Q4 2024 AvalonBay Communities Inc Earnings Call

Good afternoon, ladies and gentlemen, and welcome to Avalonbay communities first quarter, 2020 four earnings conference call. At this time, all participants are in a listen only mode.

Any remarks made by the company, we will conduct a question and answer session. You may enter the question and answer queue at any time during this call by pressing star. One if your question has been answered or English training yourself from the queue. Please press star two.

We are using a speaker phone please lift the handset before asking your questions. We ask that you refrain from taping and have yourself funds turned off during the question and answer session.

For today's conference call is Mr. Jason Reilley, Vice President of Investor Relations. Mr. Riley you May begin your conference call.

Speaker Change: Thank you Sherry and welcome to Avalonbay communities fourth 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.

Speaker Change: 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 as 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 Dot Avalon Bay Dotcom forward Slash earnings and we encourage you to refer to this information during the review of our operating results and financial performance and with that I will turn the call over to Dan Shaw CEO and president of Avalonbay communities for his remarks.

Speaker Change: Yeah.

Dan Shaw: Thank you Jason and thank you everyone for joining us I will start with a brief synopsis of Q4 and 2024 results and then turn to a review of the strategic focus areas that we are confident will continue to deliver superior growth in 2025 and in the years ahead.

Dan Shaw: Kevin O'shea, our Chief Financial Officer will provide our outlook for 2025 and the components of growth on a year over year basis, Sean Breslin, Our Chief operating Officer will then cover the macro and micro setup for 2025, along with our latest market by market expectations and Matt firm Allen, Our Chief investment Officer will discuss our rich menu.

Dan Shaw: <unk> of investment opportunities.

Dan Shaw: So let me start by expressing our condolences to those who lost loved ones and the la fires last month enter all of those impacted by the horrific damage. While we were fortunate that none of our communities incurred meaningful damage. Some of our associates were impacted including a few who lost their homes at Avalon Bay in keeping with our core.

Dan Shaw: Value of our spirit caring we activated our internal emergency relief programs to assist associates and provided incremental funding to our longtime partners at the American Red Cross.

Dan Shaw: I also want to thank our wider la based residential services team led by Eric asked garden for their tireless efforts and dedication through these events.

Dan Shaw: Okay.

Dan Shaw: As a look back on Q4 and 2024, we had a very successful year delivering revenue growth of three 4% and core <unk> growth of three 6% as highlighted on slide four.

Dan Shaw: Our suburban Costa portfolio with steady demand and limited levels of new supply continued to outperform our operating model transformation drove incremental revenue and operating efficiencies and our lease ups exceeded expectations driving incremental earnings and value creation.

Dan Shaw: We also remain nimble in capital allocation and sourcing during 2024, we increased our development starts by almost $200 million to $1 $1 billion, and we proactively raise growth capital sourcing $2 billion of new capital and an attractive five 1% initial cost.

Dan Shaw: As we head into 2025, we expect much of our operating and investment momentum to continue and are confident that our strategic focus areas as outlined on slide five we will continue to deliver superior internal and external growth for shareholders.

Dan Shaw: Slide six details our successes and key next steps in our operating model transformation.

Dan Shaw: As of year end 2024, we're generating an incremental $39 million of NOI from these initiatives running $2 million ahead of plan and.

Dan Shaw: In 2025, we expect to generate an additional $9 million of revenue and operating efficiencies and we are well on our way to our updated goal of $80 million of annual incremental NOI over the next few years.

Dan Shaw: We continue to be one of the industry leaders in the utilization of centralized services, which is now handling more customer facing interactions, including an expansion this year to provide centralized leasing support.

Dan Shaw: We also continue to beat on the on the forefront and the use of AI in the apartment industry, having been an early investor in adopter of a lease AI and with a further expansion this year and two additional components of the customer journey.

Dan Shaw: Our investments in technology and centralized services, along with the efficiencies we achieve in managing clusters of assets are providing meaningful scale benefits for our platform and driving incremental NOI throughout the existing portfolio.

Dan Shaw: As investors you can see these results in various financial categories.

Dan Shaw: For example, our implementation of ancillary services for residents resulted in 15% other rental revenue growth in 2024 and is projected to produce almost 9% growth in 2025.

Dan Shaw: In the area of labor efficiencies, our same store payroll expense declines in 2023 and was zero in 2024.

Dan Shaw: Like to thank our operating teams for their continued execution of these initiatives and delivering these results.

Dan Shaw: Importantly, the benefits we are generating via our operating initiatives also facilitate external growth with new assets more valuable on our platform, allowing us to underwrite incremental yield on acquisitions and new development.

Dan Shaw: Slide seven highlights our continued progress in optimizing our portfolio for superior growth in the near term our conviction for our suburban class a portfolio is reinforced by the outlooks for both steady demand and limited new supply.

Dan Shaw: In the medium to longer term, we also believe that our suburban closer portfolio is well positioned to capture future renter demand and particularly the lifestyle preferences of many aging millennials and downsizing baby boomers.

Dan Shaw: We're now 73% serving suburban up from 70% just a year ago, making strong progress toward our 80% target allocation.

Dan Shaw: We're also focused on further optimizing our portfolio by increasing exposure to select sunbelt markets and Submarkets as we detailed at our Investor day.

Dan Shaw: An increasing number of Avalon Bay customers live in these markets and we also see the benefits of diversifying away from certain risks, including increasing our exposure to areas with less regulatory risk with.

Dan Shaw: We increased our expansion market presence to 10% from 8% in 2024, and we expect to make further progress toward our 25% expansion market target in 2025 and believe that we're in an attractive window to facilitate this portfolio shift by acquiring and developing assets at a cost basis meaningfully lower than it.

Dan Shaw: Has been over the past few years.

Dan Shaw: Our third strategic focus area as referenced on slide eight is continuing to leverage our unique development capabilities to generate consistent and accretive external growth.

Dan Shaw: In 2025, we are planning to increase development starts to $1 6 billion.

At a point in time when overall starts in the industry will be coming down, allowing us to secure stronger deals and returns.

These developments will also face less competition when they lease up in roughly two years time.

Dan Shaw: By the end of this year and we expect to have $3 5 billion under construction, which is 50% higher than where we are today setting the stage for a further uplift in earnings growth and value creation in 2026 and 2027.

Dan Shaw: We plan to fund the bulk of this new development from the equity capital that we proactively secured last year as highlighted on slide nine.

Dan Shaw: In total we sourced via equity forwards $890 million of equity at an average price of $226 per share and an initial cost of around 5%, providing a 100 plus basis point spread to our expected development yields on new projects. Our balance sheet is as strong as it's ever been which provides the capital to leverage our.

Dan Shaw: Strategic capabilities to fuel further growth in 2025 and beyond.

Dan Shaw: And with that I'll turn it to Kevin to discuss our initial 2025 outlook. Thanks, Dan.

Dan Shaw: On slide 10, we provide our operating and financial outlook for 2025 for.

Kevin O'shea: For the year using the midpoint of guidance, we expect three 5% growth in core <unk> per share driven by our same store portfolio and by stabilizing development, partially offset by the impact of funding costs associated with capital markets and transaction activity.

