Avalonbay Communities Inc (AVB) — Q4 2021 Earnings Call Transcript

Thank you, Aleena, and welcome to AvalonBay Communities' fourth quarter 2021 earnings conference call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon’s press release as well as in the company’s Form 10-K and Form 10-Q filed with the SEC. As usual, this press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today’s discussion. The attachment is also available on our website at www.avalonbay.com/earnings and we encourage you to refer to that information during the review of our operating results and financial performance. And with that, I will turn the call over to Ben Schall, CEO and President of AvalonBay Communities, for his remarks. Ben?

Thank you, Jason. And thank you to everyone for joining us on the call today and for your engagement. Kevin, Matt, Sean, and I will provide some initial commentary and then we will open the session up for questions. I want to start by thanking the AVB associate base, 3,000 strong, for all their contributions throughout 2021. Thanks to your commitment, we produced strong business results and embarked on our next phase of growth by ramping up our development and investment activity, all while navigating the challenges presented by the pandemic. Thank you especially to everyone working on site at our communities and construction projects and to our human resource teams for all you do to support each other, serve prospects and residents, and build for our future. Turning to the presentation, Slide 4 provides the summary of our success and strong finish to 2021. On the operating side in the fourth quarter, we delivered a 12.4% increase in core FFO and a 4.7% increase in same-store revenue. On a cash basis, same store revenue increased 8.3%. This momentum continues in the New Year as we build on our strong operating foundation with healthy occupancy levels, low resident turnover, and strong embedded revenue growth. We also successfully ramped our investment activity in 2021 with almost $2 billion of new development starts and acquisitions, and with the bulk of this capital funded by dispositions and incremental debt financing at a historically low cost of capital. In an otherwise low-yielding environment, our development capabilities allow us to generate significant value and meaningful incremental NOI growth on top of the internal growth generated by our operating portfolio. As shown on Slide 5, we completed $1.1 billion of projects in 2021 with an expected $65 million of new NOI upon stabilization. At a development yield of 6% and with a 230 basis point spread to an estimated market cap rate of 3.7%, these communities have created $650 million in value. That’s a very robust 60% value creation margin. As Matt will describe further, we expect to start an additional $1 billion to $1.25 billion of development projects this year at projected yields of 5.5% to 6.0%, and we control a growing development rights pipeline which will set the stage for continued accretion and value creation from our development platform for many years to come. As we continue to invest and grow, we’re also optimizing the earnings growth and long-term value of our existing portfolio. A large component of this optimization is the selling of older assets with slower growth profiles and redeploying that capital into more expansion markets. During 2021, as highlighted on Slide 6, this led to our acquisition of $725 million of assets with an average age of three years at a 3.8% cap rate and a disposition of $865 million of assets with an average age of 26 years at a 3.7% cap rate. The bulk of our acquisitions were and will continue to be in our expansion markets, which over time, across Southeast Florida, Denver, Austin, Dallas, Charlotte, and Raleigh-Durham, we see as having the potential to grow to become 20% to 25% of our portfolio through a combination of development and acquisitions. These expansion markets share many of the same characteristics as our established markets including concentrations of knowledge-based workers and strong housing fundamentals. They also provide portfolio diversification and increased exposure to longer-term population shifts. So most of our portfolio and new development capital in the long term will be in our established markets where we have a high-quality portfolio of assets situated in regions that we believe will continue to thrive as vibrant centers of innovation, education, technology, and with strong job and income profiles. And in regions where we continue to leverage our long tenure with some of the strongest operating and development teams in the multifamily industry. Turning to Slide 7, we continue to make significant investments in technology and innovation as we evolve our operating platform in order to provide enhanced value to prospects and residents while achieving operating efficiencies and driving new sources of revenue. We generated approximately $10 million of incremental NOI from our initiatives already deployed and about a third of the way to delivering our target of 200 basis points of margin improvement or $40 million to $50 million of NOI to the bottom line. Finally, I want to emphasize our continuing investment in our people and our leadership in ESG. Starting with ESG, our goal is to keep AvalonBay at the forefront as a leader in sustainability and corporate responsibility, an area of increasing importance for our residents, associates, and investors. As an output of this corporate leadership, we’ve been recognized by various organizations as ESG leaders as shown on Slide 8 including the NAREIT Leader in the Light Award as the top-ranked multifamily REIT for ESG leadership. And most importantly, we continue to invest in our people and our culture. AvalonBay is an amazing place because of its people and we’re extremely focused on fostering an inclusive and diverse culture that attracts, retains, and provides growth opportunities to our people. We’re excited for the year ahead, are fortunate to have a deeply dedicated team of associates, and we enter the year with our foot forward and in growth mode. With that, I’ll turn it to Sean to talk further about our operating results and tailwinds heading into 2022.

