horizon 1 and 2 financial objectives we communicated during our Investor Day last year, which reflect generating an incremental $80 million in ROI from our portfolio.
Speaker Change: A year in 2024, we expect to have achieved roughly $37 million of that $80 million and look forward to producing the balance of it over the next few years. We'll continue to keep you informed about our efforts and achievements as we innovate further in the future.
Matt: Now I'll turn it over to Matt to address recent lease up performance, development starts, and capital recycling activities. Matt? All right, great. Thanks, Sean. Turning to our development communities, you can see slide 14 details the continued impressive results being generated by our lease ups.
Matt Birenbaum: Thanks, Sean. Turning to our development communities, you can see slide 14 details the continued impressive results being generated by our lease-up. The six development communities that had active leasing in the second quarter are delivering rents of $320 per month, or 11% above our initial underwriting, which is translating into a 40 basis points increase in yield. And this performance is being supported by strong leasing velocity, with these assets averaging 37 net leases per month, which was an all-time company record, driving our increased guidance for lease-up analyzed for the year by roughly $4 million.
Matt: The six development communities that had active leasing in the second quarter are delivering rents $320 per month or 11% above our initial underwriting which is translating into a 40 basis points increase in yield
Matt: And this performance is being supported by strong leasing velocity, with these assets averaging 37 net leases per month, which was an all-time company record, driving our increased guidance for lease-up NOI for the year by roughly $4 million.
Matt Birenbaum: On the strength of these results and with the transaction market providing more insight into current asset values, we're also increasing our projected development start volume for the year, as shown on slide 50. We now expect to break ground on nine new communities this year for a total projected capital cost of $1.05 billion, with the vast majority of these starts in either expansion regions or the Northeast and almost exclusively in suburban submarkets. Three of these starts occurred in the second quarter, with most of the others expected in Q3.
Matt: On the strength of these results, and with the transaction market providing more insight into current asset values, we're also increasing our projected development start volume for the year, as shown on slide 15.
Matt: We now expect to break ground on nine new communities this year for a total projected capital cost of $1.05 billion, with the vast majority of these starts in either expansion regions or the Northeast, and almost exclusively in suburban submarkets.
Matt: Three of these starts occurred in the second quarter, with most of the others expected in Q3. Based on today's rents, operating expenses, and construction costs, these developments are underwriting to a projected yield of 6.4%, generating our target spread of 100 to 150 basis points over current cap rates.
Matt Birenbaum: Based on today's rents, operating expenses, and construction costs, these developments are underwriting to a projected yield of 6.4%, generating our target spread of 100 to 150 basis points over current cap rates. And we control a total development rights pipeline of roughly $4.5 billion, providing plenty of opportunities for future profitable growth in years to come. Turning to slide 16, after several quarters of quiet activity, we have also been active in the transaction market recently, closing on five dispositions since our last call for aggregate sales proceeds of $515 million. All of these dispositions were in our established coastal regions, and they priced at a weighted average cap rate of 5.1%, reflecting an average price per home of $475,000.
Matt: And we control a total development rights pipeline of roughly $4.5 billion, providing plenty of opportunities for future profitable growth in the years to come.
Matt: Turning to slide 16, after several quarters, which were quiet, we have also been active in the transaction market recently, closing on five dispositions since our last call for aggregate sales proceeds of $515 million.
Matt: All of these dispositions were in our established coastal regions and they priced at a weighted average cap rate of 5.1%, reflecting an average price per home of $475,000.
Matt Birenbaum: Three of the five sales were also in urban submarkets, where we are seeing better investor interest after several years when these locations were heavily out of favor with institutional capital. We reinvested a bit less than half of this capital so far into three acquisitions in our expansion regions at an average price per home of $260,000, as we are starting to find attractive opportunities to buy low replacement costs in some markets and assets that we like.
Matt: Three of the five sales were also in urban submarkets, where we are seeing better investor interest after several years where these locations were heavily out of favor with institutional capital.
Matt: We have reinvested a bit less than half of this capital so far into three acquisitions in our expansion regions at an average price per home of $260,000 as we are starting to find attractive opportunities to buy the low replacement costs in some markets and assets that we like.
Matt Birenbaum: Our asset trading activity continues to move us closer to our long-term portfolio allocation goals of having 25% of our portfolio in expansion regions and 80% in suburban submarkets. We will look to redeploy more of those proceeds before the end of the year, as well as bring several additional assets to market as we continue to focus on optimizing our portfolio as we grow.
Matt: Our asset trading activity continues to move us closer to our long-term portfolio allocation goals.
Ben Schall: of having 25% of our portfolio in expansion regions and 80% in suburban sub-markets. We will look to redeploy more of those proceeds before the end of the year, as well as bring several additional assets to market as we continue to focus on optimizing our portfolio as we grow. And with that, I'll turn it back to Ben.
Benjamin Schall: Thanks, Matt. I'll wrap up on slide 17 with the highlights from our recent ESG report. Our efforts on sustainability are led by Katie Rothenberg and her team, but it is a full commitment across the entire organization that enables us to continue to make meaningful progress on these collective initiatives.
Ben Schall: Thanks, Matt. I'll wrap up on slide 17 with the highlights from our recent ESG report. Our efforts on sustainability are led by Katie Rothenberg and her team, but it is a full commitment across the entire organization that enables us to continue to make meaningful progress on these collective initiatives.
Benjamin Schall: From reducing our operating costs and environmental impact to making AVB more inclusive and diverse and to all of the time invested via volunteering by our local teams, a huge thanks to all AvalonBay associates. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone. The confirmation tone will indicate your line is busy.
Ben Schall: from reducing our operating costs and environmental impact to making AVB more inclusive and diverse and to all of the time invested via volunteering by our local teams a huge thanks to all Avalon Bay associates. And with that, I'll turn the call to the operator to facilitate questions.
Speaker Change: Thank you. We will now be conducting a question and answer session.
Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.
Benjamin Schall: You may press star two if you'd like to remove your question from the list. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start button. One moment, please, while we poll for questions.
Operator: Thank you. Our first question is from Eric Wolfe with Citi. Please proceed with your question. Hey, thanks.
Speaker Change: Thank you. Our first question is from Eric Wolf with Citi. Please proceed with your question.
Eric Wolfe: You mentioned in your remarks the strong growth you're seeing in the fourth quarter specifically. I was just wondering if that's a good run rate for us to think about as you go into 2025, or there's something in that number that wouldn't maybe carry over, like lower seasonal costs. You know, just because you brought up the remarks, I don't know if you were trying to signal something about your earnings growth going forward. Yeah, Eric, this is Kevin.
Eric Wolf: Hey, thanks. You mentioned in your remarks the strong growth you're seeing in the fourth quarter specifically. I was just wondering if that's a good run rate for us to think about as you go into 2025 or if there's something in that number that wouldn't maybe carry over like lower seasonal costs.
Speaker Change: Just because you brought up the remarks, I don't know if you were trying to signal something about your earnings growth going forward.
Kevin O'shea: I'll take a crack at this one. Others may want to jump in. We weren't trying to signal anything about 25% in terms of our guidance yet. It's a little bit early at this point in the year to do that.
Speaker Change: Yeah, Eric, this is Kevin. I'll take a crack at this one. Others may want to jump in. We weren't trying to signal anything about 25 in terms of our guidance yet. It's a little bit early at this point in the year.
Speaker Change: to do that, rather we're simply noting that the fourth quarter would be expected to have a sequential increase in earnings to get from that third quarter midpoint core FFO per share guidance of $2.71.
Speaker Change: to the implied midpoint in the fourth quarter of $2.84. That $0.13 pickup is primarily driven by...
Kevin O'shea: Rather, we were simply noting that the fourth quarter would be expected to have a sequential increase in earnings to get from that third quarter midpoint core FFO per share guidance of $2.71 to the implied midpoint in the fourth quarter of $2.84. In the same store portfolio, much of it is a seasonal decline in operating expenses, but some of it is a sequential continued increase in same store revenue. The Uncanny Countertops. All rights reserved.
