Avalonbay Communities Inc (AVB) — Q1 2022 Earnings Call Transcript

Thank you, Jay. And welcome to AvalonBay Communities first quarter 2022 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 this 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.

Thanks, Jason. And thanks all for joining us on today’s call. Matt and I will open with some prepared remarks, and we are joined by Kevin and Sean for Q&A. Starting on Slide 4 of our presentation, Q1 was a very strong start to what we continue to expect to be a very strong year of operating results. Core FFO per share came in at $2.26, a 15.9% year-over-year increase and $0.06 above the midpoint of our guidance. I will dive deeper into the drivers of that outperformance in a moment. On the capital allocation front, our industry-leading development platform continues to drive meaningful earnings growth and value creation with a very robust 6.9% yield on developments completed this quarter. For the year, we are projecting about $700 million of completions at an average yield of 6.3%, which represents a substantial spread to current market cap rates. As we grow, we are also optimizing the portfolio through the selective sale of older, slower growth assets from our established regions. This quarter, we completed $270 million of dispositions at a high 3% cap rate with the intention to then redeploy this capital primarily into acquisitions in our expansion markets. In April, we executed on an equity forward for $495 million as an expected source of capital to opportunistically draw down through the end of 2023, locking in our cost of capital for future development activity at what we expect to be an accretive spread. Turning to Slide 5, GAAP residential revenue increased 8.5% on a year-over-year basis, led by about a 6% increase in effective lease rates and a 100 basis point improvement in net bad debt. On a cash basis, residential revenue increased almost 10%. As shown on Slide 6, the 8.5% GAAP revenue growth was 150 basis points greater than the 7% increase we assumed in Q1 guidance, with lease rates and occupancy above our prior guidance. And while still at elevated levels, better-than-expected bad debt and rent relief collections drove the bulk of the outperformance relative to our expectations. Portfolio performance has been supported by a number of tailwinds as detailed on Slide 7. Starting with Chart 1, we continue to see elevated move-ins from greater than 150 miles away, which speaks to a continued flow of residents back to our established markets and is a particularly positive indicator for our urban and job-centered suburban communities. In Chart 2, we also continue to see de-densification with fewer roommates and a desire for more space, leading to fewer adults per apartment and driving incremental demand across our portfolio. As rents continue to grow, they are supported by greater household income from new residents, which was up 12% in Q1 relative to the prior year period, as shown on Chart 3. Finally, as shown on Chart 4, the monthly cost of renting versus the cost of owning a home materially favors renting in our markets with a difference of almost $1,000 per month, historically high levels, which provides a meaningful cushion and support to our rent growth. As shown on Slide 8, this backdrop is translating into continued momentum like term effective rent change, which accelerated throughout Q1 and continued into April at 13.7%. Looking forward, our portfolio is positioned extremely well heading into the peak leasing season. As shown on Slide 9, occupancy remains strong and steady at about 96.5%. Annualized turnover remains very low relative to historic figures, and 30-day availability, effectively the near-term inventory that is available for lease, remains limited at less than 5% of our units. While we continue to capture meaningful loss to lease as existing resident leases expire, our portfolio-wide loss to lease remains high currently at 14%, which has been supported by a 4% increase in asking rates since the beginning of the year. Turning to Slide 10, we are making meaningful progress in the transformation of our operating platform as we drive toward our goal of improving margins by 200 basis points or an additional $40 million to $50 million of NOI with approximately $10 million generated to date. This slide highlights three of our many initiatives, including bulk internet and managed Wi-Fi, which is projected to ultimately deliver over $25 million of incremental annual NOI, smart home technology, which unlocks both operating efficiencies and revenue opportunities going forward, and our digital mobile maintenance platform, which will not only enhance our residents' experience with us but also deliver material value through enhanced operational efficiency. Before turning it to Matt, Slide 11 provides our updated full-year guidance with projected 16% core FFO growth, reflecting our strong momentum in Q1 and incorporating our increased outlook for same-store revenue and NOI growth. We have also updated our guidance to take into account a couple of factors. On the operating side, while core operating performance is quite strong, there continues to be some uncertainty about net bad debt in certain markets, particularly in Southern California and Alameda County and Northern California. In some other markets, while eviction moratoria have expired, the core processes are moving slowly. As a result, some of the growth we are expecting in the back half of 2022 may be pushed to 2023, which we have assumed in our updated guidance. Regarding our projected core FFO growth for the year, we have scaled back our assumption for acquisition activity for 2022 based on where we stand today. While we remain active, including another acquisition we recently put under contract, we update our guidance from being a net buyer in 2022 to an assumption of balancing acquisition volume with disposition volume. With that, I will turn it over to Matt to go further into our development and capital allocation activities.