Alright, thanks Ben. I thought I’d share a few slides on recent portfolio rent trends both overall and across different markets and sub-markets. Starting on Slide 9, 2021 was a pretty unique year. In the first half of the year, we experienced not only a significant recovery in our business, with the average move-in rent growing fast enough to exceed pre-COVID peak rent levels by mid-year. And in the second half of the year, the combination of lower turnover which was down 20% year-over-year, 11% below pre-COVID levels and the lowest we’ve seen in 10 years, along with a healthy demand resulted in rents defying seasonal norms by growing into September and then flattening through year-end. Historically, we’d see rental rates peak in July and August and then decline in the low single-digit percentage range through year-end as represented by the dashed line for 2019. For the calendar year 2021, the portfolio average move-in rent grew by 23% and at year-end exceeded 2019 levels by about 9%. Moving to Slide 10, improved performance has been broad-based with every region experiencing a significant increase in average move-in rent over the past year. Average move-in rent in New England increased by 30% during 2021, the highest of our established regions, at the end of the year about 10% above pre-COVID levels. Improved performance in Boston has been supported by healthy job growth across various industries, most notably Biotech, and reduced apartment deliveries in both urban and suburban sub-markets. In addition, for a region that is typically more seasonal given the weather patterns, it’s quite unusual to see rents flatten out in the last quarter of the year versus decline. That’s the sign of a pretty strong market. In Southern California, the average move-in rent grew by 23% during 2021, and at year-end it was 21% above 2019 levels, the highest of our established regions. Performance has been supported by solid job growth, particularly in the content-producing sector of the economy in LA, the lowest level of new multifamily supply of any of our regions at 1.1% of stock, and a very tight single-family market. At the other end of the spectrum, Northern California continues to lag the portfolio due to major tech employers delaying their return to the office impacting the reopening of other businesses and agile quality of life in the region. While the average move-in rent increased by 15% during 2021, at year-end it was roughly 7% below pre-COVID levels. For the region that has lagged in the recovery, we could see a very meaningful increase in moving rents in 2022 when a greater percentage of the workforce, particularly the tech segments that have experienced very robust wage increases in the past couple of years, go back to the office. We noted New York, New Jersey, and Pacific Northwest regions all delivered a 20% to 25% increase in average move-in rent during 2021. The mid-Atlantic ended the year with rents about 5% above 2019 levels. For the Pacific Northwest and New York/New Jersey regions, we’re trending at roughly 10% ahead of 2019 levels. Turning to Slide 11 to address suburban and urban performance trends, the average move-in rent for our suburban portfolio increased by roughly 20% during 2021 and was approximately 13% above 2019 levels at year-end. Our urban portfolio, while the average move-in rent increased almost 30% during 2021, it was essentially at 2019 levels by the end of the year. Urban markets with rents still below 2019 levels include San Francisco at about 17% and Washington DC at roughly 3%. In contrast, rents in New York City are currently about 4% above 2019 levels. With that, utilization rates in the high teens in the San Francisco Metro area at low to mid 20% in both New York City and Washington DC. We should continue to see a meaningful improvement in demand in our urban sub-markets as a greater percentage of the workforce has called back to the office. We see an increasing size of that demand returning. In Q4, our urban portfolio experienced about a 30% increase in the share of move-ins from more than 150 miles away as compared to pre-COVID norms. In markets like New York City and San Francisco, the share of move-ins from greater than 150 miles away increased by roughly 50% compared to historical norms. And we’re along just the move-ins are incurring in our suburban portfolio as well, but the increased share is more like in the 20% range. Moving to Slide 12, the improvement of rent levels has translated into strong like-term effective rent change. The average likeness of rent change in Q4, 2021 with October and November in the high 10% range followed by December at roughly 11.5%. The positive momentum continued in January, the rent change was roughly 12.5%. Importantly, we experienced a meaningful increase in rent change across six of our eight regions in January. And overall, we’re starting the year from a position of strength, January occupancy averaged 96.4%, asking rents have increased 1.5% since the first of the year. And we’re seeing early signs of continued low turnover in an environment with very healthy rent increases. With that operating summary, I’ll turn it to Kevin to address our full outlook for 2022.

Thanks, Sean. Turning to 2022. Apartment fundamentals in our established markets remain highly attractive. On Slide 13, we show just how strong they are by providing data on some key trends including strong job and wage growth for the professional services sector, which includes our target renters. The opportunity for further gains in office utilization from today’s low levels, rising single-family home prices which support rental demand, and a relatively stable outlook for new apartment deliveries in our markets. On Slide 14, we provide our financial outlook for 2022. For the year, we expect robust growth from both our same-store portfolio and from stabilizing development to drive nearly 16% growth in core FFO per share at the midpoint of our guidance of $9.55. In our same-store residential portfolio, we expect a continued rebound from the pandemic in our urban markets and continued economic momentum across our entire portfolio. During the midpoint of guidance, we project same-store residential revenue will increase by 8.25% based on growth in our urban portfolio in the low 10% range and growth in our suburban portfolio in the low-to-mid 7% range. We project same-store residential operating expenses to increase by 4.75%, primarily due to cost pressure in a couple of categories initiated as being deployed and some one-time benefits in 2021 that are not present in 2022. As for cost pressure, we’re experiencing these primarily in two areas. First, in utilities as a result of very favorable supply contracts for commodities that expired late last year. And second, in property taxes resulting from successful appeals in the prior year period and the expiration of certain pilot programs in New York, which will burn off over the next few years but at the same time allow us to exit rent stabilization and achieve full market rents on most of those communities over time. Among our various initiatives, we’ve started to deploy our bulk internet smart access offering, which will create a year-over-year expense headwind of about 50 basis points in 2022. It is part of the strategy to deliver a net profit of more than $30 million when this is stabilized over the next few years. Lastly, we’ve realized some one-time benefits in 2021, including a payroll tax credit in Q4 returning about a 30 basis point headwind to OpEx growth in 2022. As a result, we expect same-store residential net operating income will increase by 10% in 2022. For development, we expect to continue to generate earnings and NAV growth from stabilizing developments and to continue investing heavily in this differentiated capability, as you could see here on this slide. For our capital plan, we projected external capital sources of about $900 million from asset sales, our closure sale activity, and capital markets activity. For our capital uses, we expect to deploy about $1.2 billion towards development, redevelopment, and debt maturities in 2022. Finally, in our earnings release, we’ve also provided earnings guidance for Q1, to which at the midpoint we project core FFO per share of $2.20 in the first quarter or about $0.07 lower than in Q4. This sequential earnings decline is driven by several items, including OpEx increases in utilities, property taxes, and payroll, including previously mentioned payroll tax credit in Q4. All the increases are due to compensation adjustments and strategic initiatives and NOI decreases from net disposition activity in Q4. On Slide 15, we illustrate the components of our expected 15.6% growth in core FFO per share. Most of our growth, specifically $1.02 per share, is expected to come from NOI growth in our same-store redevelopment portfolios. About a third of our earnings growth or $0.44 per share is due to NOI from investment activity, which in turn is primarily from development. Partially offsetting these sources of growth is a combined increase of about $0.17 per share from capital market activity and increases in overhead. On Slide 16, we show the key components driving our expected net quarter overall increase in same-store residential revenue including our expectation for a strong increase in these rates, a favorable impact from a lower level amortized and newly granted concessions, an increase in other rental revenue, and modest improvement in underlying uncollectible lease revenue which we expect will remain elevated in the first half of 2022 before slowly improving in the second half of the year. However, we are assuming a year-over-year reduction of about $18 million in recognized rent lease collections from the emergency rental assistance program, which results in about a 90 basis point headwind to our projected full-year residential revenue growth rate. Moving to same-store residential revenue trend across our markets on Slide 17. Our expansion markets at Denver and Southeast Florida are expected to lead the portfolio revenue growth in 2022, followed by the Pacific Northwest. With the reasons Sean mentioned earlier, we expect Northern California to trail the portfolio average; however, it’s a region with a history of outside down cycles followed by robust recoveries. So we could be favorably surprised by actual performance in Northern California that has removed through the year. With that, I’ll turn it over to Matt to discuss our plans for our future development activity.

