Avalonbay Communities Inc (AVB) — Q2 2022 Earnings Call Transcript

Thank you, Kyle, and welcome to AvalonBay Communities Second 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. Ben?

Thank you, Jason, and thanks, everyone, for joining us today. Kevin, Sean, and I will share some prepared remarks, and Matt is with us as well for Q&A. I'll start by discussing our financial and operating performance as well as our latest approaches to capital allocation. On operations, we had a very strong second quarter with core FFO of $2.43 per share, exceeding our prior guidance by $0.12 per share or more than 5% above expectations. This magnitude of outperformance is atypical, particularly since we increased Q2 guidance at the end of April and was driven by continued asking rent growth, above-average occupancy and favorable net bad debt. As shown on Slide 4, core FFO increased roughly 23% during the second quarter, bringing our year-to-date core FFO growth up to 19%. And as Kevin will describe more fully, we're raising core FFO guidance for the year to $9.86 per share at the midpoint, an increase of $0.28 per share over our prior guidance. As we will highlight later during our remarks, there are a number of meaningful tailwinds that support our strong earnings guidance for the back half of the year and support continued growth going into next year, or if the macro environment were to erode in a way which impacts our operating fundamentals, that should serve as a ballast. Switching over to capital allocation. Our balance sheet is as strong as it has ever been, providing strength in an uncertain macro environment and allowing us to maintain our focus on creating shareholder value over time and across cycles. We've also responded to the changing capital markets in certain ways. We issued a $500 million equity forward in April at $250 a share, which we can draw down through the end of 2023 to fund our future growth. As we communicated in Q1, we also shifted from being a net buyer to a net neutral trader of assets in 2022, as we continue to optimize the portfolio and rotate capital from our established regions into our expansion markets. We continue to selectively match dispositions with acquisitions at market cap rates, which we've seen widen by approximately 50 basis points in many markets. Consistent with prior activity, our dispositions are generally of older assets with higher CapEx profiles in our established regions, which we're utilizing to fund acquisitions of newer assets in our expansion markets. And while we remain active on the development front, with $2.1 billion under construction and a $4.7 billion development rights pipeline, we have reduced our projected 2022 starts based on some project-specific delays. For new potential projects, we are focused on maintaining flexibility so that we can ramp up or down our overall 2023 development start volume, depending on how macro conditions evolve. Before turning it to Sean, let me quickly provide some additional color on our Q2 revenue growth. Slide 5 provides a breakout of our 12.9% Q2 same-store revenue growth, with the vast majority coming from growth in lease rates as well as the reduced impact of concessions as compared to Q2 last year. Net bad debt also improved relative to last year with additional rent relief payments offsetting the change in underlying bad debt. Turning to Slide 6. Net bad debt was a meaningful component of our outperformance relative to Q2 guidance, with rent relief payments via the federal government's emergency rental assistance programs continuing into May and June as compared to our prior expectations that these government funds would run dry earlier in Q2. And while net bad debt remains elevated, we are pleased to see improving resident payment behavior with underlying bad debt currently in the low 3% of revenue range, down from mid-4% in Q4 2021 and compared to 50 to 70 basis points historically. And with that, I'll turn it to Sean to review the operating backdrop in more detail.

All right. Thanks, Ben. Turning to Slide 7. The strong revenue growth Ben noted was supported by very healthy trends in the business throughout the quarter. Turnover remained below historical norms, even though it ticked up in absolute terms in June, given normal seasonal patterns, but occupancy was above 96% each month of the quarter. Additionally, like-term effective rent change trended up during the quarter and averaged roughly 14%, supported by healthy demand across all of our regions. Lastly, we started to see some improvement in noncollectible lease revenue, excluding rent relief, during the second quarter as residents who were chronically delinquent started moving out from communities, particularly in some of our more challenged markets like L.A. and New York. While we expect the number of delinquent accounts to continue to decline in the back half of 2022, the rate of improvement will likely be modest from month to month. Moving to Slide 8. The outlook for the business remains quite positive. Asking rents continued to increase throughout the second quarter and are up more than 9% since the 1st of the year, supporting loss of lease of roughly 15% at quarter end. And with the continued trend of historically low availability and resident incomes growing in the double-digit percentage range, we're well positioned to capture higher rent levels as we move further into the second half of 2022 and look ahead to 2023. Turning to Slide 9. Our lease-up portfolio continues to post very strong results. Leasing velocity exceeded 30 leases per month during the quarter at rents that were on average about $350 or 12% above initial projections. As a result, stabilized yields are projected to be in the mid-6% range on almost $700 million in business, producing significant value creation relative to underlying cap rates. Now I'll turn it to Kevin to address our updated outlook for 2022 and the balance sheet.