Great, thanks Ben. Turning to Slide 12. Our development activity continues to generate outstanding results. The five consolidated communities currently in lease-up, which are widely dispersed across five different regions, have rents which are currently $230 or 9% above proforma, which in turn is contributing to yield that is 40 basis points ahead of our initial expectations at 6.1%. With an estimated value on completion in excess of $1 billion and a cost basis of $690 million, this provides roughly $360 million in value creation for an exceptional profit margin of 52%. While hard costs are trending up, there is still plenty of room from March to compress from these elevated levels and still provide strong risk-adjusted returns going forward. As we mentioned in last quarter’s call, our teams have also been very active in sourcing new development opportunities as shown on Slide 13. At the end of the first quarter, our development rights pipeline had grown to $4 billion, up from $3.3 billion at the start of the year, with new sites added in our expansion regions of Denver and Austin, as well as established regions in New England and Northern California. All of these new development rights are in suburban locations, and with the total pipeline weighted 75% suburban and 25% urban, our stabilized portfolio will likely trend towards that mix over time as well. The chart in the lower right-hand corner of this slide provides an illustration of how inflationary pressures on both NOIs and hard costs would typically flow through to development yield. This is an increasingly important issue in the current environment. Our development rights pipeline is underwritten to a current average yield or cost of roughly 5.5%. The chart shows how a change of plus or minus 10% to both hard costs and NOIs would impact that yield, holding all else constant, because hard costs represent 60% of total capital on new development with variances depending on the specific site. You can see that rising NOIs have roughly twice as much of an impact on yield as rising hard costs of a similar magnitude. As a reminder, we underwrite all of our development on a current basis and typically do not trend either NOIs or costs. Even in the current environment with hard cost inflation running at a level, this gives us a measure of safety. This math suggests even if hard costs rise by 10% from current levels, the 5.5% yield can still be preserved with just a 6% increase in NOI. Slide 14 provides a quick update on our progress in our expansion markets of Denver and Southeast Florida. We have been measured in our approach to building diversified portfolios in these regions, investing through a combination of acquisitions, funding local third-party developers, and developing our own communities directly as we do in our established regions. This has allowed us to put together portfolios that we believe will be optimized for future revenue growth as well as initial investment return with strong locations in both urban and suburban submarkets in both regions. Critically, we are also focused on getting the products we want that will be well positioned to take advantage of demographic trends like the aging of the millennials and the increase in work-from-home, as reflected in the larger-than-typical average unit size and young average asset age shown on the chart. We expect to follow a similar trajectory as we ramp up our investment activity in our newest expansion regions of North Carolina and Texas and make steady progress towards our goal of a 25% allocation to these expansion regions. Turning to Slide 17, we also launched a new investment vehicle in the first quarter, which we are calling our Structured Investment Program, or SIP. This is a mezzanine lending platform that provides short-term construction financing to local third-party developers in our established regions plus Denver and Florida with our position in the capital stack between the primary construction loan and the sponsor equity. The SIP provides another way for us to leverage our deep expertise in development, construction, and operations to generate attractive risk-adjusted returns for our shareholders, and we expect to build this program to a $300 million to $500 million total investment level over the next few years. And with that, I will turn it back to Ben for some closing remarks.

Thanks, Matt. To wrap up and summarize key themes, Q1 was a strong start to the year with several tailwinds continuing to support our operating fundamentals, which are some of the strongest we have experienced and have us well positioned going into the peak leasing season. We continue to invest in our operating platform with the teams executing across a number of transformative initiatives in 2022, including both Wi-Fi, smart access, and mobile maintenance. As you heard, we continue to lean into our development platform with lease-ups outperforming and generating meaningful earnings growth and value creation. We are also building our development rights pipeline, now up to $4 billion, providing options on future value creation including significant investment in our established regions at accretive returns as well as a continued focus on optimizing the portfolio by growing in our expansion markets. Finally, we continue to look to tap our Company’s strengths with our structured investment program being our latest offering by utilizing our development, construction, and financial know-how to grow earnings and create value. With that, I will turn it to the operator for questions.

Thank you very much. As you look at entering the structured investment program, how quickly do you expect to scale up to that $300 million to $500 million and how are you thinking about laddering in the deals and redemption timing?

Hey Nick, this is Matt. I guess I can take that one. I think it will take us a couple of years. It really will be dependent on the volume. The transaction market starts volume and kind of how our origination goes, but I would expect it is probably going to be two to three years before we get it up to that level. Then once you get to that level, these are typically three to five-year investments. So each year, there are some redemptions, and hopefully, you are putting out some new money. So it is a ramp to get it there and then probably that is worth keeping it there.

Thanks and then as you look to enter it, what were you thinking in terms of just the competition within this market and then are you going to have an option to buy or own throughout all of the deals?