Hi, great. Thanks, Kevin. On Slide 18, we can see that we’re continuing to ramp up our development activity in response to the favorable market conditions. We had been starting roughly $1.1 billion in new development per year, most of the prior cycle before sharply curtailing new investment activity as COVID hit in 2020. We’ve been able to shift gears aggressively last year, getting back to an annual start level of roughly $1.2 billion and expect similar volume this year. This development continues to be very profitable with current development underway underwritten to an initial stabilized yield of 6%. With cap rates in the mid-threes, this puts us on track to extend the tremendous value creation margin Ben mentioned on our 2021 completions. In the pie charts on the right, you can also see how market performance and our portfolio allocation priorities are reflected in our recent starts activity with 90% of the 2021 and 2022 starts in suburban locations and a broad geographic mix including more than 20% in our expansion regions. As we accelerate our starts activity, our regional development teams have also been focused on back-selling the development rights pipeline to generate the next set of investment opportunities for 2023 and beyond. As shown on Slide 19, we have future development sites under control across all of our regions that have seen an increase in pipeline activity in the past few quarters. The project shown on the slide here represents $2.6 billion of future starts activity over the next two to three years and excludes some of our longer-term densification opportunities at existing assets which brings our total development rights pipeline to $3.3 billion at the end of 2021. We’ve been even more active so far this year with an additional $700 million approved by our investment committee just in January and more on the way including our first development right in Austin, Texas. This activity puts us on track to exceed $4 billion in development rights by the end of the first quarter. And with that, I’ll turn it back to Ben.

Thanks, Matt. As you heard on the call today, we’re entering the New Year from a position of strength on multiple fronts and to close, I want to emphasize five key themes that will guide us in 2022 as we seek to generate outsized value in earnings growth and as we continue to differentiate ourselves as one of the leading real-estate companies in the country. First, our decade-long track record as a leading developer with deep market knowledge and experience across the breadth of communities and apartment styles allows us to create value by tailoring each development to best fit the needs of the local area as well as continuing to meet the evolving needs of residents. It also drives meaningful incremental earnings NOI growth across cycles. Second, as we grow, we are optimizing the earnings growth and value creation potential of the existing portfolio by pruning slower growth assets and diversifying into new markets, providing an expanded domain to create value through our development, operating, and strategic capabilities. Third, our operating model is set to deliver meaningful earnings growth by utilizing technology and investing in innovation to improve operating margins and unlock additional revenue opportunities. Fourth, we will continue to lead on ESG, an area increasingly important to municipalities as we seek development approvals, to residents as they make housing decisions, and to our associates as we meet our mission of creating a better way to live. Lastly, at the center of all that we do, we will continue to foster our evergreen culture and invest in our people. We look forward to our engagement with shareholders and stakeholders on these themes and others during the year. And I’ll turn it to the operator to facilitate questions.

Thank you, appreciate all the color. I guess, maybe starting on the portfolio optimization and the target of 20% to 25% in the expansion markets, what’s the expected timing of actually getting there?

Yes, thanks, Nick. I would continue to look at our growth in Southeast Florida and Denver as a good proxy. We’ve been active in those markets over the last three to four years. We have a target reach of those markets of about 5%. And we’re about halfway through. Increasingly, we’ve got our people on the ground there. Our development activity continues to source additional opportunities and the hope is that we can accelerate from there in those two markets. So when you look to our next set of expansion markets, I would expect them to move on a similar type of timeframe over the coming years.

Thanks, and I guess another timing question. In terms of 200 basis points on the margin expansion opportunity, I think you mentioned your third done. When would you expect that 200 basis points to be in the run rate?

Yes, Nick, this is Sean. It is a multiyear process. It’s going to take us a few years to work through everything. But we’re making steady progress. I’d say if you talk about over the next 36 months to 48 months, it’s in the ballpark to work through all of it.

Good afternoon, guys. I’m sorry if I missed this. But could you confirm the loss lease in the portfolio as of January?

Yes, Rich, this is Sean. It’s trending at 12%.

And so, maybe just going back to some of the timing questions, if I heard correctly, it sounds like your leases are 23% higher than where they were this time last year give or take. But your leasing spreads are really strong, but not at 23%. Does that mean that you’re not capturing all the loss to lease and some will bleed into ‘23 or how should we think about that?