Speaker Change: sequential growth from 3Q to 4Q in the same store portfolio. Much of it is a seasonal decline in operating expenses, but some of it is a sequential continued increase in same store revenue.
Unknown Executive: Uncanny Countertops is a production of Uncanny Countertops. Transcripts are provided by Transcription Outsourcing, LLC. That's helpful. And then in the presentation, you had some slides about the sort of unevenness in Baghdad. Can you talk about what you're seeing there, why you're seeing it? What you're seeing sort of suggests that it might be harder to eventually get back to that normal long-term average that you typically run into. Yeah, Eric and Sean.
Speaker Change: potential favorable trends that Sean alluded to in his remarks as well as some other adjustments.
Speaker Change: So that was really all we're trying to signal and roadmap to investors is the growth from 3Q to 4Q and the components and the resources that being kind of coming primarily from same store as well as continued growth from our lease up portfolio as well.
Speaker Change: Got it. That's helpful. And then in the presentation you had some slide about the sort of unevenness in bad data. Can you talk about, you know, what you're seeing there, why you're seeing it, and if what you're seeing sort of suggests that it might be harder to eventually get back to that normal long-term average that you typically run at?
Sean Breslin: Yeah, I mean, overall, what I would say is, if you stand back and look at it, relative to what we've seen in the last couple of years, things are absolutely trending in the right direction, right? So, you know, it was 2.3% last year, and we're looking in terms of underlying bad debt, and we're expecting that to decline down into the roughly 1.7% range for 2024. So it's moving in the right direction. Each month, each quarter can be a little bit bumpy based on underlying activity. But I think we're trending in the right direction.
Speaker Change: Yeah, Eric and Sean. Yeah, I mean, overall, what I'd say is you stand back and look at it, you know, relative to
Speaker Change: What we've seen in the last couple of years, things are absolutely trending in the right direction, right? So, you know, it's 2.3% last year in terms of underlying bad debt.
Speaker Change: Yeah, we're expecting that to decline down into the roughly 1.7% range.
Speaker Change: for 2024. So it's moving in the right direction. Each month, each quarter, it can be a little bit bumpy based on underlying activity.
Sean Breslin: We've not provided a precise forecast as to when we would expect it to get back to normal levels, just based on the underlying activity that has to manifest itself in that actually happening, which relates to court cases and various things like that. So we'll certainly provide our best insight as we turn the quarter towards 2025. But do you feel good about the overall change from 2023 to 2024 at this point in time?
Speaker Change: But I think we're turning in the right direction. We've not provided a precise forecast as to when we would expect it to get back to normal levels, just based on the underlying activity that has to manifest itself in that actually happening.
Speaker Change: which relates to court cases and various things like that. So, we'll certainly provide our best insight as we turn the quarter towards 2025, but you'll feel good about the overall change from 23 to 24 at this point in time.
Speaker Change: Got it. Thank you.
Austin Wurschmidt: Our next question is from Austin Wurschmidt with KeyBank Capital Markets. Please proceed with your question. Yeah, Austin. It's Sean.
Speaker Change: Thank you. Our next question is from Austin Wershman with KeyBank Capital Markets. Please proceed with your question.
Austin Wershman: Good afternoon. Is it fair to say that based on the some of the lease rate growth data that you provided for what you expect for the back half the year kind of in that three percentage range that the earn-in heading in the next year should be around that mid 1% range maybe maybe a little bit below that heading into 2025?
Sean Breslin: Given where we sit here with kind of half a year left to go, it wouldn't be appropriate to make comments as it relates to what we think the earnings are going to be in January. But, you know, you can sort of do some math based on the rent change last year versus this year and try to reach your own conclusion on that. That's fair. And then, so just based on maybe the projected acceleration in same store revenue growth from 3Q to 4Q, you mentioned that picks up a bit, I think you highlighted in the presentation, but I know you don't want to provide. 5.
Sean: Yeah, Austin, it's Sean. Given where we sit here with kind of half a year left to go, it wouldn't be appropriate to make comments as it relates to what we think the earnings going to be in January. But, you know, you can sort of do some math based on rent change last year versus this year and try to reach your own conclusion on that.
Austin Wershman: That's fair. And then, so just based on maybe the projected acceleration in same-store revenue growth from 3Q to 4Q, you mentioned that picks up a bit, I think you highlighted in the presentation.
Speaker Change: I know you don't want to provide too much on 25, but is that directionally what you'd expect then heading into next year, just given the growth you're getting in the back half of the year on lease rate growth, what you're seeing from a supply perspective?
Speaker Change: or is there something specific in the fourth quarter that's causing that to reaccelerate?
Austin Wurschmidt: Yeah, I think for the most part, Austin, if you think back to Q4 of last year, we have a little bit softer comp when we get to Q4 of this year, and that is, in part, producing the expectation for slightly better revenue growth in Q4, as well as the continued activity in a couple areas. One, from an operating initiative standpoint, continue to drive other rental revenue. We continue to push that and see that increasing sequentially as we move quarter to quarter.
Speaker Change: Yeah, I think for the most part, Austin, if you think back to Q4 of last year, we have a little bit softer comps.
Speaker Change: when we get to Q4 of this year.
Speaker Change: and that is in part producing the expectation for slightly better revenue growth.
Speaker Change: in Q4, as well as the continued activity in a couple areas. One, from an operating initiative standpoint, continue to drive other rental revenue. We continue to push that and see that increasing sequentially as we move quarter to quarter.
Austin Wurschmidt: And then, consistent with my last comment, we do expect bad debt in the second half of the year, potentially by Q4, to be a little bit better as compared to where we've been. So there are a few things that are contributing to it, but I would say the softer comp from last year is really the primary reason.
Speaker Change: And then consistent with my last comment, we do expect bad debt in the second half of the year, potentially by Q4 to be a little bit better as compared to where we've been. So there's a few things that are contributing to it, but I would say the softer comp from last year is really the primary reason.
Speaker Change: Thanks for the time.
John Kim: Thank you. Our next question is from John Kim with BMO Capital Markets. Please proceed with your question. Thank you. Kevin, you mentioned that you expect same store expenses to, [inaudible] Sure. John, this is Kevin.
Speaker Change: Thank you. Our next question is from John Kim with BMO Capital Markets. Please proceed with your question.
John Kim: Thank you. Kevin, you mentioned that you expect the same store expense to rise, I think, in the third quarter to 6% before monitoring back down again in the fourth quarter. Can you just explain that dynamic?
Kevin O'shea: Sean may want to jump in here a little bit. Essentially, what you've got going on in the second and third quarter is a seasonal uptick in the number of the OPEX categories, particularly redecorating utilities and marketing expenses, as well as a timing-related increase in our routine expenses. So what you're seeing, when you go from the second quarter to the third quarter, is essentially a nine-cent sequential increase in OPEX in the same-store portfolio.
John Kim: Sure, Sean may want to jump in here a little bit, you know, essentially what you've got going on in the second quarter, third quarter
Sean: is a seasonal uptick in a number of the OPEX categories.
Speaker Change: particularly, you know, redecorating utilities and marketing expenses.
Sean: as well as a timing-related increase in our routine expenses. So what you're seeing, you're going from the second quarter to the third quarter, essentially a $0.09 sequential increase in OPEX in the same store portfolio. And then the third, fourth quarter, you see that reversal seasonally. In the fourth quarter, there's going to be sort of a $0.07 sequential decline from the third quarter to the fourth quarter in OPEX.
Kevin O'shea: And then the third and fourth quarter, you see that reversal seasonalally in the fourth quarter, where roughly there's going to be sort of a seven-cent sequential decline from the third quarter to the fourth quarter in OPEX. So that's a little bit of the background on that. And then I wanted to ask about Bill Torrent. It looks like you have a new project in this category in Dallas. I was wondering how...