Yes. Thanks for that. So the second question, no, we do not expect to have an option to buy the deals, and we are trying to be very clear with the market and the sponsors that we are working with. For us, this is not a program that is about ultimately owning that real estate. It is a program that is about leveraging our expertise and our local market presence in these markets to generate good risk-adjusted returns during the duration of the investment. So we really are viewing it as a onetime investment. What was the first part of the question?

Competition.

Competition, sorry. Yes. There is competition. There is competition from some of our REIT peers as we are aware. Although I would say, I think that the market conditions are probably shifting in a way that is going to make this program more attractive going forward, as development capital maybe gets a little more challenging, as first loan proceeds start to get constrained. So we are pretty bullish. And the other thing is we have key relationships in all of these markets. We have been in them for many years. And so we view it as really another way we can work with a lot of folks that we have worked with in other capacities in the past, and it is kind of another sleeve of capital to it.

And Nick, if you think about us in our established markets, self-performing and being our own GC, we have come with a ton of daily on-the-ground knowledge that we think we can leverage here and do so in a competitive way as we think about risk-adjusted returns.

Thank you.

Hey, good afternoon guys. I wanted to maybe circle back to the acquisition, taking down guidance by about $0.05 from acquisition, but also square that to the recent equity raise. Just trying to understand, it seems like, if I’m thinking about this correctly, using the equity raise to potentially fund development in the future but maybe taking a little bit of a pause on the acquisition market given the uncertainty with cap rates, is that sort of the right way to think about that? And if so, does it mean you are really taking a medium to long-term approach rather than trying to maximize returns over the near-term? And I say that in a complementary way, not in a negative way.

Yes. Sure, Rich. This is Kevin. Maybe just with the first part of I think you are right with respect to all that, maybe to break it apart into two pieces. You are correct. Obviously, we did the equity forward $500 million of spend. Mentioned, our intention, at least at this point, is that while we can pull that down in one or more settlements from here through the end of 2023, our expectation is at this point that we are going to use that equity capital to draw down over the course of 2023 to fund development in 2023. So that is our current intention. So it is basically capital that we have earmarked at this point to fund future starts into 2023. As to kind of the first part of what you are referencing in terms of the change in the reforecast in acquisitions, you are correct. We increased overall expectations for core FFO for the full-year by $0.03 to $9.58 at the midpoint. And as you can see on page four of the earnings release, there are a number of pluses and minuses that result in a net $0.03 change. Among the more notable changes are obviously an expectation for a $0.11 increase in earnings from higher same-store NOI primarily driven from higher rental rates and to a lesser extent, from higher occupancy and rental repayments. And then second, as you pointed out, Rich, a $0.05 decrease in earnings from capital markets and transaction activity which, in turn, when you kind of net the pluses and minuses in that category, is driven by a decrease in forecasted acquisition activity based at least on where we stand today at this early point in the year. Of course, what we may do when acquisitions can change pretty quickly. That is a dynamic part of our budget and what we may be doing on the investment front. So Matt can certainly speak to that but at the moment, we pulled that down a little bit, which creates a little bit of a $0.05 decrease. The other notable item is just a $0.03 decrease in earnings related to the flow through the compensation items. So that is sort of the other reconciliation of the reforecast for 2022, and the equity forward, to be clear, is not being pulled down in that model for 2022 because that is not our current expectations.

Rich, it is Ben. Just a couple more tidbits there. So on the acquisition side, as Kevin hit on, it is a reflection of where we stand today. We did narrow the box some earlier this year. We wanted to assess the market and obviously some macro dynamics happening there. And the assumption we pulled it down to is similar to what we had last year, which is sort of a balance between acquisitions and dispositions, and we continue to think about it really as trade capital and so capital that we can be looking to monetize out of our established regions and then redeploy that capital into our expansion markets.

And that is a good segue into my next question. At the risk of overstepping here, why wouldn’t you accelerate dispositions? You have done a really good job of taking maybe older properties with higher CapEx spend, selling those at tight cap rates and rolling it into expansion markets. Why wouldn’t you accelerate dispositions right now and maybe take that money and use it as, call it, dry powder?

Yes, I will start and then Matt can chime in. We were very active last year, had a lot of activity at the end of last year and are continuing to push there for some of the reasons that you hit on. Again, the bulk of our portfolio, we have got a lot of conviction around. It is performing well. So our movement as we think about optimizing the portfolio is a longer-term approach. So we are thinking about assets at a point in time, how do we think about value today versus value six months from today and why there could be some movement in cap rates, let’s say. There are also very strong operating fundamentals that are going to help support asset values as we look forward.