Yes. So just to clarify a couple of things, the 23% represents the move-in values at the end of the year as compared to the beginning of the year; not all of the leases in the portfolio being up 23%, if that makes sense. On the loss to lease side, like I said, it’s 12% today is a, I think I mentioned on the last call, about a third of the portfolio, at this point in time is constrained by various things, the regulations in New York City, there are a couple of COVID overlay issues out there, etc. So it’s really achievable today. If you just mark everything in the market, call it 8%. So how will that manifest its way through the portfolio will be as leases expire throughout 2022 and we’re able to move people to market. So that’s how things will slowly lead in. So if you’re trying to understand sort of the pace of revenue growth, given that phenomenon, then we do expect revenue growth will accelerate as we move through the year because all those leases are being marked to market as they expire.

That’s very helpful. And so maybe just framing the debate here a little bit on your guidance range, can you maybe give us a little bit of color as to what assumptions are driving to the high end versus the low end?

Yes, I mean, there are a number of different factors that play into that. So we could spend some time on obviously, Kevin talked about what we’re seeing in terms of or what we expect in the way of bad debt trends being modestly positive, but then we have a drag from rent relief that he also pointed out, those two variables could swing one way or another. And we’re expecting an improvement in underlying bad debt in the second half of the year. They could accelerate, which gives us a little extra juice. Rent relief could also accelerate, but could also go the other way. It’s a pretty unpredictable factor. And then obviously, you have the normal things that we talked about in terms of turnover, where it occurs, is it in markets that are currently regulated that we can get people to market? How fast is market rent growth move through the years? So there are those normal factors that we would expect in addition to the unusual factors in the current environment.

And just you didn’t mention anything about development? And I appreciate the range that you gave for NOI contributions. But is there, was it higher than what we were expecting, which is obviously a good thing, any things that you’re looking for on development that would make you more bullish or bearish?

Rich, this is Matt. I mean, as it relates to the 2022 earnings, that’s more or less the die is cast at this point; there are not going to be huge variations in that number because those are deals that are already under construction and in many cases have already started leasing. So the variability there would be around what is the actual lease-up pace and rate, does it do a little better or a little worse than what we’ve projected. But the bigger place where it will start to move the needle more materially in the out years would relate to starts that might happen this year.

Good afternoon, guys. Just to follow up on that development question really quick. Just it’s a little bit of nitpicking, but I guess the midpoint of the starts forecast for 2022 is a little bit less than what occurred in 2021. Is there a reason for that? Is it timing? Is it something else that we’re not aware of?

Yes, no. Rich, it’s Matt. It’s just these deals are lumpy. And one deal happens to start in December versus January or February can change the number, kind of on any particular period of time you want to take rolling four quarters or calendar year. So I would tend to look at it more kind of on a two-year basis, which is why that’s the way we presented the slide. You think about 2021 and 2022 together to $2.3 billion, $2.4 billion worth of starts and again, we’re looking to accelerate that and hopefully 2023 we do even more.

And then, I appreciate the detail around the composition of the same-store revenue outlook. Within that, I don’t think it was mentioned, but what are you baking in for sort of your underlying market rent growth assumption within all that sort of separately from just what’s baked in already and so forth?

Yes. That’s reflected in the bar that Kevin identified on the slide, Rich. If you take a look at that, that includes, it’s basically the confluence of different pieces, the very first bar on the lease rates. They reflect sort of the embedded piece, how much of the loss lease you can capture as well as the effective change you might see in rents as you move through the year, so all of that is embedded in that number.

Great, thanks, everybody. Sean, just curious, based on what you saw in urban markets in the fourth quarter, sort of bucking seasonal trends do you expect this - have you seen it continue? Do you think it can continue into 2022? And what did you guys assume in your guidance? Did you assume that it’s just more typical demand trends, just any thoughts there would be appreciated?

In the urban markets, specifically, you’re talking about Austin.

Yes, correct. You referenced I think 50% or so upside versus what you’ve seen historically in New York and San Francisco and then 30% I think.

Yes. We started to see that occur in Q2. It’s really accelerated as we get into Q3 and Q4 in terms of the percentage of movements coming from more than 150 miles away. I suspect and I haven’t looked at the full data for January may have slowed a little bit just given Omicron. But I think our belief is that we’re going to continue to see a steady improvement in places like New York City, DC, San Francisco, as more people are brought back to the office, we don’t think office utilization is going to go back to exactly where it was pre-pandemic. I don’t think most people do. But if you’re in the high teens to low 20% range, it may go to 70% utilization, it was still triple what it is today. So would you expect to see improvement across those markets as we move through the year, as well as some of these jobs that are suburban locations that have sort of the same thing going on we should be like a Tyson’s Corner here in Northern Virginia as an example. So we do expect healthy performance out of those markets, as we move through the year, and we’ve seen that begin, and the trend should continue. It was a little hard to tell, is it the exact pace. And that’s why Kevin made the comment that Northern California is still expected to trail the portfolio average revenue growth. But it is a market that could surprise to the upside. We just have to wait and see.

Yes, and also I had a follow up.

Sorry, I was just going to add an addition to the comments that Sean referenced, you also just have overall job growth. You look at the overall job growth relative to pre-COVID levels in our urban markets and we continue to think that there’s some pretty meaningful room to run there and will serve as a decent driver.

Yes, that makes a lot of sense. And Sean, you had started to hit a little bit on my follow up there. So how did you go about I guess, underwriting same-store revenue growth for Northern California? What pace did you assume or how should we think about what’s currently underlying that range?

Yes. I mean, the way I would think about it is kind of three pieces could give you a rough roadmap. First is obviously what’s intended, which is easy. Where leases are today in January compared to they were basically on average for 2021. And then you’ve got the loss-to-lease component, which is easy to compute. And then you have what you expect in terms of market rent growth. The third piece is the one that’s most uncertain. So we can see where we’re moving people in today in the last quarter as an example. And so we can assume that as leases expired moving through the year, we should be able to achieve at least that level. And then we have some modest growth built in beyond that based on a slow pace in terms of the return to office. But as Kevin mentioned earlier, things could accelerate there. It’s just hard to put your finger on it as to how much incremental demand will show up, when it will show up, and how much it will drive performance in 2022. For the most part, you need to see a meaningful increase in that demand and in market rents in the first half of the year for future revenue in 2022. Once you get to the second half, that is mainly lease expirations, etc.