Kevin O'shea: And our same store residential portfolio, we expect revenue growth of 3% operating expense growth of four 1% and NOI growth of two 4% for the year.

Kevin O'shea: For development, we expect new development starts in about $1 $6 billion. This year, and we expect to generate $30 million in residential NOI from development communities currently under construction and undergoing lease up during 2025.

Kevin O'shea: As for our capital plan, our outlook calls for $2 $1 billion of capital uses consisting of $1 3 billion of investment spend and $835 million for debt maturities and amortization.

Kevin O'shea: In terms of sources, we anticipate raising new capital of $960 million in 2025, which we currently assume will be sourced from the unsecured debt issuance later this year.

Additionally, we expect to sell our outstanding forward equity contracts to source, an incremental $890 million in 2025, which brings its total capital to be sourced to $185 billion. This year.

Kevin O'shea: We also expect to generate about $450 million in free cash flow after dividends in 2025 and as a result of this capital plan, we project and restricted cash at year end 2025 was about $275 million.

Kevin O'shea: On slide 11, we illustrate the components of our expected three 5% growth in core <unk> per share to a projected $11 39 per share in 2025 from $11 one per share in 2024.

Kevin O'shea: We expect 31 per share of earnings growth to come from NOI growth and our same store and redevelopment portfolios and we expect another 33 per share of earnings growth to come from NOI from new investment primarily from development.

Kevin O'shea: Partially offsetting these sources of growth is an increase of 29 per share from capital markets activity.

Kevin O'shea: Within this bucket, we have called out on slide the components of capital markets costs.

Kevin O'shea: Including lower interest income of <unk> 13 per share as our projected cash positions will be lower on a year over year basis in 2025.

Kevin O'shea: And then <unk> <unk> impact from higher share count as we sell our equity forward contracts over the course of this year in connection with match funding development starts.

Kevin O'shea: These two items combined for 'twenty, one of the 29 cents for cost and capital markets activities.

Kevin O'shea: As for the remaining eight of.

Kevin O'shea: Costs from capital markets activity. These.

Kevin O'shea: These consist of modest headwinds for refinancing existing debt net disposition activity, partially offset by modestly higher capitalized interest and earnings growth from Sip activity.

Kevin O'shea: So with that summary of our outlook I'll turn it over to Sean to discuss our operating business.

Sean Breslin: Alright, Thanks, Kevin.

Sean Breslin: Going to slide 12, and the outlook for apartment demand in 2025.

Sean Breslin: Third party forecasts reflect a moderating but healthy environment for a job and wage growth with wage growth specifically in the high 3% range, which should support a relatively stable effective rent growth throughout the year.

Sean Breslin: For our portfolio specifically, we're also likely to benefit from an expected increase in job growth in two important sectors professional services and information, which over indexed to our established regions and produce above average wages.

Sean Breslin: Growth in these sectors was relatively weak in 2024, but it is expected to rebound nicely in 2025.

Sean Breslin: Turning to slide 13 demand for apartments in our established regions will continue to be supported by two other important factors.

Sean Breslin: First so much stable rent to income ratios, which remained below pre COVID-19 levels given healthy income growth the last few years.

Sean Breslin: And indicate rental affordability in our coastal markets shouldn't be a material issue.

Sean Breslin: And second the relatively unaffordable nature of for sale housing our established regions.

Sean Breslin: Currently renters looking to trade under the median price home in our established regions.

Sean Breslin: First the cost increase of more than 2000 per month.

Sean Breslin: Relative to the median price department and that excludes the ever rising cost of ensuring that home, which has risen materially over the last few years.

Speaker Change: Pivoting to slide 14, and the outlook for supply are established regions are expected to see the lowest level of supply as compared to both the U S. Overall and the Sun belt with new deliveries, representing just one 4% of stock.

Speaker Change: And when you look at our suburban Submarkets, we're roughly three quarters of our same store portfolio is located.

<unk> is even better is suburban deliveries are only forecast to be one 2% of stock in 2025.

Speaker Change: Additionally, as we look beyond the current year its important to remember that that can often take years to get a new development entitled and our suburban coastal markets. So we may experience low levels of new supply in these regions for an extended period of time.

Speaker Change: Moving to slide 15, and our outlook for 2025 revenue growth.

Speaker Change: Three primary drivers of our expected 3% increase in same store total rental revenue growth.

Speaker Change: First higher lease rates, which reflects our embedded growth from last year and our forecast for like term effective rent change of 3% for the calendar year 2025.

Speaker Change: Second strong growth in other rental revenue, which is estimated at almost 9% in 2025 as we continue to deploy various operating initiatives.

Speaker Change: Third improvement in uncollectable lease revenue from residence, which is forecast to decline by approximately 40 basis points from one 8% in 2024 to one 4% in 2025.

Speaker Change: So turning to slide 16, our established coastal regions are expected to produce rental revenue growth north of 3%, while the expansion regions are projected to deliver sub 2% growth. It's heavy levels of Unlevered inventory from 2024, and new deliveries in 2025 continue to weigh on near term.

Speaker Change: Performance.

Speaker Change: And our established regions to mid Atlantic is projected to lead with mid 4% revenue growth followed by Seattle in the low threes, Northern and southern California at roughly 3% and then New York, New Jersey, and Boston and the mid 2% range.

Speaker Change: Moving to the outlook for operating expense growth on slide 17, we expect same store operating expense growth of four 1% consisting of an organic growth rate of 3% the net impact of profitable operating initiatives, adding 50 basis points.

Speaker Change: And the phase out of property tax abatement programs, most notably in New York City, adding another 60 basis points during 2025.

Speaker Change: Additionally, we expect operating extra operating expense growth to be higher in the first half of the year as compared to the second half for several reasons, including year over year comp issues related to our Avalon connect deployment.

Speaker Change: For insurance in 2024, and merit adjustments for our associates, which will occur in the first half.

Matt: Now I'll turn it to Matt to address our investment activity for 2025.

Matt: Alright, Thanks, Sean turning to slide 18.

Matt: We are looking forward to an active year across our various external investment platforms. This year supported by the funding already in place from last year as indicated in Kevin's remarks, we expect to continue to ramp up our sector, leading development platform with $1 6 billion in new starts planned at yields in the low to mid sixes.

Matt: We also want to continue to be active in the transaction market with portfolio trading activity as we pursue our long term portfolio allocation goals selling assets out of our established coastal regions and redeploying that capital into acquisitions, primarily in our expansion regions.

Matt: Given the decline in operating fundamentals and associated asset values in many of our expansion regions over the past two years, we do view this as a more attractive relative trade in the current environment and will look to increase our portfolio trading where we can.

Matt: And our structured investment program or CIP, which is our mezz lending platform to provide high yield capital to merchant builders in our markets.

Matt: We have continued to be highly selective and did not originate any new loans last year. However, we do have several attractive opportunities in the current pipeline and expect to be able to grow. This book of business from its current $190 million balance by another $75 million in 2025, as we advance towards our program goals size of 400 million in total.

Matt: And we continue to grow value added investment in our portfolio with highly accretive opportunities to add more resident solar kitchen, and bath renovations and accessory dwelling units in California.