Thanks, Sean. On Slide 10, we provide a revised financial outlook for 2022. We now expect full year core FFO per share of $9.86 or a 19.4% increase over last year's earnings. If achieved, this would represent the company's strongest growth in full year earnings in over 2 decades. This also represents an increase of $0.28 relative to our expectations in April, reflecting continued strong revenue growth across our business. Drilling down a bit further, this $0.28 increase represents $0.31 in higher same-store residential revenue, partially offset by a $0.03 decrease in other categories, as described on Page 5 of our earnings release. This $0.31 increase in same-store residential revenue is in turn driven primarily by higher-than-expected growth in lease rates and by lower-than-expected bad debt, with $0.09 of the increase having already been recognized in the second quarter and the remaining $0.22 divided roughly evenly over the third and fourth quarters. As it relates to bad debt and rent relief, we expect underlying bad debt before the impact of rent relief to decline from 3.9% in the first half of the year to about 2.7% in the second half. We also expect rent relief to decline from the $28 million we recognized in the first half of the year to $7 million in the second half, nearly all of which is expected in the third quarter. As a result, we expect net bad debt will increase from 135 basis points in the first half of the year to 215 basis points in the second half for a full year rate of about 180 basis points. Keep in mind that net bad debt for 2021 was 210 basis points, so the change in bad debt on a full year basis is projected to contribute roughly 30 basis points to revenue growth in 2022. Thus, for overall same-store portfolio, at the midpoint of our revised guidance, we now project same-store residential revenue year-over-year growth of 11.25%, same-store residential operating expense growth of 5% and same-store residential NOI growth of 14.25%. Finally, we expect to start about $850 million in new developments in 2022, down slightly from the $1.15 billion expected in our initial outlook as starts for a few planned developments have shifted into early 2023. Turning to Slide 11. Nearly 90% of current development underway is already match funded with long-term debt and equity capital. Locking the cost of this investment capital helps ensure that these projects will provide earnings and NAV growth when they are completed and stabilized. Turning to Slide 12. As we look ahead, our balance sheet remains exceptionally well positioned to provide financial strength and stability, while also giving us the flexibility to continue funding attractive growth opportunities across our investment platforms. In this regard, we enjoy low leverage with a net debt-to-EBITDA of 4.9x, which is below our target range of 5x to 6x. Our interest coverage ratio in unencumbered NOI percentage are at record levels of 7x and 95%, respectively. And our debt maturities are well-laddered with a weighted average years to maturity of about 8.5 years. And as shown on Slide 13, our liquidity position is excellent, with $1.3 billion in excess liquidity relative to our remaining unfunded commitments of about $400 million as of quarter end. With that, I'll turn it back to Ben.