Speaker Change: So that's a little bit of the background on that one.
Speaker Change: And then I wanted to ask about Bill Torrent. It looks like you have a new project in this category in Dallas.
John Kim: Thank you. How do you look at this opportunity going forward and how you anticipate margins in the bill-to-rent format versus multi-housing? John, I'll start with a couple of comments and appreciate you calling out that new project in Plano. You know, the BTR space, when people talk about BTR, a significant portion of it is townhome development, and that's a product that we're very comfortable with, one that we've developed historically, one which we own, operate, and develop today.
Speaker Change: I was wondering how you look at this opportunity going forward and how you anticipate margins in the built-to-rent format versus multifamily.
Speaker Change: John, I'll start with a couple of comments, and I appreciate you calling out that new project in Plano.
Speaker Change: Yeah, the BTR space, when people talk about BTR, a significant portion of it is townhome development. And that's a product that we're very comfortable with, one we've developed historically, one which we own, operate, and develop today.
Benjamin Schall: So it's a product that we like the prospects of going forward. You think about demographics, population shifts, and you think about what's happening in the for-sale market. And so we've been active in the townhome space, I'd say increasingly active over the last couple of years, and there are some places where we're building townhomes in conjunction with our apartment projects. We actually have some townhome projects that we've built that are full townhome projects.
Speaker Change: So it's a product that we like the prospects of going forward. You think about demographics, population shifts, you think about what's happening in the forest sale market. And so we've been active in the townhome space, I'd say increasingly active over the last couple of years. And it's some places where we're building townhomes in conjunction with our apartment projects.
Benjamin Schall: So this, as we go forward, you know, the Plano project sort of fits that type of growth, and, you know, our growth in BTR growth in townhomes, you should expect to come through our similar channels of how we've been growing, which is some through our own development, some through funding of other developers, which is what this Plano project was, as well as some potential acquisitions. But as far as yield and operating margins are concerned, do you find them similar to multi-family? Yeah, hey, John, it's Matt.
Speaker Change: We actually have some townhome projects that we built that are full townhome projects.
Speaker Change: So this, as we go forward, you know, the Plano project sort of fits that type of growth and, you know, our growth in BTR, growth in townhome, you should expect to come through our similar channels of how we've been growing, which is
Speaker Change: Some through our own development, some through funding of other developers, which is what this Plano project was, as well as some potential acquisitions.
Speaker Change: But as far as yield and operating margins, do you find it similar to multi-family?
Matt Birenbaum: Yes, very similar. I mean, again, these are communities where there are 150 homes in one location, you know, with a small amenity package, including a club house and a pool, and the operating margins are very comparable to multi-family communities that we would have in that region. Thank you. Our next question is from Jamie Feldman with Wells Fargo. Please proceed with your question. Great, thank you. So I appreciate the color or the thoughts on the back half of the year in terms of your expected rent change. Who knows? Metoor
Speaker Change: Yeah, hey John, it's Matt. Yes, very similar. I mean, again, these are communities where it's 150 homes in one location, you know, with a small amenity package including a cub house and a pool, and the operating margins are very comparable to multi-family communities that we would have in that region.
John Kim: Thank you.
Speaker Change: Thank you. Our next question is from Jamie Feldman with Wells Fargo. Please proceed with your question.
Jamie Feldman: Great, thank you. So I appreciate the color or the thoughts on the back half of the year in terms of your expected rent change.
Jamie Feldman: New. One and a half, whether it's your major regions in the Northeast and the West or just kind of coastal versus sunbelt, how you think that plays out, and then, you know, what do you feel about visibility this time of year versus this time last year? You know, clearly we're heading into the slower season, but what feels different to you? Yeah, Jimmy and Sean. Why don't I take your second question first?
Speaker Change: Reynolds mid-tour or new one-and-a-half. Can you talk more about by region whether it's you know your major regions in the Northeast and the West or just kind of coastal versus Sunbelt how you think that plays out and then
Speaker Change: How do you feel about visibility this time this year versus this time last year? Clearly, we're heading into the slower season, but what feels different to you?
Jamie Feldman: Just from a macro perspective, I think we feel generally pretty good about the outlook that we've provided, and I would say, just relative to last year, there are different things happening in terms of the general outlook, but I'd say overall, each time we present our forecast, we present what we think is our realistic case for that forecast, and the environment sort of dictates that. So I wouldn't say we're more or less confident this year than last year, per se. There are a lot of things that are happening out there that you could point to that create concerns, or you could create optimism. We try not to get caught up in that.
Speaker Change: Yeah, Jimmy, it's Sean. Why don't I take your second question first just from a macro perspective.
Sean: I think we feel generally pretty good about the outlook that we've provided.
Speaker Change: And I would say, just relative to last year, I mean, different things happening in terms of the general outlook.
Speaker Change: I'd say overall, you know, each time we present our forecast, you know, we present what we think is our realistic case for that forecast.
Sean Breslin: As it relates to the outlook for the markets, I try to keep it at a high level as opposed to going through all the regions, but we do expect continued outperformance across our established East Coast regions in the second half of the year. Relative to the Sun Belt and relative to the West Coast regions, generally speaking, with one exception potentially being Seattle, which surprised I think most of us to the upside in the first half of the year and expected solid growth in Seattle in the back half of the year. So without going through every region, I would think of it as East established, West established, followed by the expansion regions in terms of this latter performance.
Speaker Change: and the environment sort of dictates that. So I wouldn't say we're, you know, more or less confident this year than last year per se. There's a lot of things that are happening out there that you could point to that create concerns or you could create, you know, optimism. We try not to get caught up in that.
Speaker Change: As it relates to the outlook for the markets, I'll try to keep it at a high level as opposed to going through all the regions, but we do expect continued outperformance across our established East Coast regions in the second half of the year.
Speaker Change: relative to the Sun Belt and relative to the West Coast regions generally speaking with one exception potentially be in Seattle which has surprised I think most of us to the upside in the first half of the year.
Speaker Change: and expect good, solid growth in Seattle in the back half of the year. So, without going through every region, I would think of it as East established, West established, followed by the expansion regions in terms of the latter performance.
Jamie Feldman: Okay, thank you. And then, you know, thinking about the Dallas or the Plano asset, just how are you thinking about putting capital to work in development? Infusions into developer balance sheets versus on your own balance sheet. Is there something changing, you know, given rates are on their way down? Seems like the cycles, people are getting more positive on what late 20 or late 25, 26 can look like.
Speaker Change: Okay, thank you.
Speaker Change: And then, you know, thinking about the Dallas or the Plano asset, just how are you thinking about putting capital to work in development through?
Speaker Change: infusions into developer balance sheets versus on your own balance sheet.
Speaker Change: Is there something changing, you know, given rates are on their way down, it seems like the cycles, people are getting, you know, more positive on what late 20, or late 25, 26 can look like. Do you think you pair back maybe some of these, you know, more capital infusion type investments versus just doing everything on balance sheet or keep the same mix?
Jamie Feldman: Do you think you will pair back maybe some of these, you know, more capital infusion type investments versus just doing everything on the balance sheet or keep the same mix? Jamie, what I would call out as different going forward is we have, to a certain degree, institutionalized our programs of providing capital to third-party developers, and we think about that as additive to the external investment activity that we make through our own teams. As we look out over the next number of months, a number of quarters, you can hear from us that we are incrementally more positive about and around the prospects for development, and we're excited for the DFP program because it potentially allows us to accelerate external investment activity, call it earlier in that development cycle.
Speaker Change: What I would call out as different going forward is we have
Speaker Change: to a certain degree institutionalized our programs of providing capital to third-party developers. And we think about that as additive to the external investment activity that we make through our own teams.
Speaker Change: As we look out over the next number of months, a number of quarters, you can hear from us we are incrementally more positive in and around the prospects and development. And we're excited for the DFP program because it potentially allows us to accelerate external investment activity.