I guess one thing I would just add to that, Rich, is it is also about the relative value between what we are buying and what we are selling. I would say that changes - and we may be starting to see a little bit of a change in where values might be in the regions we are looking to buy in, and some of the regions we are looking to sell and maybe haven’t been quite as in favor and that shift may be changing. So I actually think, looking forward, that relative value proposition on the trade may look a little better than it is say in the first quarter of this year when we were being more cautious.

Thanks guys. That is it for me.

Thanks, good afternoon. I was wondering, first, if we could just start on kind of the renewals that you are sending out for, I guess, either May, June, July and how those stacked up to the first quarter in April.

Yes Steve, it is Sean. In terms of committed renewal offers that have gone out, we are basically in the low teens, which is a little bit better than we originally expected when we contemplated the budget, probably maybe 150 bps or so higher than what we originally expected. So that is what is out now.

Okay. And Sean, has there been any change in how consumers feel about the take rates, or do they often shop around and realize it’s essentially the same everywhere, leading them to return and sign?

Yes. I mean, I think as what was reflected on the slide that Ben presented, as it relates to turnover, the acceptance rates on renewals as well as lease breaks, which typically account for about a third of move-outs, both of those were down pretty materially. I mean, turnover is down, call it, 20% year-over-year, but it is down 15% to 16% compared to kind of pre-COVID norms when you look at Q4 and then again in Q1 of this year. So pricing power is strong for us. I think when people get a renewal offer and they go shop it, they see that we are selling value. If I’m going to go out and it is going to pay roughly the same and then I have got moving costs or switching costs people are inclined just to stay where they are.

Right. That makes sense. Kevin, maybe one for you and if I missed it in here, I apologize. What is the assumption for bad debt or uncollectibles for the full-year today and kind of what was it? And just trying to compare that to 2021.

So Steve, I will jump in here and Sean may want to add here a little bit. So in terms of overall bad debt on a percent of revenue basis, there is not a whole lot of change. Of course, there are two categories that feed into that number. But just to kind of give you a sense that for the full-year in our budget, we assume that uncollectible revenue overall would be about 270 basis points of the headwind - 270 basis points of revenue. And at this point, it is 264 basis points. So on a net basis, marginally better. But as you probably saw reflected, there is a bit of movement as we have seen in the first part of the year so far in some of those underlying pieces. Underlying bad debt trends, delinquencies, if you will, in a couple of our jurisdictions have trended worse such that overall, for the full-year, we expect that category to be a little bit worse over the course of the year. At the same time, we saw more rent relief payments in Q1, and we now expect to receive more rent payments overall for the full-year. So kind of when you net that out over the full-year, our reforecast for overall bad debt, taking into account rent relief and underlying bad debt trends, is roughly net neutral relative to our initial outlook with higher expected rent relief payments expected primarily in the front half of the year to be nearly offset by higher underlying bad debt projected primarily in the back of the year. Sean, do you want to add anything?

Yes, Steve, the only thing I would add just on your question for 2021 is the uncollectible revenue that we reported for 2021 was $2.1 million as compared to the current reforecast, as Kevin alluded to, is $2.64 million for 2022.

Got it. Okay. So it is a little bit of a headwind year-over-year. But you are saying within the 9% revenue growth, you have got about a 270 basis point, in effect, bad debt sort of headwind in the growth this year.

Correct. And the way I would probably think about it, Steve, is relative to our original budget, some markets are getting a little bit better. But given the delay in the eviction moratorium expiration, particularly throughout Los Angeles and Alameda County in Northern California, we adjusted our outlook to reflect continuation of bad debt trends in those markets through 2022 and not seeing significant improvement until we get into 2023. That is really what you kind of put through it. From a geography standpoint, that is where we expect a little more of a headwind than we maybe originally anticipated but as Kevin noted, a little more than offset by greater rent relation.

Great. And just one last question for Matt. Just on kind of the construction supply chain, just how is that sort of unfolding as you are looking to start new projects? Was that a lot more challenging today? Is it getting better? Just where are the bottlenecks? And what is that, maybe due to the risk of starts or how do you sort of manage that? And what should we expect?

Yes, Steve, I guess I would say construction inflation is definitely running hot. So costs are on the rise. This is where us being our general contractor really does help because we are able to build on the relationships we have had over many years with a lot of our subcontractors and negotiate early agreements and sign build agreements. So we are doing what we can to stay in front of it. The supply chain issues and the actual availability issues have probably gotten a little bit better over the last four or five months. So I haven’t heard as much about that. I would say the bigger challenges have been just getting final permits through jurisdictions, in some cases, getting certificates of occupancy, and final inspections from jurisdictions, getting the power company out there to set the meters. Those things probably haven’t gotten better yet. So I think that is slowing down, supplies extending out durations on construction jobs by a quarter or two in many cases. I’m not talking about us so much as the industry as a whole. But for us, so a couple of starts that we thought we were going to start in the first half of the year, and we will probably get delayed a couple of months to the second half of the year, but that is really more about just kind of the delays in getting through the jurisdiction and getting the final approval.