Matt: Slide 19 provides a bit more color on our development starts for the year. All are located in suburban submarkets and are less expensive wood frame construction with the volume concentrated in our expansion regions and in California.

Matt: It has been exceedingly difficult to get the math to work for new starts on the west coast for the past several years as.

Matt: As reflected in the extremely low levels of supply in those markets. This should provide strong support for future performance for the over $500 million in new development, we planned for northern and Southern California in 2025.

Matt: And with that I'll turn it over to Ben to wrap things up.

Ben: Thanks, Matt to recap on slide 22024 was a very successful year for Avalon Bay with the organization and delivering strong financial and operating results going forward, we continue to execute against our strategic focus areas with a laser focus on delivering superior growth.

Ben: Fundamentals in 2025 continue to look favorable and our established regions. We have a rich menu of investment opportunities and have a balance sheet well positioned to pursue accretive accretive opportunities with.

Ben: And with that I'll turn the call to the operator to facilitate questions.

Ben: Thank you.

Speaker Change: To ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star Ciena 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.

Speaker Change: Our first question is from Eric Wolfe with Citibank. Please proceed.

Eric Wolfe: Thanks for taking my question. So how should we think about the development accretion youre going to see in earnings this year versus last year. Obviously, you have the capitalized cost moving higher but not sure. If there's an offset in terms of total increase in capital costs. So I was just trying to understand how youre thinking about.

Speaker Change: For earnings accretion this year versus last.

Speaker Change: Yeah, Eric This is Kevin there's obviously a number of puts and takes that go into that calculation you do have.

Speaker Change: Slightly higher capitalized interest this year about six.

Speaker Change: On the other hand, we do have lower Occupancies this year versus last.

Speaker Change: We watch that sees this year. It was about 3000 units last year was about 22 later you know, it's a little less of that so and some of that occupancy fall off a little bit in the first half of this year. So and there are other things going on as well we've got as you can see lower cash levels. So lower interest income and then also we have the equity forward issuance this year.

Speaker Change: <unk>, which will increase our share count relative to 'twenty four our expectation regarding the equity four is probably that we're likely going to be pulling the endo shares in the back half of the year when you roll it all together.

Speaker Change: Roughly we anticipate about 15 sensitive growth from our investment platforms, primarily from development, which is really kind of a few areas. The NOI from the basketball 33 cents.

Speaker Change: S I E net.

Speaker Change: Net earnings growth, maybe around three cents higher cap interest about six cents.

Speaker Change: And then partially offset by the lower interest income is 13 cents a share issuance under the floors.

Speaker Change: Probably another <unk> attributable to the net dispositions.

Speaker Change: Some of the development activities. So that that's how you get to the 15 cents give or take and that's about that's about 140 basis points of growth all in.

Speaker Change: So that's one way to sort of look at it that's how we that's how we can take a look at that issue.

Speaker Change: Thank you.

Speaker Change: And you've talked about continuing to deploy capital in the BTR product like you know given the larger units.

And suburban locations I guess are there any additional challenges to developing are operating those communities that you've seen thus far versus more traditional multifamily to the extent that there are some portfolios that have been marketed.

Speaker Change: Products that are the kin to what you would develop you know would you would you be willing to take a look at those.

Speaker Change: Yeah, Hey, Eric it's Matt.

Speaker Change: To the extent that there are portfolios that are aligned with our strategic priorities. We would absolutely take a look at them I will tell you as it relates to be T. R. A lot of what's been built today has been in tertiary markets or in a pretty far flung kind of third ring suburbs of our major markets.

Not a lot has been out there we did buy one asset last quarter in Austin that kind of checked all those boxes. It was 100 per cent three and four bedroom townhomes.

Speaker Change: And we yes, we expect we will probably grow more of that product through either DSP, where we're funding kind of middle market builder developers of the product or building more of it ourselves we have a number of communities. We expect to start this year that our garden to have townhome components to them as well we started when I was last year as well as in Austin.

Speaker Change: So.

Speaker Change: That's more likely to be the case pack, we're certainly open to it and on the operating side, we don't really have enough history of operating 100% ETR communities to speak to it yet again, we do have several thousand townhomes in next communities within our own portfolio and I'm not sure of the profile of those has been materially different I don't know Sean if you are.

Sean Breslin: Yes, the only thing I would add Eric is if you think about the way people operate BTR, particularly for these smaller communities that are 100 to 150 units is typically not dedicated staff.

Sean Breslin: There's a there's a maintenance team theres a sales team they were up around from community to community, it's more where the multifamily industry and for US specific specifically have been moving over the last two or three years is to have a more mobile enable flexible workforce. So I think it's pretty well aligned to the extent that the assets to matt's point or within a reasonable.

Sean Breslin: Somebody a sort of core multifamily assets. It makes it relatively easy for us to operate those.

Sean Breslin: Got it that's helpful. Thank you.

Speaker Change: Our next question is from Jamie Feldman with Wells Fargo. Please proceed.

Speaker Change: Great. Thank you for taking the question can you provide more color on your thoughts on new renewal.

Speaker Change: You know new leases renewal leases and what the trajectory looks like throughout the year. If you look at slide 12 of the presentation. It shows a meaningful pick up sequentially in the job outlook employment outlook. So I'm. Just wondering are you assuming a similar acceleration into <unk> I'm blends.

Speaker Change: As you did in the last year.

Sean Breslin: Yeah, Jamie this is Sean.

Sean Breslin: Happy to take that one so yeah. So as I mentioned in my prepared remarks, we're expecting like term effective rent change to average 3% for the year.

Sean Breslin: To your point, we are expecting slightly stronger growth in the second half of the year as compared to the first half of the year, which is actually the opposite of what occurred in 2020 four.

Sean Breslin: The combination of different factors influencing that in terms of year over year comp issues.

Sean Breslin: More declines in supply expected in the second half of the year as opposed to the first half of the year and various other things so slowly.

Sean Breslin: Slightly better growth in the second half of the year is the way to be thinking about it today.

Sean Breslin: Okay, but so can you provide more granularity on what youre thinking on new leases versus renewal and then specifically.

Sean Breslin: Tends to be seasonal slowdown is that are you still expecting to take like I know in <unk> you expected inflection higher it didn't play out how are you thinking something similar this year.

Sean Breslin: Yes, so for the full year the expectation is that renewals, though average probably in the mid fours and new move ins all average kind of mid 1% range.

Sean Breslin: And that as it relates to the first quarter consistent with sort of historical norms. We would expect sequential improvement as we move through the first quarter into the prime leasing season. So as it relates to Q4, we did have slightly softer rates on both new move ins and renewals given.

Sean Breslin: Nightly lower occupancy, but net net it wasn't terribly material given the volume of leases is pretty light during those two months.

Yeah.

Speaker Change: Okay, and then I guess, just thinking with the sticking with the four key resolved I mean were there any markets that surprised you I'm looking at that you know what you provided in the.

Sean Breslin: In the earnings release.

Sean Breslin: She is Denver it seemed like it really rolled over.

Sean Breslin: You know in November December nothing else seemed to really stand out. So can you provide us more color on what played out differently than you expected or if there's any markets that caught you off guard.