But it should begin to converge versus other markets, most likely towards the back half of the year given comps otherwise, and then this potential lift that you kind of spoke to from demand coming into the market, is that fair?

When you say converge, converge relative to what?

Either blended lease rates slowing in other markets due to more difficult comps, whereas Northern California and certainly lagged, as you guys highlighted and then it starts to accelerate either as others decelerate or it’s catching up?

Certainly, there is the possibility. Yes. There’s a possibility. One thing you have to realize is that the leases that were signed in the first half of 2021, still had fairly decent concessions. Rents are much lower than where they are. So you’re going to see pretty good effective rent growth in that market in the first half of the year. The second half will be dictated by some of the factors that I mentioned as it relates to demand.

Good afternoon. Can you just clarify the relationship between moving rents and your effective rent growth? So periodically, if you had or hypothetically, if moving rents were 23% above for the remainder of the year would your effective rent growth beat 23% once it plays catch up?

Not necessarily for some of the factors that I've mentioned earlier, John. I mean, you’ve got those are strictly moving rents which given turnover rates, just call it roughly 50%. There are also renewals. And, as I mentioned earlier, when I was talking about loss to lease there are constraints on renewals and a number of our markets. Some are normal, like the rent regulations in New York. Some are sort of this COVID overlay but it impacts about a third of the portfolios. You can’t effectively assume that you’re going to mark everyone to current move-in rent values over the next 12 months as leases expire.

So that move-in rent is always going to be higher than your effective rent growth. Yes, I think part of it is timing part of it is other fictional factors. But I’m just wondering, did the moving rents always appear higher than the effective rent growth that you achieve?

Yes. I mean, you’ve got, there are a number of different factors that feed into it. I mean, you’ve got a lag. So again, moving rents for as a moment in time, we’re talking about December versus January being up 23%. That was for that batch of movements during that period of time. And so you got sort of the two endpoints. So there’s a lag in terms of what asking rents are and then people move in is typically lag there. You’ve also got a lag because of renewals, but in theory to your original question, if there were no constraints and no lags, and you could mark 100% of the rent roll to market on February 1, yes, you would see a significant move in the average rent, lease rent for the portfolio.

And a question on your development starts which this year are predominantly 90% suburban? Is this the year of view where secular trends will continue suburban versus urban? Or do you see urban development picking up after this year?

Hey John, it’s Matt. Yes, I think last year was also our starts level was also certainly at least 80% urban, if not 90%. So I think it’ll still be awhile for us. When I look at our development rights pipeline, I expected our starts will continue to weigh pretty heavily suburban over the next couple of years. That is where we’re seeing better economics in terms of obviously, rents have recovered a lot more there as Sean’s data showed. And also, that tends to play to our strengths because the suburban submarkets are more supply constrained, actually, entitlements are more difficult to get there. So we like the risk-return profile there. The market as a whole, I think, in our established regions, you probably will see far fewer urban starts not just from us, but in general. In our expansion regions, there’s a lot of urban start activity going on, as well as suburban.

Thank you for taking my questions. So I wanted to talk about that development pipeline and in your development starts for 2022. If we kind of go back in the last cycle, you were averaging about $1.4 billion in development starts sort of through that I think 2014, ‘15, ‘16 period. How should we think about development starts with the pipeline that you have today? I mean looking out, will there be a big step function change as we think about the next couple of years?

It’s Matt, Chandni. I can take a shot at that. And then I don’t know if Kevin may want to weigh in as well or Ben. But yes, I mean, last cycle, we did ramp it up coming out of the GFC. And then there were a couple of years there where we were running at that level you described, I think over the course of the six or seven years, it was more like $1 billion to $2 billion, but we’re a bigger enterprise now and costs are up. So even on an apples-to-apples basis to do that much volume in the current environment that’s probably more like $5 billion to $6 billion a year in starts. And if we can find those opportunities, we’re feeling pretty optimistic based on our current book of business and the pipeline that we’re seeing we’re certainly ready and prepared and we look forward to the opportunity to be able to continue to grow.

And to add on that Chandni, the other part is the tie-in with our expansion markets and so part of that moves provides expanded opportunities that there and so early on, we’re growing through a combination of acquisitions, funding other developers and our own development. But that pipeline will also start to accelerate. And so you look a couple of years out, yes, we expect the overall development pipeline to continue to grow in size.

Maybe the final point there Chandni, as you think sort of about the our ability to fund this development activity, it's sort of somewhat tied to what's going on in the core business where we are in the cycle, what kind of EBITDA growth we have and what our capital options look like. At the moment what we’ve been doing is funding our external needs through a combination of newly issued debt and disposition activity for this year, with respect to our capital needs of about $900 million. Current plan, which of course can change is that we’re likely to fund that primarily through the issuance of new debt and then modestly through some net disposition activity, of course capital market conditions and our users can change. But it kind of speaks to the notion of a couple of things. Obviously, with our EBITDA rising very briskly here this year, we can utilize debt to help fund development and it’s an attractive source, it is both in its loan right and on a real basis when you think about inflation. And we can do that by issuing debt, because our EBITDA is rising quite a bit, and we can be leveraged neutral in doing so. But in a typical year, in most years, we can fund about $1 billion to $1.3 billion or so of development activity through a combination of free cash flow, selling assets where we can retain the capital because of our gains capacity, and then leverage neutral issuance of debt. So that’s kind of in a normal environment, plus or minus what we can do. We can probably do a little bit more early in the cycle as same-store NOI gross briskly as it is now. And potentially, at some point right now our equity or equity is attractive as a source for funding development, although at the moment, we find asset sales to be more attractive. But if we’re going to be doing an awful lot more than those, that kind of level of development funding, it does imply that we’re going to have some level of equity market access, so that's another constraint to layer as think about what’s possible. So the three constraints we traditionally think about is, we’re constrained by opportunity set. We’re constrained by sort of organizational capacity, and then we’re constrained by sort of what we have on the capital side so I was speaking sort of that third bucket right there.