Great. Thanks that is it for me.

Great, thanks and good afternoon everybody. I was curious how the 4% increase in asking rates year-to-date is tracking relative to your expectation at the outset of the year and where you think that - where that could finish the year.

Yes, it is Sean. Good question. What I would say is that it is tracking a little bit ahead of what we anticipated and part of the reason why we looked at updating our reforecast and outlook for the year was based on the trend that we were seeing, not only in asking rents, but what people were actually taking on renewals as well as what we are seeing on the movement side as well as the renewal offers that we have in the Q. I think, typically, what would happen if you look at our business historically, as you would see rents continue to rise as we move through sort of the July maybe early August period and then decelerate in the back half of the year. As we talked about on the last quarter call, for 2021, things didn’t really decelerate in terms of asking rents. It kind of just leveled off. We do believe that this year and was reflected in our outlook is that we start to see somewhat more normal seasonal patterns to see some deceleration in the back half of the year. But macroeconomic forces, et cetera, just the overall supply and demand dynamics in the housing market will really dictate kind of where things come out, so we will have a better sense for that as we get to our second quarter call.

That makes sense. What does that imply based on your current expectation for how things will play out in a more seasonal pattern? What does that imply for that 14% loss to lease? How much of that do you draw down? And what are you left with entering 2023 based on the current guide?

Yes. Good question. I would say that one probably it is a little more challenging to answer sitting here in late April when we are talking about what it might be in January of 2023. So I would say, based on what we know today, it should be well above average, but trying to give you a range would be just too speculative at this point.

Okay. That is fair. And then just last one for me. I’m curious, Kevin, has there been any change in terms of the amount of capital that you plan to source versus the $880 million that you initially outlined back in February, I believe and do you still expect the balance or the bulk of that to be through debt capital based on what we have seen - where we have seen rates move up into this point?

Yes. Thanks, Austin. This is Kevin. So yes, the short answer is our capital plan has changed a little bit, not a lot. You are correct. When we began the year, our initial outlook was for $880 million of external capital, most of which at that time was planned to be sourced for the issuance of unsecured debt. At this point, our current capital plan calls for just under $700 million of external capital. So we are down, call it, $200 million overall relative to our initial outlook. Of that nearly $700 million of external capital that we currently expect for the year, about half is expected to come through net disposition proceeds from sales of pulp circle, as well as a little bit of disposition-only on dispositions, which is much more of a closure to a push, as been alluded to a moment ago, and the other half from newly unsecured debt against which we have $150 million of hedges in place at a forward starting swap rate of 1.37%, so about 150 basis points below where treasuries are today. Just to kind of put that in perspective, what needs to still be sourced, of the $700 million of external capital, as you can see from our earnings materials, we sourced $270 million in Q1 versus a $95 million acquisition in Q1 for about one-fourth of the anticipated external capital needs in Q1 with 3/4 left to go out here. Just as a reminder, at the moment, as I mentioned ago, we do not plan, at this point anyway, on drawing down capital on the record in 2022, but rather to expect to do so in 2023 to the year.

Great. Very helpful. Thank you.

Hi, thank you for taking my question. So you took down your high-end of your guidance by a couple of pennies. Could you perhaps give us a little bit of color as to what would get you to the high end versus the low end right now?

Chandni, we had a hard time hearing. This is Kevin.

I’m really sorry, my throat is really messed up. I can repeat.

No, no, I think I have got it. I think you want to know what could drive us to the high end of our range of $9.7 versus the midpoint $9.58. I think the answer primarily is an increase in expected rental revenue received over the course of the year. There could be other signs, including acquisition activity and so forth, but they probably would be a smaller impact. Anything that would drive us toward the high end of the range would be primarily driven by an expectation for much higher rental rate growth than we are currently seeing with the other known acquisitions as well.

Got it. And then towards the low end, what would it take to get you there? Like what would have to kind of go wrong in that equation?

Yes, it is probably the inverse of just kind of what I suggested. So something unexpected today that involves sort of a macroeconomic event that would cause a sharp but unexpected decline in revenues over the course of the year. I guess analogous is sort of what we saw in 2020 with the pandemic, which is not in our expectation, but certainly, I guess, potentially within the realm of possibility.

Understood. And then as a follow-up. So you are sending renewals right now at the low teens rate you mentioned earlier. At this point last year, perhaps there were obviously a lot of deal seekers that got into apartments just given where the market was. Are you seeing any reversal from that standpoint where people no longer are able to afford especially those who previously did not level up on the apartments? I mean what are you seeing from the deal-seeking activity standpoint? Is it reversing?