Jamie Feldman: Just one thing I'd add there, Jamie, just to be clear, whether we're doing it as an AvalonBay development or a DSP, they're both on the balance sheet, we're both match funding them, and they're being reported as consolidated communities. The only difference is that in one case, our development and construction teams are actually executing on it, and in the other case, there's a third-party developer, but from a capitalization point of view, they're the same.
Speaker Change: call it earlier in that development cycle.
Speaker Change: Just one thing I'd add there, Jamie, just to be clear, whether we're doing it as an Avalon Bay development or a DFP, they're both on balance sheet, we're both match funding them, and they're being reported as consolidated communities.
Jamie Feldman: The only difference is that, in one case, our development and construction teams are actually executing on it, and in the other case, there's a third-party developer. But from a capitalization point of view, they're the same.
Jamie Feldman: Okay. All right. Thank you very much.
Jamie Feldman: Okay. All right. Thank you very much.
Adam Kramer: Thank you. Our next question is from Adam Kramer with Morgan Stanley. Please proceed with your question. Okay.
Speaker Change: Thank you. Our next question is from Adam Kramer with Morgan Stanley. Please proceed with your question.
Adam Kramer: Thanks for the question. Just wondering where you guys are going out with renewals for August, September, and maybe even October, if you have that. Again, Adam and Sean, we mentioned that for August and September, renewals went out below sixes, which is the visibility that we have today. Got it.
Adam Kramer: Great. Thanks for the question. I was wondering where you guys are going out with renewals for August, September, and maybe even October, if you have that.
Speaker Change: Yeah, Adam and Sean, we'd mentioned that for August and September, renewals went out below sixes, which is the visibility that we have today.
Sean Breslin: Helpful. And on a kind of a backwards looking basis, just thinking about the kind of the cadence of particularly new and blended lease growth in May, June, and July. Looks like a nice acceleration to June and then a little bit of a decel into July. Just wondering if you could kind of comment on kind of what happened, right? The seasonal pattern, was this something different, was this a pull forward of seasonality? Just be interested to kind of hear on a backwards-looking basis what happened in the last few months. Yeah, Adam. It's Sean again.
Speaker Change: Got it. Helpful.
Speaker Change: Kind of on a backwards-looking basis, just thinking about kind of the cadence of a particularly new and blended lease growth in May, June, and July.
Speaker Change: Looks like a nice acceleration to June and then a little bit of a decel into July. Just wondering if you could kind of comment on kind of what happened, right? Was this kind of the typical seasonal pattern? Was this something different? Was this a pull forward of seasonality? Just interested to kind of hear on a backwards looking basis what happened the last few months.
Sean Breslin: I mean, I think the way it lays out is pretty consistent with historical seasonal patterns, where you think about where you start the year in January, asking rents typically rise through kind of early July. Depending on the market, I'm kind of just picking the average here, you know, 6%, 7%, then you see a decelerate in the back half of the year, also consistent with seasonal norms. And so the acceleration that we saw was a combination of two things.
Speaker Change: Yeah, Adam, it's Sean again. I mean, I think the...
Sean: The way it lays out is pretty consistent with historical seasonal patterns where you think about where you start the year in January, asking rents typically rise up through kind of early July.
Speaker Change: Depending on the market, I'm kind of just picking the average here, you know, six, seven percent, then you see a decelerate in the back half of the year, also consistent with seasonal norms.
Sean Breslin: One, the seasonal approach, the seasonal factors. Second, it's just our overall revenue management approach. And what we saw early in the first quarter was better than anticipated occupancy, lower turnover; we hit the gas pretty hard as it related to asking rents. You saw that manifest itself in both renewals and new move-ins as we move through Q2. But as you see the seasonal peak in rents, and you try to make sure that you're maintaining stable occupancy, you start to see it begin to decelerate in the July-August timeframe for the balance of the year.
Speaker Change: And so the acceleration that we saw was a combination of two things. One, the seasonal approach, the seasonal factors. Second, it's just our overall revenue management approach.
Speaker Change: And what we saw early in the first quarter was better than anticipated occupancy, lower turnover. We hit the gas pretty hard as it related to asking rents. You saw that manifest itself in both renewal and new move-ins as we move through Q2.
Speaker Change: But as you see, the seasonal peak in rounds.
Speaker Change: and you're trying to make sure that you're maintaining stable occupancy, you start to see it begin to decelerate July, August timeframe to the balance of the year.
Sean Breslin: And so as you look at what happened, for example, from June to July, some markets were up a little bit, some markets were down a little bit. Overall, we've been down slightly, 30 basis points from June to July, but it's not material in the whole scheme of things. But we would expect to see continued seasonal deceleration as we move through August all the way through the balance of the year. Thanks for your time.
Speaker Change: And so if you look at what happened, for example, from June to July...
Speaker Change: Some markets were up a little bit, some markets were down a little bit. Overall, we've met down...
Speaker Change: [inaudible]
Speaker Change: Great. Thanks for the time.
John Pawlowski: Thank you. Our next question is from John Pawlowski with Green Street. Please proceed with your question. Thanks, Matt, a question for you on getting a sense for how the economics of the development rights pipeline compared to the starts this year. So he went and started with an additional billion dollars a start.
Speaker Change: Thank you. Our next question is from John Pawlowski with Green Street. Please proceed with your question.
John Pawlowski: Thanks. Matt, a question for you on just to get a sense for how the economics of the development rights pipeline compared to the starts this year. So if you went and started as an additional billion dollars of starts, how would you yield compared to the 6.4 percent you're expecting for 2024 starts?
John Pawlowski: How much would you yield compared to the 6.4% you're expecting for 2020? Yeah, John, it really depends on the geography. So, you know, the next billion dollars versus starts, what are those yields going to look like? It does depend on where they are.
Matt Birenbaum: So, you know, we're finding yield, basically, from here in the mid-Atlantic north to Boston, those suburban kind of medium density to lower density products, mid to high sixes, you know, to even pushing seven or even a little bit north of seven in some of our Jersey starts. What we're seeing in the expansion regions is yields kind of around six, low sixes. But again, cap rates are lower there as well, so we still have that spread.
Matt: Hey John, it really is depending on the geography.
Matt: You know the next billion dollars versus Starks. What are those yields going to look like it does depend on where they are so You know we're finding yields
Speaker Change: you know, basically from here in the mid-Atlantic north to Boston, those suburban kind of medium-density to lower-density products, mid to high sixes. You know, to even pushing seven or even a little bit north of seven in some of our Jersey starts.
Speaker Change: What we're seeing in the expansion regions is yields kind of around six, low sixes.
Matt Birenbaum: And on the West Coast, it's hard to find deals that you can get a yield into the sixes, which is why very little of the startup activity is in those regions. So it would really depend on the kind of mix of business. And then the other thing I'd say is hard costs are moving, and you don't know how much until you actually bring the jobs to bid. So some of the acceleration that we're seeing this year is, frankly, because hard costs are coming in a little better than we thought, so those deals are starting to pencil in a little better than we thought.
Speaker Change: But again, cap rates are lower there as well, so we still have that spread. And on the West Coast, it's hard to find deals that you can get a yield into the sixes.
Speaker Change: which is why very little of the start activity is in those regions. So it would really depend on kind of the mix of business. And then the other thing I'd say is hard costs are moving and you don't know how much until you actually bring the jobs to bid. So.
Speaker Change: Some of the acceleration that we're seeing this year is frankly because hard costs are coming in a little better than we thought so those Deals are starting to pencil a little better than we thought so and we have more visibility into that on the jobs that are closer
Matt Birenbaum: And we have more visibility into that on the jobs that are closer to starting than the ones that aren't. So there are some deals that aren't going to be ready to start for another year or two, where based on the hard costs we looked at 12 months ago, they might have been in the fives, but based on where hard costs are today, they might be in the six. Okay, that's helpful.