That’s great level of detail. Thank you for that. And for my follow-up question, I know you gave out good detail on how should we think about the low end versus high end of guidance and one gets you to each side. But could you perhaps contextualize cadence through the years? And how should we think about seasonality this year given these discounts are pretty much thrown out of the window in 2021?

Yes. This is Sean. What I was indicating earlier, just based on leases that were written in early 2021, the first half of 2021, basically being substantially below where things are today, that we do expect revenue growth to accelerate as we move through the year. As we move those leases, the market certainly is the driving factor. As Kevin mentioned, when we get to the back half of the year, we expect bad debt to improve. So that also leads to accelerating revenue growth as we move through the year. So as it relates to seasonality in the back half of the year, it’s a little too early to tell. We are expecting to get back to more like seasonal norms when we get to the back half of the year as compared to what we experienced in 2021. It may be very different by market, depending on the sort of shape of effective rent growth as you move through the year. What demand comes back and when it comes back to some of these markets that we’re talking about where we’ll still be expecting a more full return to the office, etc. So I would say that we are expecting more like seasonal norms when we get to the back half of the year, but we’ll probably know better as we get through, say mid-year, what that might look like.

Thank you for the time. Sean, just one quick word for you, the 11% same-store like-term effective rent change and the fourth quarter, can you give us a sense of what it would have been had there been no regulatory curbs?

Yes, it would have been higher. I can’t give that to you outside my head, John. But I can certainly circle back. And what I would say is what I mentioned earlier is about a third of the portfolio is currently constrained and you would have seen better renewal growth. My guess is to provide a little bit of color move-in rents were 12.5% and renewals, we’re at 10. You probably would have seen the renewal side look more like the move-in side, but still a little bit of a Delta just because the lag between when renewal offers are made when they’re actually signed leases renew, just as our renewal offers 60 to 90 days in advance, but you would have seen maybe another 100 basis points on a blended basis if the 10 went to 12 and 50% turnover as an example if you’re looking at it in kind of theoretical terms.

And then Ben or Kevin, the $880 million year mark from capital sales or asset sales and capital markets activity. To peel that back what’s the kind of preliminary assumption assuming your cost of capital stays where it is, and the private market pricing stays where it is? What’s the preliminary assumption for asset sales within that figure?

Yes. Let me start a couple a little bit. So the external funding needed is kind of what we really need to run the business. If we weren’t, we’re just sort of really kind of not focused on it, on the trading activity. So there will be a fair bit of acquisition and dispositions just kind of on a trading basis, through the investment group that Matt oversees. From the standpoint of raising external capital, our current plan, as I mentioned a moment ago, that it’s funded largely through the issuance of newly issued debt. Just given more debt rates are today, although they’re up from where they were three, four, six months ago, they’re still quite attractive by almost any metric, and certainly attractive relative to our investment use which in this case is development. So the $900 million or so is really primarily funding the investment activity. So it will be mostly through debt and we’ll likely be able to do so on a leverage neutral basis. There is we do expect to be a modest net seller of assets and so those net disposition proceeds will be worked into a small component of that $900 million. And again, of course, as you point out, that’s where we stand today. We think all of our main capital choices unsecured debt, selling assets, and issuing equity are attractive, but we rank order those debt and asset sales are a lot more attractive than selling assets, selling equity today. So our plan at the moment kind of puts asset sales and debt, but just given our rising EBITDA growth and our capacity to issue debt on the leverage neutral basis, and both on a nominal and then on a real basis for debt rates are today, our preference is probably to use a little bit more debt here right now.

John, just a little bit more color on kind of overall transaction activity, acquisition, and dispositions. We are expecting both of those to be up relative to 2021. And Kevin, use the term sort of trading capital. And that tends to continue to be our approach, which is the trading capital out of predominantly northeast and assets that have had pretty good runs up in value tend to be older assets, lower IRR profiles, and then redeploy that capital into our expansion markets to capture that growth and as part of our overall portfolio allocation objectives.

Hey, it’s Michael Bilerman here with Nick. Ben, over Avalon’s time in terms of market expansions and growing, and I take it that you’ve always pursued a very measured approach. There’s always been sometimes a transaction that speeds up the process, either through swaps with other REITs or potential transactions with private partners either on a buy or sell side, given all the activity that’s happening in the multifamily market, is there an opportunity today, where some of this transformation could be accelerated?

Yes. Thanks, Michael. Yes, it’s a possibility. But I wouldn’t describe it as a priority right now. I think there we do look at some of the portfolios that are out there. They tend to be more geographically dispersed and given our focus on our core set of expansion markets and really, in its approach based on for us to create value, we want to be able to leverage our full operating teams and our development teams to create that value. We stay pretty narrow from a geographic perspective. So there could be a portfolio that fits enough of the kind of strike zone for us that we would look at. And so that will stay on our radar, but I expect more of our activity to be similar to what you’ve seen in 2021 with some expanded growth going into this year and following years.

And I guess in your mind today, would you be more leaning towards likely accelerating dispositions or conversely trying to find and maybe taking down more deals before you sell? I’m just curious sort of where you’re finding the most demand, because I would imagine, even though some of these portfolios are geographically dispersed, given the relationships you have with third-party capital sources, you may be able to do something unique there as well. And I just didn’t know where the bias was today, whether you want to hit the bid on the sale or whether you want to be aggressive on the buy?