Yes, this is Sean. Good question. I would say it is not changing materially in terms of behavior. If you look at people that are moving out for rent increase or some other financial reasons, it is up very modestly on a year-over-year basis, and probably importantly, the reason we are not experiencing that is wage growth has been quite robust. If you look at wage growth, particularly across the occupations that are represented primarily by our residents, it is not uncommon to find high single-digit, low double-digit numbers out there for people in those sectors. I think that is consistent, even with some of the movements that we are seeing that Ben referenced in his prepared remarks, where people that are moving in this quarter as opposed to the same quarter last year with incomes up 12%, 13% range. That is pretty good, especially in an environment where people are generally spending less from a discretionary income standpoint on various items. So, so far, there is not much stress in the system, if that is kind of the main purpose of the question.

Yes. Thank you very much.

Thanks for taking the question. Matt, I want to go back to your comments on just the development deliveries for the industry overall, not just AvalonBay. Are there any markets where these delays are particularly high right now where the operating results are just benefiting from a dearth of deliveries and you just see in a few quarters, we are going to be talking about just kind of a lot of deliveries dropped onto a market once some of these jurisdictional delays? I’m just trying to get an understanding of whether some of these operating results in certain markets are artificially high right now and there is going to be a shoe to drop?

Yes, it's interesting, John. I don't expect a sudden correction; instead, I think supply will gradually come in over a longer period, extending the delivery timeline. It will eventually arrive, giving those markets more time to absorb it, but demand is also increasing. I don't anticipate changes in the near future for certain issues, especially concerning jurisdictions or utilities, as these are structural problems. Entities like these don't quickly hire a lot of new employees. For instance, if you visit Austin now, which has substantial new supply on the way, developers and contractors will mention that a project that typically takes two years is now taking two and a half to three years. However, there are many projects starting. I believe that, in general, delivery times will just be extended. Among our markets, including those we are expanding into, Denver and Austin are likely the most affected. While other markets have high supply that we aren't involved in, I would say these two are the ones facing the most pressure due to their inability to keep up with supply in terms of deliveries and final inspections.

Okay. Makes sense. And then final question just on Southeast Florida, 25% year-over-year revenue growth. I know it is just a few assets. Can you give me a sense for how much of this is really strong market fundamentals versus these acquisitions being previously undermanaged?

Yes, John, it is Sean. I would say it is a little bit of a blend of both. Certainly, the market fundamentals and pick stores that you want to use have been quite healthy with significant market rent growth as you move through, particularly in the back half of 2021 that is currently being captured in early 2022. But I would say there are a couple of different assets out of that, again, small pools you referenced, that we felt had a compelling opportunity when we bought the asset in terms of how it is managed, whether it was how the parking garage is managed at one case, how the pricing was managed in terms of revenue management in another case that have probably given us a little bit of a lift. But I would say market fundamentals have been very robust, and you would still see pretty robust numbers come out of Southeast Florida, maybe the high teens range or something like that, low 20s. It depends on sort of the management value add, if you want to all that.

Okay. Alright, great. Thank you.

Hi everyone. I just wanted to go back to the acquisition guidance and make sure I understand the thought process there. Is it that you think prices will come down as higher rates flow through and you don’t want to refer ahead of that? Are you concerned about the economic outlook and, therefore, like the rate growth assumptions? Is it just lower accretion given the higher cost of capital? I guess what are the key factors that are making you more defensive?

Brad, this is Ben. I will start, and Matt can provide more color. It is primarily just an updated snapshot of where we stand today. As part of that, as I mentioned before, we did get more selective, and that was to assess and sort of feel out whether there were going to be changes. There are obviously factors in the macro market, including rising rates; and part of that is how much does that get offset or is there a countervailing balance with fund flows, which continue to be very strong into the multifamily sector. We are hoping that there is opportunity; as a group, we are going to be most impacted by higher rates; it is going to be those levered buyers. We are not that, and we are also able to take a long-term approach, with our investment thesis. We are paying close attention. As I mentioned in my prepared remarks, we are active in the market and are continuing to actively underwrite and pursue some acquisition opportunities.

Yes. Okay, thanks for that. And then I guess you have this chart on de-densification in the deck. I’m curious, is that something that you expect to be somewhat permanent or is it a sort of a COVID anomaly that will reverse people go back to work and need to double up again financially?