Speaker Change: to start and the ones that aren't. So there's some deals that aren't going to be ready to start for another year or two where...
Speaker Change: Based on the hard costs we looked at 12 months ago, they might be in the fives, but based on where hard costs are today, they might be in the sixes.
John Pawlowski: But there's nothing unique, or maybe a stale land basis that's juicing the 6.4% yield on 2024 starts. Is there anything unique that's inflating the expected yields on this year's? Now, in fact, if anything, it's the inverse. The newer deals we're signing up have a lower land basis. It's more reflective of where today's market is. Great.
Speaker Change: Okay, that's helpful. But there's nothing unique or maybe a stale land basis that's juicing the 6.4% yield on 2024 starts. Is there anything unique that's inflating the expected yield some this year starts?
Speaker Change: No, in fact, if anything, it's the inverse. The newer deals we're signing up have a lower land basis that's more reflective of where today's market is.
Matt Birenbaum: Last question on acquisitions. Could you share the average cap rate on the three deals you acquired in recent months? What's a reasonable base case of acquisition volume we should expect?
Speaker Change: Last question on acquisitions. Could you share the average cap rate on the three deals you acquired in recent months and what's a reasonable base case of acquisition volume we should expect this year?
Matt Birenbaum: Yes, so the three we've bought so far, the cap rate's around a five. And again, what we sold, the cap rate's just slightly north of that at a 5.1, so that spread has actually come in some. I looked at last year that it was more about 40 basis points. So now, you know, that's one reason why we're looking to be more active, because we feel like the trade is looking a little better. You know, we are.
Speaker Change: Yes, so the three we've bought so far, the cap rate's around a five.
Speaker Change: And again, what we sold, the cap rate is just slightly north of that at a 5.1. So that spread has actually come in some. I looked at last year that it was more about, it was probably 40 basis points. So now, you know, that's one reason why we're looking to be more active because we feel like the trade is looking a little better. You know, we are.
Josh Dennerlein: Hoping to do at least another $300 million or so of acquisitions before the end of the year. We could certainly do more. We have more assets that we're going to bring to the sale in the disposition market as well, but it depends on whether we find assets that we like. Thank you.
Speaker Change: hoping to do at least another $300 million or so of acquisitions before the end of the year. We could certainly do more. We have more assets that we're going to bring to sale in the disposition market as well. But it depends on if we find assets that we like.
Sean Breslin: Our next question is from Josh Dennerlein with Bank of America. Please proceed with your question. Yeah, hey guys, thanks for the time. Um, Ben, I was looking over the ESG slide, and I noticed you highlighted some solar sites your team has activated.
Matt: Thanks, Matt.
Speaker Change: Thank you. Our next question is from Josh Dennerlein with Bank of America. Please proceed with your question.
Josh Dennerlein: Hey guys, thanks for the time. Ben, I was looking over the ESG slide and I noticed you highlighted solar sites your team has activated in 2023. Could you remind us of just your goal on that front?
Josh Dennerlein: You remind us, all on that front. Operating Model Transformation. On the second part, Josh, that's a separate bucket of activities. So that's not in the operating model, $80 million target.
Josh Dennerlein: If any of that income from those solar sites is included in that $80 million of incremental NOI from the operating model transformation, or is that something else or in addition?
Speaker Change: On the second part, Josh, that's a separate bucket of activity. So that's not in the operating model $80 million target.
Sean Breslin: Yeah, it's part of a NOI-enhancing pool that also has the sustainability benefits associated with it. And so when we talked at the investor day around our increase menu and opportunity set to be investing back into the portfolio in the 10 to 14% type of range, those solar projects were a component of that. Okay, okay, I appreciate that. And then I just want to follow up on Eric's first question on the seasonality of, mentioned 4Q as a lower quarter. Could you remind us of the cadence throughout the year? Watch Out!
Speaker Change: You know, it's part of a NOI enhancing pool that also has the sustainability benefits associated with it. And so when we talked at the Investor Day around our increase menu and opportunity set to be investing back into the portfolio in the, you know, 10 to 14 percent type of range, those solar projects were a component of that.
Speaker Change: Okay, okay, appreciate that. And then just want to follow up on Eric's first question on the seasonality of expenses. You mentioned 4Q as a lower quarter. Could you remind us like the cadence throughout the year and if there's anything we need to like kind of watch out for on a go-forward basis?
Sean Breslin: I wouldn't, I'm not sure there's anything to watch out for going forward. I mean, typically, and Kevin went through this earlier, but you know, in terms of the sequence of OPEX, you do see a spike in the third quarter historically. And as Kevin noted, for this year, that spike from Q2 to Q3, about a third of that's in utilities based on seasonal increases in energy and water and sewer and things like that.
Speaker Change: I wouldn't, I'm not sure there's anything to watch out for going forward. I mean typically, and Kevin went through this earlier, but you know in terms of the sequence of OpEx, you do see a spike in the third quarter historically.
Speaker Change: And as Kevin noted, for this year, that spike from Q2 to Q3, about a third of that's in utilities based on seasonal increases in energy and water and sewer and things like that.
Sean Breslin: About a third are in R&M, seasonal increase in turnover, which is historically the case, and some projects from the first half to the second half, and then kind of this and that, and then things slow down as you get into the fourth quarter. So I think that's normal.
Kevin: about a third's in R&M, seasonal increase in turnover, which is historically the case in some projects from the first half to the second half, and then kind of.
Kevin: [inaudible]
Sean Breslin: I don't think the pattern has changed materially. What you should see going forward that would be different, and we have explained before, is that as it relates to the absolute level of OPEX growth, we have a number of things happening that will begin to dissipate in terms of the impact on the portfolio in 2025. So our OPEX guidance for the full year is the 4A that we identified, but there's about 160 basis points of unusual activity embedded in that, about 80 basis points from the burn off of various pilots, mainly the 421As, and then the net impact of the operating initiatives primarily in the utilities category with both telecom and internet, things of that sort.
Speaker Change: We have a number of things happening that will begin to dissipate in terms of the impact on the portfolio in 2025.
Speaker Change: So our OPEX guidance for the full year is the 4A that we identified, but there's about 160 basis points of unusual activity embedded in that, about 80 basis points from the burn-off of various pilots, mainly the 421As.
Speaker Change: And then the net impact of the operating initiatives, primarily in the utilities category with both telecom, internet, things of that sort.
Sean Breslin: So kind of the organic run rate is closer to 320 basis points for this year, and some of those elevated activities that I just mentioned will begin to dissipate as you get into 2025. So without providing specific guidance, there's a little bit more of a tailwind as we get into 2025 related to those various categories, but the seasonal patterns won't really change if you think about it from quarter to quarter.
Speaker Change: So, kind of the organic run rate is closer to 320 basis points for this year.
Speaker Change: and some of those elevated activities that I just mentioned will begin to dissipate as you get into 2025. So, without providing specific guidance, there's a little bit more of a tailwind as we get into 2025 related to those various categories, but the seasonal patterns won't really change if you think about it from quarter to quarter.
Speaker Change: Thank you.
Michael Goldsmith: Thank you. Thank you. Our next question is from Michael Goldsmith with UBS. Please proceed with your question. Good afternoon.
Speaker Change: Yep.
Speaker Change: Thank you. Our next question is from Michael Goldsmith with UBS. Please proceed with your question.
Sean Breslin: Thanks a lot for taking my question. Are you seeing any changes in resident behavior across markets or any sort of price sensitivity among your tenants? Yeah, Michael, Sean, in terms of any sort of movement, if you want to describe it that way, nothing terribly substantial.
Michael Goldsmith: Good afternoon. Thanks a lot for taking my question. Are you seeing any changes in resident behavior across markets or any sort of price sensitivity among your tenants? Thanks.