Speaker Change: Yes, so as you pointed out I mean, Denver was the only one that was maybe a little bit of a surprise I mean, I think if you think of the fourth quarter. One thing to keep in mind here is on a net basis. It was not terribly material. We're talking about the Q4 shortfall was about 700000 on $670 million of revenue.

Sean Breslin: And for the full year.

Sean Breslin: Total rental revenue growth was like three or four 2%. So it was off three or four basis points from what we originally anticipated so.

Sean Breslin: The primary driver being as I've mentioned slightly higher occupied excuse me the vacancy that we anticipated which did impact as it move in our renewal rates across most of the markets.

Sean Breslin: I'll go through in November and December So net net not a material number but at the margin. When you have a small sample size of leases that can move the different change calculation.

Speaker Change: Okay. So it sounds like your outlook in each of the market hasn't really changed.

Speaker Change: No no I'd say like I said, it was just a little bit of a rounding error in Q4.

Speaker Change: But the fundamental outlook for 2025 is intact.

Speaker Change: Okay alright, thank you.

Speaker Change: Sure.

Speaker Change: Our next question is from Steve <unk>.

Speaker Change: With Evercore ISI. Please proceed.

Speaker Change: Can you please make sure your phone muted.

Speaker Change: Oh, Hey, we're going to move on to the next one which is Austin, where Schmidt with Keybanc capital markets. Please proceed.

Austin Schmidt: Great Thanks, and good afternoon.

Austin Schmidt: Just curious if you guys, Matt maybe if you've seen any pickup in the transaction market and just how that's kind of playing into your ability to use the disposition capital to rotate into the expansion markets and whether you still expect to be net neutral on the buy sell side this year.

Matt: Yeah, Hey, Austin.

Matt: So the transaction market has been.

Matt: Pretty.

Matt: Volatile I would say, we did see a pretty significant pick up in Q4 fourth quarter multifamily closings were up quite a bit over fourth quarter of 2003 and over third quarter, but almost all of that business was deals that priced before you know when the tenure was closer to four than four and a half.

Matt: And so.

Matt: So what we see is anytime that the 10 year starts to get down towards that level transaction volume starts to pick up because there is a lot of capital that's still on the sidelines, but.

Matt: When we see rates move back up to where they are today. The volume comes back down again, because cap rates for most of these assets are trading still below the debt rates and it's just you know eliminate buyers that they will fit that profile. So we saw a number of larger deals close in Q4, I would expect Q1 to be much.

Matt: Meyer.

Matt: We just had the big MHC conference.

Matt: As people 90 days ago, they would've said theres going to be all of these listings come out and everything is all geared up now they can't have they all said, yeah, maybe second half yes.

Matt: There needs to be some more stability in that rates for the market to pick back up for us.

Matt: We actually last year wound up being a net seller of a couple hundred million that was not our expectation we thought at mid year that we were going to be net neutral. So we didn't we did get more sold than we expected relative to what we bought so so we start the year and we have a couple of dispose currently working in the market that we expect to close here in Q1.

Matt: So we start the year with a little bit of a head start on our trading activity. So we do.

Matt: I think we have some spending money so to speak and we are looking to be more active understanding now that the limited is there enough for sale that we would want to buy and you know that that has yet to be seen because we are selective in terms of what fits our box.

Matt: So I guess I mean is the approach to continue to kind of have assets teed up to give you that buying power to the extent that the market does free up when you see opportunities arise and and I guess, you know I mean, how do you how do you kind of take advantage of where the balance sheet is today with the forward equity available to fund development.

Speaker Change: You know stock prices at a level you guys had been willing to issue some equity and clearly there's you know fundamental improvement ahead over the next few years within those expansion markets. So just curious how you're thinking about you know all the different sources and uses and whether you'd be willing to look at.

Matt: Other sources of capital if the disposition markets.

Speaker Change: Yeah. It remains volatile thank you.

Matt: Yeah.

Matt: I'll speak to that a little bit and Kevin may want to chime in as well, but yeah. So the first thing is we are not counting on the disposition market to fund our development. We're looking to grow development significantly this year and that is being funded primarily through the equity forward that was sourced last year interest free cash flow. So again, we're starting.

Matt: From a good place where we're a little ahead on our discipline relative to our acquisitions.

Matt: And yes to the extent that we see more.

Matt: We continue to see buying opportunities, we're hoping we can increase our asset trading to roughly $1 billion on both sides, both buying and selling this year and to the extent, we see the buying opportunities. We like and you are right. The vacancy is getting pretty interesting.

Matt: Can certainly use some of the discounts we've already pre funded so to speak we will pull more distal assets off events and then we can also consider other sources of capital to the extent that the yields were appealing.

Austin Schmidt: Yeah Austin this.

Kevin maybe just add a couple of things I think youre looking at it the right way in Matts comments.

Austin Schmidt: Tie into that and we are in a strong position from a financial point of view, we've got a lot of capacity.

Austin Schmidt: Capacity to lean into opportunities should they make sense to do so.

Austin Schmidt: Naturally we need to look at sort of the incremental return relative to our funding cost and given where debt rates are that doesn't narrow the opportunity set somewhat but I think what that really speaks to is.

Austin Schmidt: Not only our capacity to be flexible, but having a mindset of being nimble.

Austin Schmidt: And responding to opportunities not only in the investment market, but also the capital markets.

Austin Schmidt: Try to create that spread so that we can deliver as a cost effective capital to us to the investment uses that kind of move us down the field towards our strategic objectives in terms of portfolio positioning and funding development.

Austin Schmidt: And also I'll add I'll add a third area of emphasis which is increasingly as we think about opportunities. We also want to bring our strategic capabilities to bear and particularly the operating model initiatives. We're now in our underwriting.

Austin Schmidt: Underwriting on specific new acquisitions, and new developments to the tune of 30 to 40 basis points of incremental yield by having those assets on our platform.

Austin Schmidt: And I also would emphasize that we're now at a point in most of our expansion markets, where we've got our teams in place. We've got the density at asset is starting to build up where I really do feel like we're at the point, where we can leverage those investments we've been making over the last four or five years to step into further growth.

Speaker Change: That's all very helpful. Thank you.

Speaker Change: Our next question is from Jeff Spector with Bank of America. Please proceed.

Jeff Spector: Great. Thank you.

The Big picture Ben on recent demographic.

Jeff Spector: What's changed is that we're seeing any anything impacting your decision on the.

Jeff Spector: Allocation of suburbs for 80%.

Jeff Spector: No.

Jeff Spector: Confident to stick with that at this point is there any look to decrease that thank you.

Jeff Spector: Yes, I appreciate that Jeff and we go through a fairly robust updated strategic assessment each year.

Jeff Spector: Getting into trying to identify are those that are there shifts that have happened that as we think forward. A couple of years, we want to start to get ahead of them. So that's a constant process constant part of how we think about evolving our platform.

Jeff Spector: A lot of the demographics is obviously longer term trends demographics migration shifts regulatory environment. So.

Jeff Spector: We are still at this point focused on moving increasingly to the suburbs with a target of getting to 80% suburban exposure. We made good progress. This year and then the other big shift is our expansion market shift to to get to 25% and then the other elements, which are increasingly hearing us talk about is evolution of <unk>.