Yes, there is a matching component of it, I would say given the run-ups that we’ve seen in our existing markets and also seeing the run-ups in some of the markets that are growing, and we’re comfortable at this point in sort of the trade capital arena, what sort of matching a level of disposition activity and redeploying that capital and expansion markets for incremental growth, then as you’re referring to it would mean tapping into additional disposition activity or potentially tapping into incremental equity. And right now, we sort of look out on it, like we’re going to continue to progress in a fairly measured way. And then the last piece that I would emphasize, I mean, from an overall total investment perspective, we’re continuing to invest significantly $2 billion plus this year, but a good portion of that’s going into our established markets around these development opportunities. And so as we look at from a risk-return perspective leveraging our existing teams and being able to unlock the next rounds of that 200 to 250 basis point spread that remains very high on our list in terms of attractiveness.

Thank you for taking my questions. So I wanted to talk about that development pipeline and in your development starts for 2022. If we kind of go back in the last cycle, you were averaging about $1.4 billion in development starts sort of through that I think 2014, ‘15, ‘16 period. How should we think about development starts with the pipeline that you have today? I mean looking out, will there be a big step function change as we think about the next couple of years?

It’s Matt, Chandni. I can take a shot at that. And then I don’t know if Kevin may want to weigh in as well or Ben. But yes, I mean, last cycle, we did ramp it up coming out of the GFC. And then there were a couple of years there where we were running at that level you described, I think over the course of the six or seven years, it was more like $1 billion to $2 billion, but we’re a bigger enterprise now and costs are up. So even on an apples-to-apples basis to do that much volume in the current environment that’s probably more like $5 billion to $6 billion a year in starts. And if we can find those opportunities, we’re feeling pretty optimistic based on our current book of business and the pipeline that we’re seeing we’re certainly ready and prepared and we look forward to the opportunity to be able to continue to grow.

And to add on that Chandni, the other part is the tie-in with our expansion markets and so part of that moves provides expanded opportunities that there and so early on, we’re growing through a combination of acquisitions, funding other developers and our own development. But that pipeline will also start to accelerate. And so you look a couple of years out, yes, we expect the overall development pipeline to continue to grow in size.

Maybe the final point there Chandni as you think sort of about the our ability to fund this development activity, it sort of is somewhat tied to what’s going on in the core business where we are in the cycle, what kind of EBITDA growth we have and what our capital options look like. At the moment what we’ve been doing is funding our external needs through a combination of newly issued debt and disposition activity for this year, with respect to our capital needs of about $900 million. Current plan, which of course can change is that we’re likely to fund that primarily through the issuance of new debt and then modestly through some net disposition activity, of course capital market conditions and our users can change. But it kind of speaks to the notion of a couple of things. Obviously, with our EBITDA rising very briskly here this year, we can utilize debt to help fund development and it’s an attractive source it is, both in its loan right and on a real basis when you think about inflation. And we can do that by issuing debt, because our EBITDA is rising quite a bit. And we can be leveraged neutral in doing so. But in a typical year, in most years, we can fund about $1 billion to $1.3 billion or so of development activity through a combination of free cash flow, selling assets where we can retain the capital because of our gains capacity, and then leverage neutral issuance of debt. So that’s kind of in a normal environment, plus or minus what we can do. We can probably do a little bit more early in the cycle as same-store NOI gross briskly as it is now. And potentially, at some point right now our equity or equity is attractive as a source for funding development, although at the moment we find asset sales to be more attractive. But if we’re going to be doing an awful lot more than those, that kind of level of development funding, it does imply that we’re going to have some level of equity market access. So that’s another constraint to layer in as think about what’s possible. So the three constraints we traditionally think about is, we’re constrained by opportunity set. We’re constrained by sort of organizational capacity, and then we’re constrained by sort of what we have on the capital side. So I was speaking sort of that third bucket right there.

That’s great level of detail. Thank you for that. And for my follow up question, I know you gave out good detail on how should we think about the low end versus high end of guidance and one gets you to each side. But could you perhaps contextualize cadence through the years? And how should we think about seasonality this year given this discounts are pretty much thrown out of the window in 2021?

Yes. This is Sean. What I was indicating earlier, just based on leases that were written in early 2021, the first half of 2021, basically being substantially below where things are today, that we do expect revenue growth to accelerate as we move through the year. As we move those leases, the market certainly is the driving factor. As Kevin mentioned, when we get to the back half of the year we expect, bad debt to improve. So that also leads to accelerating revenue growth as we move through the year. So as it relates to seasonality in the back half of the year, it’s a little too early to tell. We are expecting getting back to more like seasonal norms when we get the back half of the year as compared to what we experienced in 2021. It may be very different by market, depending on the sort of shape of effective rent growth as you move through the year. What demand comes back and when it comes back to some of these markets that we’re talking about where we’ll still expecting a more full return to the office, etc. So I would say that we are expecting more like seasonal norms when we get the back half of the year, but we’ll probably know better as we get through, say midyear, what that might look like.

Thank you for the time. Sean, just one quick word for you, the 11% same-store like-term effective rent change and fourth quarter, can you give us a sense of what it would have been had there been no regulatory curbs?

Yes, it would have been higher. I can’t give that to you outside my head, John. But I can certainly circle back. And what I would say is what I mentioned earlier is about a third of the portfolio is currently constrained and you would have seen better renewal growth. My guess is to provide a little bit of color, move-in rents were 12.5% and renewals were at 10%. You probably would have seen the renewal side look more like the move-in side, but still a little bit of a Delta just because of the lag between when renewal offers are made when they’re actually signed leases renew, just as our renewal offers are 60 to 90 days in advance, but you would have seen maybe another 100 basis points on a blended basis if the 10 went to 12 and 50% turnover as an example if you’re looking at it in kind of theoretical terms.