Yes, Brad, it is Sean. I mean the short answer is it is probably too early to tell, but I would say there are a number of macro factors that we see out there that could support this being maybe a little bit longer phenomenon in terms of maybe being more secular, I suppose just a cyclical issue. Certainly, people working from home and wanting to have more space or quiet space as opposed to - that might be doing something else, people spending a little bit more on housing in general, whether it is single-family, multifamily, and the thought of home has kind of been how you want to describe it, but a place where the spending more significant time, not only from a work standpoint but for other reasons. I would just say just given the nature of the population and how we see things evolving demographically, a lot of the growth we have seen has been in single-person households. You can see that kind of playing through the people who are on that bubble maybe going through COVID, where they were just getting married and had kids, took time during COVID to say, okay, this is a good window for us to leave XYZ location to move somewhere else, so people coming back maybe more just singular in nature, so in the future of that way for a longer period of time. A number of different issues out there can quantify several others as well that would tend to lead you to a conclusion that this may be durable. The short answer is we will know probably over the next few quarters that we continue to see that trend remain in place.

Brad, another theme that supports it to want to emphasize is just the financial health of our resident, our customer. Think about job and wage growth. You think about savings, add on the factors that Sean referenced sort of the increasing importance of the home, definitely a feeling that that is going to create additional stickiness as they look for quality home environments and more space.

Okay. Thank you.

Thanks. So I recognize your -

Hey Rich, you are very soft on the phone.

My headset stopped working. Can you hear me now?

Okay.

There are several calls taking place today. It's important to understand what you're doing on the acquisition side while waiting to see how the market develops. If I were to extend that discussion to development, it seems there are no funding issues from your view. At what point do you feel in touch with the situation? We just received a negative GDP print for the first quarter, and with inflation and the war intensifying, there are many factors that could impact property values at home. I'm curious about your perspective on expanding development; obviously, you're working on that, but how might it change in the future? What factors are you monitoring that might lead you to exercise a bit more caution in development, even if that pause isn’t happening right now?

Hey Rich, it’s Matt. I’ll take a shot at that one, and Ben might want to add his thoughts as well. We are always focused on risk management; it’s part of our core principles. As I mentioned earlier, we do not trend, so we evaluate things based on current conditions. We structure our deals in such a way that, in most cases, we don’t finalize the land purchase until we are very close to beginning renovations or breaking ground. We are very conscious of this, and I would say we have a lot of flexibility. Currently, we manage a $4 billion development rights pipeline with a total investment of less than $300 million, which includes the land on our balance sheet and the costs we capitalize for land that we don’t acquire. It's quite impressive that we can control such extensive opportunities with our level of investment, which allows us to respond appropriately. The development economics are currently very favorable. We can provide a sensitivity table since we have received inquiries about it. If construction costs continue to rise modestly faster than rents, we can still maintain the yield. At some point, that dynamic will shift, and we monitor it daily. When we do start projects, we will use matching funds. By being cautious with risk management from the outset, we generally feel that we have options on many solid business prospects, and we don’t need to make a decision until the deal's quarter begins.

I would just like to add to Matt’s comments that we have a very strong balance sheet, considering leverage, liquidity, and financial flexibility. Our net debt-to-EBITDA is five times, which is at the low end of our target range of five to six times. Additionally, our unencumbered NOI is 95%, likely at an all-time high for the company. This gives us plenty of flexibility to adapt to changing circumstances, although the likelihood of needing to do so is very low because we have $2.5 billion of liquidity from our line of credit, cash on hand, and equity forward. As Matt mentioned, we apply this strength to all areas of our business, providing us with ample firepower and flexibility.

Okay. Great. And then my second quick question is and I asked this a couple of your peers already this week, see what you have to say. This is an environment that likes which we have not seen the ability to grow rents to the degree that we have. I wonder how you are looking to preserve this to extend the opportunity into 2023 and 2024 as opposed to just sort of taking the money and taking what the market has given you. Is there a way to take this gift of an environment and let it exist and extend the shelf life of it into 2023 beyond just the earn-in that you would normally get, maybe extend lease term or do something to capture this for a longer period of time? Is there any type of strategy in your wheelhouse that you are looking to do that type of thing?

Rich, I will start with a couple of items that are top of mind. And as you mentioned, obviously, fundamentals are very strong today. But looking at it on the medium term, there are other ways that we need to be focused, and we are focused on driving value and growing earnings. You are hearing from us our other focus area and themes, right, driving margin and driving NOI through our operating model transformation, that is one. Think about how we optimize our portfolio over time, is another or selling off of slower growth, higher CapEx assets, and then redeploying that capital into our expansion markets with newer assets that we think we have a better cash flow profile. The development pipeline is another area where we continue. Just tapping into that general development DNA is another part as we think about growing earnings. An aspect of that is finding other avenues to allocate capital and grow earnings. You saw that this quarter with our announcement around the structured investment program.