Speaker Change: Product right, it's not just market and Submarket, but it's also the right product at the right price point.

Speaker Change: I think we have taken a different approach in terms of how we've built out our portfolio over time, but particularly recently in the expansion markets with a heavier suburban focus a focus on lower density slightly older products that we believe will be less susceptible to new supply and deliver.

Speaker Change: Stronger growth over a cycle.

Speaker Change: Okay. Thank you and then my second question, probably a tough one to answer given the changes we're seeing in on tariffs, but development costs and in the risk of tariffs, maybe we've seen homebuilders come out with projections of higher cost of course, I'm, assuming that would really bore his garden style.

Speaker Change: But how should we think about the risk of tariffs and the development costs I think they are fairly set in 25, but 26, how are you thinking about it. Thank you.

Speaker Change: Yes, I'll start at a high level, and then ask Matt to talk a little bit more specifically.

Speaker Change: If challenging at this point in time to forecast what apologies policy changes are going to come through.

Speaker Change: Equally challenging to figure out what the flow through of that is going to be from the economy now down to the apartment market tariffs being one of those areas.

Speaker Change: Where we can we are trying to get ahead of those those potential impacts so thinking about securing supply channel is thinking about locking and pricing.

Speaker Change: There's aspects of it that could flow through to some contract services.

Speaker Change: On the development and construction side, not huge swings, but potentially some headwinds there now you wanted to provide some more details.

Speaker Change: We do look at it all the time and Jeff I would tell you is.

Speaker Change: When do you think about what goes into the cost of a new apartment community.

Speaker Change: Land is on average maybe 15% of the total budget 10 to 20, maybe even 25, depending on the location, but on average call. It 15 soft costs interest and permits and fees overheads, probably 30% to 35%. So your heart the actual hard cost is probably about 60% to 65.

Speaker Change: 5% of the total capital cost and is that cost.

Speaker Change: Most of it probably two thirds of it is labor depending on the trade.

Speaker Change: So we have gone through and if you look at it on a typical deal for us.

Speaker Change: Based on assumptions you make about tap.

Speaker Change: What what percentage of product is foreign sourced and so on it might add a couple of percent to a total budget, maybe five to $7000 a unit if it all gets 100% pass through.

Speaker Change: So that would be a little bit of a headwind to future I see.

Speaker Change: Business.

Speaker Change: I think much more important is labor are you know what makes up hard cost. It's the materials. That's the smallest piece of it it's the labor and then it's the sub contractors profit margin.

Speaker Change: And what we're seeing in the current market today with the slowdown in multifamily starts and with the slowdown in single family starts is the sub contractors are hungry for work. So we're seeing great success on the buyout right now on the things that we currently have in the market.

Speaker Change: And you can see that even in our current the deals. We just completed this past quarter actually finished under budget, which is the first time I think I've been able to say that in probably six years.

Speaker Change: And the deals we have currently under construction are also tracking a little bit under budget. So.

Speaker Change: Much more of its going to depend on the macro environment.

Speaker Change: Sub contracted the trade base, how busy they are and ultimately their labor costs.

Speaker Change: But right now theres more tailwind and headwinds, but you know obviously that could change.

Thank you and then just one more if I can on the prior call.

Speaker Change: Company was a bit cautious on Boston can.

Speaker Change: Can you talk about Boston your thoughts between supply and demand.

Speaker Change: And then you know as pharma biotech slowing down Boston more than expected. Thank you.

Speaker Change: Yeah.

Sean Breslin: Yes, Jeff This is Sean I would say our experience in Boston.

Speaker Change: It was relatively positive.

Speaker Change: Do not have a.

Speaker Change: Our cautious outlook for Boston whatsoever.

Speaker Change: It's been a strong performer, particularly our primarily suburban portfolio well insulated from new supply.

Speaker Change: Highly educated high income workforce there in Boston.

Speaker Change: If we don't have a lot in the sort of inner core we are a handful of assets.

Speaker Change: Where theres been a little more supply so.

Speaker Change: So it may just be portfolio differences.

Speaker Change: Creating a bit of a cautious note as compared to our experience.

Thank you.

Speaker Change: Okay.

Speaker Change: Our next question is from Nick you Lisa with Scotiabank. Please proceed.

Nick: Thanks, I was hoping to get what the development completion.

Speaker Change: Expectation is for this year.

Speaker Change: Relative to the $1 3 billion that was completed last year.

Speaker Change: Yeah, Nick it's Matt I think we're only looking at completing about 300 $350 million of SER 400.

Speaker Change: 350, yeah. So that's why you're going to see expectations. If we started building takes only complete $3 50, the development underway would grow from call. It $2 2 billion today of three and a half by the end of the year.

Speaker Change: Okay. Yeah. That's helpful. Thanks, Matt and then I guess the follow up on that as you know I know page 11 of the presentation you guys gave that helpful math on.

Speaker Change: The NOI from new investment in the capital markets activity and there is not you know the net the net of those two is a slight benefit this year. So I guess based on what you just said that.

Speaker Change: 33 cents from new investment, that's that's a sort of a lighter number I guess than normal and perhaps the capital market's activity.

Speaker Change: Is eating into that more so than it would in a in a given year, meaning that like the this feels like this might be a little bit of an abnormal year for how development. Overall is contributing to earnings growth does that is that the right way to look at it.

Speaker Change: Probably that's probably true to some degree.

Speaker Change: The capital costs are a little heavier this year do you have a cap interest benefit of <unk> that goes the other way and then.

Or your discussion with Matt, where we're delivering a little bit less our occupancies. This year, which is what gives us this development NOI.

Speaker Change: <unk> is expected to see.

Speaker Change: It is expected to be a little less this year.

Speaker Change: 2200 units this year versus.

Speaker Change:

Speaker Change: Mm 3000 units in 25, but when you kind of roll. It all together you can see this in our development NOI itself, which is a component of that 33 cents.

Speaker Change: For 2025.

Speaker Change: Our development NOI is expected to be $30 million, whereas last year. It was it was a higher number.

Speaker Change: Last year at about 40 41, when you go to something like that $40 million to $45 million. So when you put it all together, there's a little bit less development NOI coming through but there are some puts and takes and I guess I'd refer you to kind of the the answer that I gave to Eric at the top of the call here in the Q&A session, where I kind of walked through the development accretion.

Speaker Change: With our earnings growth, what we think we get from our investment platforms in terms of earnings growth. This year, it's about 15 cents, which equates to about 140 basis points of growth, that's probably a little lower than a normal year, which is probably more like 150 200 basis points contribution from our investment activities and again, if you want to.

Speaker Change: Walk through this offline, we can certainly do that.

Speaker Change: Okay very helpful. Thanks, guys.

Yeah.

Speaker Change: Our next question is from John Pawlowski with Green Street Advisors. Please proceed.

John Pawlowski: Thanks for the time Matt.

John Pawlowski: Transaction market questions for you I'm curious in the markets Youre looking to buy in what rough range of replaced discount to replacement costs are you able to buy cars.

John Pawlowski: I know a lot of folks in the private market are quoted discounts to replacement costs, but it's a it's a really really subjective figure that you can pick any number to justify the price you're paying so curious for what your team is seeing given here.