Sean: Yeah, Michael, Sean, in terms of sort of movement, if you want to describe it that way, nothing terribly substantial. The only thing that might be worth noting that has continued in Q2, and we saw the same thing in Q1, is that in the tech markets, particularly in Northern California and Seattle,
Sean Breslin: The only thing that might be worth noting that has continued in Q2, and we saw the same thing in Q1, is that in the tech markets, particularly in Northern California and Seattle, the percentage of new move-ins from a more distant location within that same region is a little bit elevated. So people that may have moved to second, third, ring out, or some rural location during COVID over the last year have started to come back closer. It wasn't like they moved 1,500 miles away, but they moved, you know, 150 miles, you know, that type of thing. So that's the only thing of note as it relates to movement.
Sean: The percentage of new move-ins.
Sean: from a more distant location within that same region is a little bit elevated.
Speaker Change: So people that may have moved to second, third, ring out or some rural location during COVID over the last year, they have started to come back in closer. It wasn't like they moved 1,500 miles away, but they moved.
Speaker Change: you know, 150 miles, you know, that type of thing. So that's the only thing of note as it relates to movement.
Matt Birenbaum: And then your second question, just in terms of other resident behavior, you know, in terms of reasons for move-outs, the percentage of move-outs related to rent increases is above historical norms, not surprised, just given the inflationary pressures we've seen across the economy over the last couple of years. But on the sort of flip side, you know, move-outs to buy a home are way, way below historical norms. And so renting is still the more affordable option, particularly in our markets where the spread between, you know, the kind of median price for rent and the median price for a home is equivalent to more than $2,000 a month, a big number in our established regions. So people are potentially making different choices in other parts of their daily lives. That's the only thing of note. I got it.
Speaker Change: And then your second question, just in terms of other resident behavior, you know, in terms of reasons for move-outs, the percentage of move-outs related to rent increase is above historical norms. Not surprised, just given the inflationary pressures we've seen.
Speaker Change: across the economy over the last couple of years. But on the sort of flip side, you know, move out to buy a home is way, way below historical norms.
Speaker Change: And so renting is still the more affordable option, particularly in our market where the spread between, you know, kind of medium price for rent and medium price for home is equivalent to more than $2,000 a month, is a big number in our established regions.
Speaker Change: Renting is still the most affordable alternative so people are potentially making different choices and other parts of their daily life. That's the only thing of note.
Michael Goldsmith: Thanks for that. My final question is, it seems as though there's been a push for more supply in New Jersey suburban markets. Is there a risk that similar supply growth could pop up in some of your other suburban markets? Hi Michael, it's Matt.
Speaker Change: Got it. Thanks for that. My final question is, it seems as though there's been a push for more supply in New Jersey suburban markets. Is there a risk that similar supply growth could pop up in some of your other suburban markets? Thanks.
Matt Birenbaum: It's an interesting question. For sure, in Jersey, the late last round of Mount Laurel kind of affordable housing allocations was more aggressive than the prior three rounds. And we've been a beneficiary of that with an increase in very high-yielding development opportunities. But there will be more supply in some of those inland suburban markets than we've seen in the past. We haven't seen that, you know. Boston, by contrast, has been the same for the last 30 years.
Matt: Hi Michael, it's Matt.
Speaker Change: It's an interesting question. For sure, in Jersey, the last round of Mount Laurel affordable housing allocations
Michael Goldsmith: was more aggressive than the prior three rounds and we've been a beneficiary of that with an increase in very high-yielding development opportunities but it is, it does, there will be more supply in some of those inland suburban markets than we've seen in the past.
Michael Goldsmith: We haven't seen that, you know, Boston, by contrast, the 40B framework has been the same for the last 30 years. There's actually a lot of towns that are kind of at their 40B threshold now. So, as Sean mentioned, the suburban supply in Boston is pretty muted and I would expect it to stay that way.
Matt Birenbaum: There are actually a lot of towns that are kind of at their 40B threshold now, so as Sean mentioned, the suburban supply in Boston is pretty muted, and I would expect it to stay that way. You know, Long Island's another place where they don't really have the ability to force supply on some of these recalcitrant jurisdictions. The governor tried and got her head handed to her, so I would say Jersey's probably the biggest example.
Speaker Change: You know, Long Island's another place where they don't really have the ability to force supply on some of these recalcitrant jurisdictions. The governor tried and got her head handed to her. So I would say Jersey's probably the biggest example. The one that people talk about a lot is California.
Alexander Goldfarb: The one that people talk about a lot is California, where the state legislature is trying to do things that would push jurisdictions to approve more housing. What we've seen so far is that those attempts haven't been as effective as I think the advocates had hoped because it's still really, really difficult to make the economics work in California, so I wouldn't be concerned that there's going to be a sudden onslaught of supply there, you know, anytime soon. Thank you very much. Good luck in the back.
Speaker Change: where the state legislature is trying to do things that would push jurisdictions
Speaker Change: to approve more housing. What we've seen so far is...
Speaker Change: Those attempts haven't been as effective as I think the advocates had hoped because it's still really, really difficult to make the economics work in California, so I wouldn't be concerned that there's going to be a sudden onslaught of supply there anytime soon.
Speaker Change: Thank you very much. Good luck in the back half.
Sean Breslin: Thank you. Our next question is from Alexander Goldfarb with Piper Sandler. Please proceed with your question. Okay, good afternoon. Thank you. Two questions.
Speaker Change: Thank you. Our next question is from Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Alexander Goldfarb: First, going back to the bad debt, it was really interesting that you guys, you know, presumably would have a higher, more affluent renter base, and yet, the bad debt remains elevated. It's certainly above, you know, what MidAmerica was commenting on then on their call. And specifically, two markets that jump out are Metro New York, New Jersey, and MidAtlanta, which rivals Southern Cow. So can you just give a sense of why, you know, your renter base, which, assuming has pretty good jobs, one has higher delinquencies, and then two, what's going on in Metro New York, New Jersey, and Mid-Atlantic that's causing the delinqu Yeah, Alex, this is Sean.
Alexander Goldfarb: Hey, good afternoon, thank you. Two questions. Just first, going back to the bad debt...
Alexander Goldfarb: It was really interesting that you guys, you know, presumably would have a higher...
Alexander Goldfarb: more affluent renter base, and yet the bad debt remains elevated. It's certainly above, like, you know, what MidAmerica was commenting on then on their call. And specifically, two markets that jump out are Metro New York, New Jersey, and MidAtlantic.
Speaker Change: which rivals Southern Cal. So can you just give a sense of overall why your renter base, which assuming has pretty good jobs, one, has higher delinquency, and then two, what's going on in Metro New York, New Jersey, and Mid-Atlantic that's causing the delinquencies to be as high as they are?
Sean Breslin: I'm happy to take that one. In terms of trying to compare bad debt across companies, I'd say it's probably a little bit challenging, just because you don't know everyone's policies. And what I mean by that is, everyone bills different amounts for different things. So, you know, when someone doesn't pay us, for example, we bill them for everything. You know, we bill them for the rent, we bill them for the late fees, bill them for utilities, there's lease break fees, there's legal costs.
Sean: Yeah, Alex, this is Sean. I'm happy to take that one. In terms of trying to compare bad debt across companies, one, I'd say it's probably a little bit challenging just because you don't know everyone's policies.
Speaker Change: What I mean by that is everyone bills different amounts for different things.
Speaker Change: You know, when someone doesn't pay us, for example, we bill them for everything. You know, we bill them for the rent, we bill them for the late fees, we bill them for utilities.
Sean Breslin: You know, there are a lot of things that we bill for, and through our Customer Care Center in Virginia Beach, we track it very carefully. So I don't know if everyone's the same or not, but differences in policies can impact what the level of bad debt is. Other than that, it's hard to comment on specifically different customers. As it relates to the markets that you mentioned, New York and New Jersey, for example, are only 23% of the outstanding accounts that we have, but they punch way above their weight in terms of dollar value.