And then Ben or Kevin, the $880 million year mark from capital sales or asset sales and capital markets activity. To peel that back what’s the kind of preliminary assumption assuming your cost of capital stays where it is, and the private market pricing stays where it is? What’s the preliminary assumption for asset sales within that figure?

Yes. Let me start a couple a little bit. So the external funding needed at is kind of what we really need to run the business. If we weren’t, we’re just sort of really kind of not focused on it, the trading activity. So there will be a fair bit of acquisition and dispositions just kind of on a trading basis, through the investment group that Matt oversees. From the standpoint of raising external capital, our current plan, as I mentioned a moment ago, that it’s funded largely through the issuance of newly issued debt. Just given more debt rates are today, although they’re up from where they were 3, 4, 6 months ago, they’re still quite attractive by almost any metric, and certainly attractive relative to our investment use which in this case is development. So the $900 million or so is really primarily fund the investment activity. So it will be mostly through debt, and we’ll likely be able to do so in a leverage-neutral basis. There is we do expect to be a modest net seller of assets and so those net disposition proceeds will be worked into a small component of that $900 million. And again, of course, as you point out, that’s where we stand today. We think all of our main capital choices unsecured debt, selling assets, and issuing equity are attractive, but we rank order those debt and asset sales are a lot more attractive than selling assets, selling equity today. So our plan at the moment kind of puts asset sales and debt, but just given our rising EBITDA growth and our capacity to issue debt on the leverage-neutral basis, and both on a nominal and then on a real basis for debt rates are today, our preference is probably to use a little bit more debt here right now.

John, and just a little bit more color on kind of overall transaction activity acquisition and dispositions. We are expecting both of those to be up relative up some relative to 2021. And Kevin, use the term sort of trading capital. And that tends to continue to be our approach, which is the trading capital out of predominantly northeast and assets that have had pretty good runs up in value tend to be older assets, lower IRR, profiles, and then redeploy that capital into our expansion markets to capture that growth and as part of our overall portfolio allocation objectives.

Hey, it’s Michael Bilerman here with Nick. Ben, over Avalon’s time in terms of market expansions and growing, and I take it that you’ve always pursued a very measured approach. There’s always been sometimes a transaction that speeds up the process, either through swaps with other REITs or potential transactions with private partners either on a buy or sell side, given all the activity that’s happening in the multifamily market, is there an opportunity today, where some of this transformation could be accelerated?

Yes. Thanks, Michael. Yes, it’s a possibility. But I wouldn’t describe it as a priority right now. I think there we do look at some of the portfolios that are out there. They tend to be more geographically dispersed, and given our focus on our core set of expansion markets and really, in its approach based on for us to create value, we want to be able to leverage our full operating teams and our development teams to create that value. We stay pretty narrow from a geographic perspective. So there could be a portfolio that fits enough of the kind of strike zone for us that we would look at. And so that will stay on our radar, but I expect more of our activity to be similar to what you’ve seen in 2021 with some expanded growth going into this year and following years.

And I guess in your mind today, would you be more leaning towards likely accelerating dispositions or conversely trying to find and maybe taking down more deals before you sell? I’m just curious sort of where you’re finding the most demand, because I would imagine, even though some of these portfolios are geographically dispersed, given the relationships you have with third-party capital sources, you may be able to do something unique there as well. And I just didn’t know where the bias was today, whether you want to hit the bid on the sale or whether you want to be aggressive on the buy?

Yes, there is a matching component of it, I would say given the run-ups that we’ve seen in our existing markets and also seeing the run-ups in some of the markets that are growing, and we’re comfortable at this point in sort of the trade capital arena, what sort of matching a level of disposition activity and redeploying that capital and expansion markets for incremental growth, then as you’re referring to it would mean tapping into additional disposition activity or potentially tapping into incremental equity. And right now, we sort of look out on it, like we’re going to continue to progress in a fairly measured way. And then the last piece that I would emphasize, I mean, from an overall total investment perspective, we’re continuing to invest significantly $2 billion plus this year, but a good portion of that’s going into our established markets around these development opportunities. And so as we look at from a risk-return perspective leveraging our existing teams and being able to unlock the next rounds of that 200 to 250 basis point spread that remains very high on our list in terms of attractiveness.

Thank you for taking my questions. So I wanted to talk about that development pipeline and in your development starts for 2022. If we kind of go back in the last cycle, you were averaging about $1.4 billion in development starts sort of through that I think 2014, ‘15, ‘16 period. How should we think about development starts with the pipeline that you have today? I mean looking out, will there be a big step function change as we think about the next couple of years?

It’s Matt, Chandni. I can take a shot at that. And then I don’t know if Kevin may want to weigh in as well or Ben. But yes, I mean, last cycle, we did ramp it up coming out of the GFC. And then there were a couple of years there where we were running at that level you described, I think over the course of the six or seven years, it was more like $1 billion to $2 billion, but we’re a bigger enterprise now and costs are up. So even on an apples-to-apples basis to do that much volume in the current environment that’s probably more like $5 billion to $6 billion a year in starts. And if we can find those opportunities, we’re feeling pretty optimistic based on our current book of business and the pipeline that we’re seeing we’re certainly ready and prepared and we look forward to the opportunity to be able to continue to grow.

And to add on that Chandni, the other part is the tie-in with our expansion markets and so part of that moves provides expanded opportunities that there and so early on, we’re growing through a combination of acquisitions, funding other developers and our own development. But that pipeline will also start to accelerate. And so you look a couple of years out, yes, we expect the overall development pipeline to continue to grow in size.

Thank you, appreciate all the color. I guess, maybe starting on the portfolio optimization and the target of 20% to 25% in the expansion markets, what’s the expected timing of actually getting there?