John Pawlowski: Good detail are good kind of clarity on on construction costs and when you combine this let's say market.

John Pawlowski: Yes.

John Pawlowski: It is something that we also look at pretty closely because those are both investment options that are available to us and we're both developing and buying in many of these markets today.

John Pawlowski: So it depends on the Submarket it depends on the product side a lot of what we're looking to buy is call. It five to 10 years old and it might be at a 10% to 20% discount to replacement cost.

John Pawlowski: That is not inappropriate brand new products should sell at a higher price per door per foot than 10 year old five to 10 year old product and it'll generate more NOI.

John Pawlowski: There are markets, where we can profitably by brand new product in lease up we're coming right out of lease up below where today's replacement costs or if those are not the markets and the submarkets. We're generally looking at we're trying to stay away from those high supply Submarkets.

John Pawlowski: Yeah, what we've been looking at anyway, it kind of lines up in a way that makes it a bit more to that.

John Pawlowski: Okay.

John Pawlowski: And last one for me.

John Pawlowski: Briefly caught your portfolio trading commentary.

John Pawlowski: The quote you had could you just expand on that it sounds like you're more optimistic about getting the portfolio was down is that a function of wanting to accelerate your portfolio shift and the suburbs in the expansion markets or is it a function of youre seeing better pricing on portfolio acquisitions.

John Pawlowski: Yeah.

John Pawlowski: Well, what I meant to say anyway, with if a portfolio that align with our <unk>.

John Pawlowski: Strategic objectives can tomorrow.

John Pawlowski: Market.

John Pawlowski: Definitely be interested in pursuing it more in a our balance sheet would support it. So we certainly could pull the trigger on something it was attractive you know we're not necessarily at this moment seeing seeing that so I think the conditions are balance sheet supports that the conditions are there and more broadly we think it's a better time to make the.

John Pawlowski: Relative trade.

John Pawlowski: Maybe it has been in the last couple of years. So therefore, our hope is that we will be able to increase our portfolio trading activity further that we haven't seen it.

John Pawlowski: Yeah.

John Pawlowski: Okay.

John Pawlowski: Thank you.

John Pawlowski: Yes.

Speaker Change: Our next question is from Adam Kramer with Morgan Stanley. Please proceed.

Adam Kramer: Great. Thanks for the time here.

Adam Kramer: I wanted to ask about the Los Angeles market, obviously really unfortunate wildfires and situation. There I was wondering if you know in your portfolio.

Adam Kramer: You've seen anything on the ground, whether its leads or activity.

Adam Kramer: You know that could suggest there could be some incremental benefit to the portfolio just from a need for more rental properties.

Adam Kramer: And then on the other side of it anything from a headwinds perspective be it.

Adam Kramer: The picture moratorium or anything else that could that could impact operations or on the other side.

Yeah. Adam This is Sean first as it relates to your initial question.

Adam Kramer: If you think about the displacement of what happened there, but certainly it is tragic.

Adam Kramer: As you might imagine what we have heard on the ground from our teams is that most of those customers as you might expect are looking for single family rentals larger floor plans.

Adam Kramer: Preferably in the same school districts, if they can get it which is certainly challenging obviously given.

Adam Kramer: The level of destruction that occurred we have seen a little bit of an uptick.

I would say over the last three weeks.

Adam Kramer: Maybe 15% of our leases is around 60 leases or so has come from people who have been displaced.

Adam Kramer: But it is very specific as assets in Submarkets, Pasadena, Glendale, Santa Monica Burbank, some of those submarkets.

Adam Kramer: A handful of leases here and there that add up to about 60 leases. So it's hard to know where it's going to go forward as the insurance process evolves and things of that sort, but that's what we've experienced thus far.

And as it relates to the potential adoption of any <unk>.

Adam Kramer: Eviction moratorium and or rent freezes, we have not contemplated that as part of our guidance.

Adam Kramer: There's been chatter about the city council looked at it a week ago. They send it back to housing Committee.

Adam Kramer: The committee is reviewing it saying so back to the council. So there was a little bit of Ping pong going on right now.

Adam Kramer: So we don't know exactly how that may come out.

Adam Kramer: But we hope that they don't take action is certainly.

Adam Kramer: It has a negative impact on people who have been displaced we need more housing for those folks not less so we'll see where it comes out but we don't know anything definitive at this point.

Adam Kramer: Got it that's helpful and then.

Adam Kramer: Looking at slide 12, with the kind of job growth you know any kind of employment forecast for this year.

Adam Kramer: I don't know that I have a specific question here other than just.

Adam Kramer: Being a little bit surprised maybe at kind of the acceleration of jobs for the rest of this year and I know these different from third parties. So that the level of granularity that you guys have may not be may not be super Super robust here, but just anything you can talk about kind of what what they.

Our thinking is or what's embedded in that kind of acceleration over the course of this year from a jobs perspective.

Adam Kramer: And again it looks like it's taking jobs and three June for Q2, a level, we haven't seen in a couple of years. So just the kind of underlying assumptions or thought process. There I think would be helpful.

Speaker Change: Yeah, Adam it's been we continue to look at nave the National Association of business economists.

Speaker Change: As the starting point for our job and wage assumptions going into the year and.

And as you call out.

Speaker Change: Moderating growth last year wind up having roughly about 2 million jobs generated across the country.

Speaker Change: And the consensus is that figure coming down into roughly a.

Speaker Change: A million and a half type of range fairly consistent kind of growth throughout the year, Sean called out in his prepared remarks.

Speaker Change: We are hopeful that we will benefit from a better mix of jobs. This year, given potentially more of the growth occurring in our core Avalon Bay types of industries.

Speaker Change: Yes, one thing just to clarify and make sure you're interpreting the chart correctly as the chart on the right only reflects two job classifications within our southeast regions. It's not overall job growth. So keep that in mind that is talking about an acceleration in those specific categories of employment is.

Speaker Change: As opposed to that being the cadence of overall job growth throughout the U S.

Speaker Change: Thank you both really helpful.

Rich Hightower: Our next question is from rich Hightower with Barclays. Please proceed.

Speaker Change: Hey, good afternoon guys.

Speaker Change: So I don't want to go I want to go back your.

Speaker Change: Some comments of the breakdown between new and renewal and blend for the year and to see if you could break it down just a little bit further and tell us how.

Speaker Change: Sort of the established markets relative to the expansion markets might look under the same framework. Thanks.

Speaker Change: Okay.

Speaker Change: Yes so.

Speaker Change: As I mentioned, we expect to see an improvement in effective rent change as you move through the year.

Speaker Change: Which would be normal with the second half being slightly stronger than the first half which is the opposite of what occurred in 2024.

So that's you know kind of where we are as it relates to the sequencing by quarter as it relates to the expansion regions versus the established regions. The first thing I would say is yes.

Speaker Change: The majority of our portfolio is obviously, our established regions and were expecting.

Speaker Change: Rent change to be healthier in those regions as compared to the expansion regions.

Speaker Change: <unk> regions.

Speaker Change: We're talking about a handful of regions here so.

Speaker Change: Wouldn't necessarily average them because we have a lot of different things happening across those regions that are very unique.