Speaker Change: There's lease break fees, there's legal costs, there are a lot of things that we bill for and through our customer care center at Virginia Beach, we track it very carefully. So I don't know if everyone's the same or not, but differences in policies can impact.
Speaker Change: What the level of bad debt is other than that it's hard to comment on specifically, you know different customers
Speaker Change: As it relates to the markets that you mentioned, New York, New Jersey is an example. It's only 23% of the outstanding accounts that we have, but it punches way above its weight in terms of dollar value, so it's about a third of the outstanding receivables that we have.
Sean Breslin: So it's about a third of the outstanding receivables that we have that we're trying to chase down. And the main issue there, as you may know from being there, is just the pace at which the courts are moving. It is the slowest jurisdiction by far in the country.
Speaker Change: They were trying to chase down, and the main issue there, as you may know from being there, is just the pace at which the courts are moving. It is the slowest jurisdiction by far in the country.
Sean Breslin: And so we have, you know, almost 400 accounts out there in the greater New York metro area, and a lot of them have been sitting out there for more than a year in terms of their current time sort of in the eviction process, which continues. So we just need to see faster movement in primarily New York City, but it does extend to places like Long Island and Westchester. And then in the mid-Atlantic, a lot of that is tied to accounts in the District of Columbia and Montgomery County, two areas that have also been slow and have also taken steps to try to give renters more time through free legal advice, delays in court cases, and things of that sort. So it's sort of a combination of factors that have led to it where New York, New Jersey, the mid-Atlantic, and Southern California are kind of all in the general same range.
Speaker Change: And so we have, you know, almost 400 accounts out there in the greater New York metro area and a lot of them have been sitting out there for more than a year in terms of their current time sort of in the eviction process, which continues.
Speaker Change: So we just need to see faster movement in, you know, primarily in New York City, but it does extend to places like Long Island and Westchester.
Speaker Change: And then in the Mid-Atlantic, a lot of that is tied to accounts in the District of Columbia.
Speaker Change: and Montgomery County, two areas that have also been slow and also have taken steps to try to give renters more time through free legal advice, delays and
Speaker Change: poor cases and things of that sort. So there's sort of a combination of factors.
Speaker Change: that have led to it where New York, New Jersey, the Mid-Atlantic, and Southern Cal are kind of all in the general same range.
Matt Birenbaum: And while we've seen some movement, we need to see faster processing and sort of the relaxation of some of these other supportive benefits to prospective eviction cases kind of dissipate to allow the processes to continue to move. So that's a good thing, John, really you're only down to two, just New Canaan and Wilton. You used to have Shelton, Stanford, you know, a bunch of other markets. So is Connecticut just not a desirable market, or did you see an opportunity where the disposition IRRs were just way too good to pass up, and your intent is to re-bulk up in Connecticut? New Jersey and Long Island. Yeah, hey Alex, it's Matt.
Speaker Change: And while we've seen some movement, we need to see faster processing and sort of the relaxation of some of these other supportive benefits to prospective eviction cases kind of dissipate to allow the processes to continue to move.
Speaker Change: So that's a good take on
Speaker Change: Yes, second question is on dispositions. Obviously Darianne jumped out given that you have a you established a pretty good renter base there But you know in looking over your Metro, New York portfolio, you have a lot New Jersey a lot Long Island
Speaker Change: and Connecticut, you really are only down to two, just New Canaan and Wilton. You used to have Shelton, Stanford, you know, a bunch of other markets. So.
Speaker Change: Is Connecticut just not a desirable market, or you saw an opportunity where disposition IRRs were just way too good to pass up, and your intent is to re-bulk up in Connecticut versus the New Jersey and Long Island?
Alexander Goldfarb: Now, it is, we are almost complete with exiting the Connecticut market completely. You're right. If you go back, I think we've probably sold 15 assets in Connecticut in the last six or seven years. And, you know, once you're on that path, having a couple becomes very operationally inefficient.
Speaker Change: Yeah, hey Alex, it's Matt. Now it is, we are almost complete with exiting the Connecticut market completely. You're right, if you go back, I think we've probably sold 15 assets in Connecticut in the last six or seven years. And you know, once you, once you're on that path,
Speaker Change: to have a couple becomes very operationally inefficient.
Omotayo Okusanya: So, you're right, I mean, those are the ones that Darien was among, you know, kind of the absolute most desirable of our Connecticut portfolio. But, you know, we've kind of made the decision that we're, Okay, thanks. As a final reminder, if you would like to ask a question, please press star 1 to get into the Q&A. Our next question is from Omotayo Okusanya with Deutsche Bank. Please proceed with your question. Yes, good afternoon, everyone.
Speaker Change: The ones that Darien was among, you know, kind of the absolute most desirable of our Connecticut portfolio but, you know, we've kind of made the decision that we're exiting that market and so that, you know, when you only have two or three assets left, it's kind of not worth it.
Speaker Change: Okay, thanks.
Speaker Change: As a final reminder, if you would like to ask a question, please press star 1 to get into the queue.
Speaker Change: Our next question is from Omotayo Okonsanya with Deutsche Bank. Please proceed with your question.
Omotayo Okusanya: I just wanted to ask a question on the regulatory front, as we're kind of heading into the election cycle, if you're hearing anything at the state level, and maybe some thoughts regarding the Biden proposal to have national rent control. Yeah, this is Sean. I'm happy to take that one.
Omotayo Okonsanya: Good afternoon, everyone. I just wanted to ask a question on the regulatory front, as we're kind of heading into the election cycle, if you're hearing anything at the state level, and maybe some thoughts regarding the Biden proposal to have national rent control.
Sean Breslin: On the state front, there's a lot of different things happening across different states, so without being specific, I would just say that the various associations that we're involved with and others are very active in engaging with the local, you know, political folks as it relates to what's happening, what's being proposed, ballot initiatives, various things like that. So there's a lot of engagement there to manage that activity and, most importantly, to educate people as it relates to the pros and cons of various policies.
Omotayo Okonsanya: [inaudible]
Speaker Change: are very active in engaging with
Speaker Change: The local, you know, political folks as it relates to what's happening, what's being proposed.
Sean Breslin: And I think the trend we've seen, generally speaking, is that most political entities and individuals are sensitive to Matt's earlier point about doing things that will impact the future supply of housing in a negative way. And I think that's something that has been good for the industry over the last couple of years. The topic of rent control might sound good, but when you understand the policy and its impacts, it is absolutely the wrong policy.
Speaker Change: Pallet initiatives, various things like that. So there's a lot of engagement there to manage the activity, most importantly to educate people as it relates to the pros and cons.
Speaker Change: of various policies.
Speaker Change: Most political entities and individuals are...
Matt: sensitive to Matt's earlier point about doing things that will impact the future supply of housing in a negative way. And I think that's something that has been good for the industry over the last couple of years. The topic of rent control might sound good, but when you understand the policy and its impacts, it is absolutely the wrong policy.
Omotayo Okusanya: And for that same reason, there is plenty of engagement, not only with the Biden administration but potential candidates, particularly through the National Multihousing Council and others, as it relates to any kind of national policy, which will likely, you know, put a lot of teeth into it. First off, it's the states, but just the harm that we do as it relates to the supply of housing, which is actually what we're trying to solve for.
Matt: And for that same reason, there is plenty of engagement, not only with the Biden administration, but the potential two candidates.
Matt: particularly through the National Multihousing Council and others as it relates to any kind of national policy, which likely you know, put a lot of teeth to it, first off, for the states.
Omotayo Okusanya: So I think there's likely a roadmap there for other policies to promote some housing in areas where it's needed that is not rent control in nature, but, you know, obviously can't predict exactly what people may talk about in an election and voting system. That's helpful.
Matt: But just the the harm that we do as it relates to the supply of housing which is actually what we're trying to solve for So I think there's likely a roadmap there for other policies to promote some housing in areas where it's needed
Matt: That is not bread control in nature, but you know, obviously can't predict exactly what people may talk about in an election environment.