The one thing I would add, Rich, in response to your specific questions, is that while we are not providing guidance for 2023, there are several factors that suggest it should be a good year, as I mentioned earlier. For instance, our forecast for bad debt this year is approximately 2.5% to 2.6%, which is typically around 50 basis points lower. We're not planning to unlock all of that immediately, but rather as we progress through this year and into next year. Regarding rent increases, we are seeing strong growth in asking rents currently, which is positively impacting loss to lease and setting us up well for 2023. However, there are still a few markets where our ability to send out renewal offers is limited due to COVID-related restrictions and regulatory orders. Overall, if nothing unexpected occurs in this environment, I believe we can anticipate a favorable outcome for 2023. So, please keep those points in mind.

You got it. I will do that. Thanks.

Hey, good afternoon and thank you for taking the question. Just two questions first. On the rents that you guys are owed, I saw that nationally, you received about $14 million from the federal from treasury in the quarter. But just curious what the split is on AR balances, both that apply to California versus that fall under the federal program. Then two, within those mixes, how much is owed from existing residents versus owed by former residents, and by saying that, our understanding is from yesterday’s call is that the former residents in California need to participate in the process otherwise, the landlord doesn’t get paid. Just sort of curious on the breakout of those.

Yes. So Alex, we probably need to get back to you with the level of detail that you are looking for and all the breakout between the different components. We have got some of that in hand, but it might be better to address that offline in terms of the specific details. Kevin can provide a couple of comments to high level, but...

Yes, maybe just a response to your first question about where the money is coming from overall in terms of the emergency reassess programs. From the beginning to wear through February, about two-thirds of the funds that we received has come from California, and the next biggest chunk in 10% from Massachusetts.

Yes, Alex. So that is a high-level overview. In terms of the question about current versus former residents and stuff like that, why don’t we get back to you? Jason can follow up with you on that one.

Great. Then the second question is, you guys talked pretty helpfully about the market rents and the demand for the product. But just sort of curious, your guidance for the second quarter is a little bit short of where the Street was expecting. Are there some offsets or some items that are coming up that give a little caution to the second quarter or is it just a matter of your view of how timing for the year and that the back half of the year is going to be materially stronger such that the overall guidance range basically stays the same when you look at the full-year guidance?

And Alex, said specifically about same-store core FFO, what metrics are you going to be specifically just so we are clear what you are asking about?

Just your core FFO guidance, the top end of your range is where the Street is. So I’m just sort of curious if there were some things of caution or maybe some bad debt items or one-time items that the Street would have factored in that would have had value.

So Alex, this is Kevin. I guess, first of all, it is impossible for me to reconcile our numbers against a dozen or so analyst numbers on some composite basis. As a group and individually, you all are free and should be free to sort of make your own forecast. I guess I would make a couple of points. First of all, with respect to Q1, we guided to a midpoint of $2.20 per share. We beat it by $0.06. The Street was at around $2.26, $2.27, which ended up being pretty close to accurate, but we certainly didn’t guide the Street there. Similarly, I guess, the Street may be around $9.63, $9.64 something for the full year. We never guided the Street to that level. We guided into $9.55. As things stand, based on the kind of business plan that we have just outlined in our updated forecast, we think the balance of risk is 50/50 around $9.55 per share, and that includes kind of the pain point of pulling back a little bit on acquisitions of $0.05. So having not done so, we would probably be at $9.63, so maybe that is one way to try to reconcile out to the $9.63. Beyond that, I actually don’t know how to compare our assumptions versus composite of the Streets.

Actually Kevin, that is super awesome, I appreciate that color. Thank you.

Good. Hey everyone. I had a question on the structured investment program. I guess, how do you feel like that will influence your capital deployment preferences going forward and then also just curious why now for launching the program.

Josh, it's Matt. I don't believe it will affect our capital deployment strategy. I see it more as an addition. It's a way, as Ben mentioned, to leverage our capabilities, relationships, and presence in these markets to create additional value for shareholders. It won't displace anything else in our capital plans. Why now? We've been active in the market for some time with our developer funding program, where we provide capital to other developers specifically in our expansion areas. Through this experience, we've learned valuable insights. One key takeaway is that the expertise we offer is appreciated by potential partners, their developers, and lenders. We view this as a market opportunity to expand those capabilities. Looking ahead, I believe we are better positioned to allocate this capital competitively, especially as interest rates rise and capital becomes somewhat more difficult to secure in the coming years.

Got it. And for whether you do a mezz loan on preferred equity, are you targeting fixed or floating? I know you said like 9% to, I think, 11% kind of returns. But just curious if it will be fixed or floating.

I think our first couple of deals that we are looking at now and the one that we closed are fixed, but it is something we are talking about. We are going to meet the market where the market is. When short rates were so incredibly low, fixed was I think probably the better way to go for the capital provider. If that shifts, that will shift with it.

Awesome. Thanks guys.

Thank you for joining us today and your questions. We look forward to our continued dialogue and seeing you soon. Thank you.