Speaker Change: Sure I'll, let particularly urban Charlotte's pretty beat up it's likely going to be flat to negative.

Speaker Change: Yes.

Speaker Change: Dallas will likely to be positive this year because of a pretty rough 2024.

Speaker Change: And the 2% to 3% range positive and then Florida and Denver, Florida is expected to be very modestly positive I call it roughly flat.

Speaker Change: Plus 50 basis points, and then as it relates to Denver, So better about Denver then.

Speaker Change: What is represented by the market overall, given the distributed nature of our assets across suburban Submarkets.

Speaker Change: That being said, it's experienced the level of supply that has impacted the market more generally so it would also be below the established region average.

Speaker Change: So I would be hesitant to draw sort of a broad conclusion across expansion regions, but give you a look at those insights as it relates to each one.

Speaker Change: That's very helpful. Thank you Shawn and then a second quick one is for Matt.

Speaker Change: You mentioned wanting over time to grow the S E book.

Maybe around 400 million I think we've heard comments on other calls that that particular product in the marketplace is becoming increasingly competitive.

Speaker Change: I guess, you know in terms of capital chasing yield and so forth. So maybe just tell us about the dynamics that youre seeing in the marketplace.

Speaker Change: And.

Speaker Change: How you guys can sort of be.

Speaker Change: We will be selective and still hit your growth target there. Thanks.

Speaker Change: Sure.

Speaker Change: Rich I guess, what I would say is.

Speaker Change: We do think that we bring in terms of the competitive environment for us the issue hasnt been losing deals to other providers of that slice of capital. It's been finding deals that underwrite to an appropriate level of safety and margin for us.

Speaker Change: Relative to where our proceeds are going to stop so you know, we're not going as high up the capital stack as we used to go whereas maybe earlier iterations went just given what's happened to interest rates and valuations.

So what we saw last year as there were a lot of deals trying to get capitalized. It really they were just the wrong core product market fit they were high rises in a market that would only support mid rise or mid rise in a market that should only support garden or very aggressive super luxury rents assumed or something like that.

Speaker Change: Through the course of 'twenty for a lot of those deals got flushed out of the system and just didn't didn't happen and not only did they not happen, but eventually the sponsors just gave up and moved on so what we've seen recently I've seen in the last quarter or so.

Speaker Change: Deals that may start to make a lot more sense, they're much better basis, it's a better land deal. It's the right product it's generally.

Speaker Change: As ambitious and aggressive in terms of the density and the rent levels. So we think those deals make sense.

Speaker Change: And some of those deals people are not taking our program is strictly managed to merchant builders were not doing to kind of bridge to bridge thing or the recaps.

Speaker Change: And the reason, we're keeping it to that is because it leverages our unique capabilities in development construction and operations. So on the deals that make sense to us.

Speaker Change: I would say we are a preferred capital provider and we have.

Speaker Change: In our credit agreements with quite a few primary lenders both banks and debt funds. They take a lot of comfort in the fact that we are there with them in the lending in the capital stack because we have a lot of internal data, we know how to look at a deal and understand if it's getting built right and if it is going to be operated right. So I'd say, we're very competitive.

Speaker Change: On the deals that we want to win and it's just.

Speaker Change: Hoping that there'll be enough of them out there for what is a pretty modest goal. I mean, these are 2000 $25 million per deal. So we're talking three deals three or four deals over the course of the year. We already have one that's in due diligence right now that we hope to close here in the first quarter and several others that.

Speaker Change: R&D advanced stages, so I'd say, it's a relatively modest calling I'm feeling pretty good about it.

That's great great color. Thank you.

Speaker Change: Yeah.

Speaker Change: Our next question is from Alexander Goldfarb with Piper Sandler. Please proceed.

Speaker Change: Oh, Hey, good afternoon, good afternoon down there.

Speaker Change: Two questions first.

Speaker Change: Fee income has been a popular topic in the industry Roes out various things like Wi Fi. In addition to historic things waste services et cetera. As you guys look at the total all in pricing of rent plus these other services is it your sense that these services are additive or from a red.

Speaker Change: NIM perspective, they look at the whole sort of the whole answered a lot of <unk>.

Speaker Change: This is the amount I can pay and therefore, whether you're charging more in fees or rent. It doesn't really increase the overall sort of growth rate of the units per site.

Sean Breslin: Yeah, Alex as Sean it's a good question.

Sean Breslin: What I'd say is it depends a little bit on the composition of the various things that ended up in the bundle I'll call. It. So for example, if we're talking about bulk internet to use one example.

Sean Breslin: If we could replace the cost of that service for the resident at a comparable speed at a discount.

Sean Breslin: That they should look at that favorably right.

Sean Breslin: When it comes to other fees that are out there I think it's a it's a good point when people started looking at okay. There's a.

Sean Breslin: Let's call it a move in fees for amenities or there's a recurring maintenance fee or against this better together.

Sean Breslin: If you're an outlier as it relates to that didn't you may start to see some resistance.

Sean Breslin: Everybody's passing through utilities here, but he is pet fees things like that that are relatively standard I think it's people, who maybe were add on the edge a little bit as it relates to either the amount, they're charging for something or the unique nature of one that people may start to pause and I'm wondering if that really makes sense or not.

So it's an area that's evolving I would say, we're all pushing it the publics privates et cetera, and I think where we're providing good service and good value for our residents.

Sean Breslin: It should appreciate it it may take a little education for Hudson to understand it.

Sean Breslin: It was this fee while this is a bulk internet fee. If you look at what you pay every month to horizon, and what we're offering a statistic out et cetera et cetera. So it's a good question I think people are working their way through it and that we think we provide good value to residents for what we charge.

Sean Breslin: But it is sort of.

Sean Breslin: Owner by owner type of approach. So you really have to look at.

Okay. The second question is on <unk>.

Sean Breslin: Harvesting assets clearly you guys are now out of Connecticut as you look at Maryland, Yeah, Montgomery County has become a flashpoint given rent control.

Sean Breslin: Is it your view that that's another that Maryland is another market that you would look to significantly scale back, especially where it's been impacted by rent control laws, just sort of curious given some of the headlines out of that market.

Matt: Yeah, Alex it's Matt.

Sean Breslin: It is a factor in our overall.

Sean Breslin: Portfolio allocation goals longer term, south and talked about our goal to get to 80% suburban some of that is about demand and supply you know, we like the demographics and there's more supply constraints and mainly suburban.

Sean Breslin: Our accounts and some of it is about regulatory risk and exposure and most of the jurisdictions.

Sean Breslin: Have a more aggressive regulatory regime or more regulatory risks are urban you mentioned, one that's not Montgomery County, which is suburban we have a relatively modest presence in Montgomery County that I think we only have maybe for assets there.

Sean Breslin: So we're not necessarily looking to lighten up specifically in Montgomery County at this moment, but it is a part of our overall strategy and you'll see us continue to sell assets out of jurisdictions, where we view there being elevated regulatory risks over the next period of years I mean, even if you look at what we sold in the past year, you know we sold an asset in the city.

Seattle, we sold an asset in the city of Los Angeles.

Sean Breslin: City of Boston those are all places that that was one factor among others.

Sean Breslin: And Youll continue to see that Theres, a disposition side. Alex. Obviously, then there is also the new investment side and so.