Sean Breslin: And then if I may ask one more, in your expansion markets, are you seeing anything different just in regards to how the competition is kind of behaving, you know, in light of kind of supply deliveries? I know we kind of have the classic use of concessions, but anything unusual in regards to business practices to kind of shore up their financials that you may be seeing? Not necessarily, as Sean again, I mean, it's a typical concessions, you know, two months, three months, depending on the lease term, in the sort of hyper supply markets, like part of Austin, as an example, or maybe south end of Charlotte, you know, places like that, you know, people waive bonds, stuff like that, and nothing atypical from what you typically see in this kind of environment where there are pockets of supply coming through and packing lease up. Okay, thank you. Thank you. Our next question is from Rich Anderson with Wedbush. Please proceed with your question. Thanks. Good afternoon.
Speaker Change: Okay, that's helpful. And then if I may ask one more, in your expansion markets, are you seeing anything different just in regards to how the competition...
Speaker Change: Benjamin Schall, Sean Breslin, Matthew Birenbaum, Sean Breslin, Matthew Birenbaum, Sean Breslin,
Sean Breslin: Not necessarily, as Sean again, I mean it's the typical concessions, you know, two months, three months, depending on the lease term, in the sort of hyper supply markets, like part of Austin as an example.
Sean Breslin: or maybe south of Charlotte, you know, places like that. You know, people waive bonds, you know, stuff like that. And nothing atypical from what you typically see in this kind of environment where there are pockets of supply coming through impact and lease-ups.
Sean Breslin: Thank you. Our next question is from Rich Anderson with Wedbush.
Rich Anderson: Thanks for hanging out a little bit longer here. So, in terms of your Sunbelt expansion, you're obviously not getting any bargains there today. And, you know, if you're listening to the MidAmerica Call, things are, you know, trending in the right direction, at least eventually. Do you feel a sense of urgency to move more now than ever?
Speaker Change #100: Please proceed with your question.
Rich Anderson: Thanks. Good afternoon. Thanks for hanging out a little bit longer here. So in terms of your Sunbelt expansion
Rich Anderson: You're obviously not getting any bargains there today and, you know, if you're listening to the Mid-America Call, things are, you know, trending in the right direction, at least eventually. Do you feel a sense of urgency to move more now than ever? And part two of that same question is, can you characterize the nature of your sellers? And are you talking to any of the REITs in the cases where you are?
Benjamin Schall: And part two of that same question is, can you characterize the nature of your sellers? And are you talking to any of the REITs in the cases where you are expanding through acquisitions? Rich, this is Ben.
Matt Birenbaum: I'll handle the first part, and Matt can talk about the seller dynamics. On the first part, and we think it is an opportune time to effectuate the trade. And Matt talked earlier about how upfront dilution has gotten pretty narrow as we think about selling older, slower growth assets out of our established regions and then reallocating that capital. Yeah, the other part that comes to mind is I'm not a believer that those windows are closing.
Rich Anderson: expanding through acquisitions.
Rich Anderson: I'll handle the first part and Matt can talk to the seller dynamics.
Matt: And we think it is an opportune time to effectuate the trade. And Matt talked earlier, sort of the upfront dilution's gotten pretty narrow as we think about selling older, slower growth assets out of our established regions and then reallocating that capital.
Rich Anderson: I think when you look at the supply dynamics that are going to continue to be a weight on operating fundamentals and a lot of those markets, as well as that we're still, to a certain degree, at the front wave of refinancing activity, I expect the, you know, window of opportunity to be with us for a while. Rich, in terms of who the sellers are, we're finding, at least the assets we've been buying and then some of the others that we've bid on and maybe haven't been successful, there's a lot of institutional owners that are in funds where the funds are limited life vehicles.
Matt: You know the other part that comes to mind is I I'm not a believer that that windows closing I think when you look at the supply dynamics that are going to continue to be a weight on operating fundamentals and a lot of those markets
Matt: as well as that we're still, to a certain degree, at the front wave of refinancing activity. I expect the window of opportunity to be with us for a while.
Rich Anderson: and Rich, in terms of who the sellers are.
Rich Anderson: We're finding, at least the assets we've been buying and then some of the others that we've been on and maybe haven't been successful.
Rich Anderson: There's a lot of kind of institutional owners that are, you know, in funds where the funds are limited like vehicles and maybe reaching the end of their 7 or 10-year fund life.
Rich Anderson: They may be reaching the end of their 7 or 10-year fund life, and they're just in a position where – and frankly, they're sitting on a lot of gains on those assets if they bought them back in 2014, 2015, 2016, even though not as much gain as what it would have been if they had sold them two years ago.
Rich Anderson: and you know they they're just in a position where and frankly they're sitting on a lot of games on those assets since they bought them in you know back in 14, 15, 16.
Matt Birenbaum: They're still in a fine position, and so they're going to meet the market. Again, that's not the majority of the market, and that's why there are still plenty of assets that are not trading, sellers that are still holding out for yesterday's prices. But that's the typical buyer profile, but not your reed brethren down there. No, we have not.
Rich Anderson: Even though, you know, not as much gain as what it would have been if they had sold it two years ago, they're still in a fine position, and so, you know, they're going to meet the market.
Rich Anderson: Again, that's not the majority of the market, and that's why there's still plenty of assets that are not trading.
Rich Anderson: are still holding out for yesterday's prices, but that's the typical buyer profile. It's usually a fund sponsor with institutional capital who's three funds later now and they're closing out this one. But not your REIT brethren down there.
Rich Anderson: We haven't really got anything that another REIT was selling. Okay. Second question, I think the townhome model is interesting when you consider millennials building families and so on. Does that model work better in the expansion markets in general, or is it sort of across the board sort of? Thinking in terms of that, building out that product. Yeah, it's an interesting question.
Speaker Change #102: No, we haven't really anything that another REIT was selling. Second question, I think the townhome model is interesting. You consider millennials, building families and so on. Does that model work better in the expansion markets in general or is it sort of across the board?
Speaker Change #103: thinking in terms of that, building out that product. Thanks.
Matt Birenbaum: It really does depend on land economics. So you do see more of it in some of our expansion regions because land is cheaper there, and the zoning is more flexible. So you're seeing a lot of it in North Carolina, and we're seeing a lot of it in Texas, not so much in Southeast Florida because that looks a lot like the Northeast in terms of where rents are and land values. And very little in California, because again, land values and the other key factor is what's the relative price of a home versus the rent. And when you get into California, where the homes are in the seven figures, you know, it just doesn't pay to build rental townhomes there.
Speaker Change #104: Yeah, it's an interesting question. It really does depend on the land economics. So you do see more of it in some of our expansion regions because land is cheaper there and the zoning is more flexible.
Speaker Change #104: So you're seeing a lot of it in North Carolina, we're seeing a lot of it in Texas, not so much in Southeast Florida because that looks a lot like the Northeast in terms of where rents are and land values, and very little in California because, again, kind of land values and...
Speaker Change #105: The other key factor is what's the relative price of a home versus the rent. And when you get into California where the homes are seven figures, you know, it just doesn't pay to build rental townhomes there. It does pay in, you know, in some of these other regions, and those economics are a lot closer.
Rich Anderson: It does pay off, you know, in some of these other regions, and those economies are a lot closer. Okay. Great. Thank you. There are no further questions at this time. I would like to hand the floor back over to Ben Schall for any closing remarks. Thanks, everyone. Thanks for joining us today, and we look forward to speaking with you soon. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Speaker Change #106: Okay, great, thank you.
Speaker Change #106: Thank you. There are no further questions at this time. I would like to hand the floor back over to Ben Schall for any closing remarks.
Ben Schall: Thanks everyone. Thanks for joining us today and we look forward to speaking with you soon.
Speaker Change #107: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.