Sean Breslin: Certain locations that has heightened regulatory risk or uncertainty as it relates to the regulatory future for sure. The bar is higher there in terms of investing new capital dollars.

Sean Breslin: Right. Okay. Thank you.

Speaker Change: Our next question is from Rich Anderson with Wedbush Securities. Please proceed.

Rich Anderson: Good afternoon. So when you just look at what you have going on right now and let's say you get you know.

Speaker Change: Anything John in 2025 that you have on your plate.

Speaker Change: How much closer or do you get to your 25% target in expansion markets from the 10% that ended the year I'm. Just wondering you know what how much of the gap closes.

Speaker Change: Over the course of this coming year as you see it today.

Speaker Change: Yeah, rich we've been taken a fairly set eight and sort of measured approach there and as you saw this year, we moved it to another 2% to 3%. So we continue in that normal course between trading activity.

Speaker Change: New investment activity is probably likely in that range now that is subject to the extent that we find opportunities small portfolio opportunities to essentially move that needle quicker that's out there, but normal course, it's probably in that type of range. So it is a it's a multi year effort, which is true.

Speaker Change: Benefited us as we sort of pace, our capital allocation into these markets overtime, Okay and.

Speaker Change: Maybe correct me, if I'm wrong here, but I think 45% of your stock.

Speaker Change: This year will be in your expansion markets.

Speaker Change: Do you think is that area in the country steadily improves over the course of this year and perhaps you start to see some really big time growth in 'twenty six 'twenty seven that acquiring in those markets becomes incrementally less appealing and developing is perhaps the way you Tom.

Speaker Change: Getting to your full allegation of 25% is that a reasonable way to think about it like for now maybe more in the way of acquisitions, but later on more in the way of development.

Speaker Change: I think about it is both I mean, I wouldn't I don't think it's an either or choice for us at a market level at a sub market level, obviously, we will lean into acquisitions versus development going back to matts conversations as it relates to replacement cost, but you know I think we are in a window right now where we feel like we have it.

Speaker Change: Balance sheet, we can bring our strategic capabilities to bear where we can be growing both through acquisitions and development and then breaking down development further through our own development and through the funding of other developers and that's a program that in times, where we feel like we have the green light on development in terms of economics of the development and cost to capital.

Speaker Change: That allows us to flex capital allocation into that sleeve.

Speaker Change: Okay fair enough thanks very much.

Okay.

Speaker Change: Our next question is from Michael Goldsmith with UBS. Please proceed.

Michael Goldsmith: Good afternoon. Thanks, a lot for taking my question can you talk about the gap in performance in suburban and urban markets in the fourth quarter and do you expect that gap to remain similar in 2025.

Michael Goldsmith: When you say gap in performance, Michael can you be a little more specific as to whats youre looking for or are you talking about like rent change as an example, yes, yes.

Michael Goldsmith: Rent change exactly.

Michael Goldsmith: Change standpoint, our suburban portfolio continues to outperform it outperformed in the fourth quarter.

Michael Goldsmith: By about 40 basis points.

Michael Goldsmith: And given some of the dynamics, we've been talking about and what I referred to as it relates to the very very low levels of supply in our suburban submarkets.

Michael Goldsmith: That expectation is it will continue moving forward. There are some places with return to office that you might see a little bit of a lift more significantly on the urban side, we haven't seen that quite yet.

Michael Goldsmith: Certainly a possibility as we move through the year.

Speaker Change: Thanks for that that's helpful and my second question is that bad debt assumption for twenty-five imply that delinquencies remained elevated versus the historical level. What factors are you keeping you from reaching that historical level of bad debt.

Michael Shaw: Yeah, Michael Shaw again.

Speaker Change: Yeah in terms of reaching a historical level of bad debt.

Speaker Change: I think the couple of schools of thought there I mean people wonder is that achievable or not the 50 to 70 basis points that we have a.

Speaker Change: Realized historically that is still a little bit of a TBD.

Speaker Change: The headwinds are certainly a tighter regulatory environment in terms of the processing of evictions. The timeline is taking some of that backlog with some of it is additional regulatory actions that have been adopted that slows the process.

Speaker Change: So that may be a little bit of a headwind to getting back to normal levels at the same time, though there's always been an element of fraud in the system and I would say that the industry is much better tools available nowadays than we ever had pre COVID-19 to weed that element out screened them out essentially so theres some puts.

Speaker Change: And takes there so we still have a ways to go in terms of getting there I suspect. My intuition is we will certainly be closer to the 50 to 70 is and where we expect in 2020 five but its going to continue to take time to get there in certain markets in particular like in New York City, The district of Columbia, Montgomery County, but you can see it.

Speaker Change: Movement in those regions to support us getting there a little bit faster.

Speaker Change: Thank you very much.

Speaker Change: Our next question is from Alex Kim with Zelman and Associates. Please proceed.

Hey, guys. Thanks for taking my question just to clarifying wanted to begin is the development volume from the DSP included in the overall.

Speaker Change: One 6 billion number and is there a number or percentage even bookmark the townhomes, you're developing alongside your apartment units.

Speaker Change: Yeah, Hey, Alex it's Matt So yes. The development volume includes it's mostly our own development and a little bit of gas piece I think as we sit here today three of the 17 deals under construction or <unk> and then as we look to our 25 starts.

Speaker Change: Time will tell but my guess is maybe get similar proportion probably two or three out of 10 or 12 starts would probably be DSP those come quicker so they're a little not quite as easy to predict but.

That's that's our expectation as it relates to the townhome component. So we have the 100% townhome community under construction today, which is a DSP deal that's <unk>.

Speaker Change: Plano.

Speaker Change: And then we probably have.

Speaker Change: Two or three other communities currently under construction that have a townhome component to them I'm just looking at the list now like Norman Wayne two deals in New Jersey, Pleasance and out in the East Bay actually have some Townhomes Tech Ridge in Austin has some townhome so.

Speaker Change: Anytime that we can mix it in.

Speaker Change: We will and we see that more and more with some of our garden communities wherever he might do very typical deal like looking at Avalon wane in Northern New Jersey, I think 470 to 450 units. Its maybe 50 Townhomes in 400 stack flat and that's been that's been a great formula for us.

Speaker Change: Got it that's very helpful and then.

Speaker Change: Just another one on the BTR business as you expand your exposure to the product type or are there any plans to ramp overhead. This year will you continue leveraging your existing capabilities.

Speaker Change: Okay.

Speaker Change: So one of the nice things about the DSP is that it doesn't come with the same internal overhead if we do find third party developers their overhead through paying and developer fees, but it doesn't require incremental overhead on our platform. So.

Speaker Change: We don't see that as a driver.

Speaker Change: Got it okay, yeah, thanks for the color.

Speaker Change: Yeah.

We have reached the end of our question and answer session I would like to turn the conference back over to a bench off for closing remarks.

Thank you everyone for joining us today, and we look forward to speaking with you soon.

Speaker Change: Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

Okay.

Speaker Change: [music].

Speaker Change: Yeah.

Speaker Change: Yes.

Speaker Change: [music].

Speaker Change: Yeah.

Speaker Change: [music].