Thanks, Kevin. As we look forward, we wanted to emphasize a number of additional tailwinds, as described on Slide 14, that support continued value creation and our strong earnings outlook. To start and focusing in on development, Slide 15 highlights the historical spread between our development yields and stabilized cap rates, a core measure of how we generate meaningful value for shareholders through our industry-leading development platform. With our strong balance sheet and match funding approach, we're able to ratchet down or ratchet up our start activity at particular points in time, but do so in a way that provides consistent incremental value creation and earnings growth. On completion so far this year, projects at yesterday's cost and today's rents, we are realizing an exceptionally strong spread between stabilized yields and current cap rates of over 200 basis points, generating significant value creation and earnings growth. For projects in our development rights pipeline, we're seeing this spread range from 100 to 200 basis points based on our most current underwriting, which we believe continues to provide appropriate risk-adjusted returns. In the near term, as shown on Slide 16, our developments underway are expected to provide meaningful incremental earnings with roughly $125 million of incremental NOI to come from these projects over the next 2 to 3 years. Moving to Slide 17. And as we previously outlined, we are in the midst of transforming our operating platform with significant investments in innovation and technology that we expect to generate 200 basis points of margin improvement or $40 million to $50 million of NOI. Slide 17 provides incremental disclosure on certain of these initiatives, including the projected progress year-by-year with $20 million of additional revenue associated with the rollout of bulk Internet, managed WiFi and smart home technology and an additional $20 million in expense savings to come from the digitization of a number of customer experiences, including self-touring, maintenance, renewals and others. We also introduced our structured investment program last quarter, which is off to a solid start. As shown on Slide 18, we've closed our first 2 investments, providing preferred equity to third-party developers on new construction projects. By leveraging our intimate knowledge of development, construction and operations, we believe that we can achieve attractive risk-adjusted returns on $300 million to $500 million of capital, a book of business we will build up over time and providing incremental earnings growth. Before closing, I also want to highlight, as shown on Slide 19, our continued ESG leadership given the recent publication of our 11th Annual Corporate Responsibility Report. On the E, we are one of the first REITs to set numeric, science-based targets for emission reductions, and we're proud that we've achieved actual reductions through these initiatives, 30% reductions in Scope 1 and Scope 2 emissions and 20% reductions in Scope 3 emissions, so far. On the S, our investments in our people and culture, including advancing our inclusion and diversity initiatives, remain a priority, with progress being made and more to come. We also continue to invest in our local communities through volunteer time and direct donations, a key part of how AvalonBay associates connect around our evergreen culture, including our spirit of caring. In closing, on Slide 20, with a summary of our key takeaways. We're very pleased with our operating results to date, have meaningfully lifted our earnings expectations for the year and believe that there are a number of tailwinds specific to AvalonBay that set the table for strong continued growth looking ahead. And with that, I'll turn it to the operator to facilitate questions.

I'm interested in discussing the transaction market and looking at Slide 15. There seems to be a significant gap between the initial yields from development and the transaction market. I understand these are annual figures, but cap rates decreased in 2022. I'm curious about the changes you've observed in cap rates and asset values in your markets over the past 3 to 6 months.

Yes, certainly, in the last couple of months, there's been a shift in the transaction market with the rise in rates. We are quite active in the market, and things are changing quickly. The first thing I would say is that no one can be completely sure, but the recent data suggests, as Ben mentioned in his prepared remarks, that cap rates are likely up around 50 basis points, perhaps a bit more in some regions and a little less in others, depending on the asset type. There are definitely deals that are not transacting, especially those aimed at highly leveraged buyers, but most of the assets in our portfolio are more institutional-grade. It’s likely that they fall within that range. Net operating incomes continue to grow, so in terms of overall asset values, they may be down 5% to 10% due to some growth in the numerator that offsets the increase in the denominator.

That's helpful. And then just as you start to execute on some of these structured investment program deals, how did the first few deals come about? What sort of competition are you seeing? Just kind of any color on at least the entrance into this market.

Yes, it's Matt speaking. I can address that. Our first two deals are located in the East Bay area of San Francisco and in Denver. We also have additional opportunities emerging on the East Coast, which creates a good geographic balance for us. Typically, we engage with local merchants, builders, and developer sponsors. We believe there is significant potential for deal flow due to our established presence in these markets. Some of these sites were previously identified by us as land prospects, while others are being sourced through the brokerage community, involving discussions about asset acquisitions and dispositions. Additionally, we're developing strong relationships with primary lenders. All of these deals have first construction lenders, who appreciate our involvement and expertise further down the capital stack in development, construction, and operations. We aim to cultivate repeat business from these lenders, and we believe that as capital becomes somewhat more limited, our deal flow will likely increase. Thus, we feel confident about our competitive position moving forward.

I was wondering if you could share your expectations for the 2023 earn-in at this point. Given that we are starting from what appears to be a historically high earn-in, and considering the significant loss to lease currently in effect, I am curious about the likelihood of experiencing negative revenue growth if conditions decline significantly. I understand that every recession is different, but I would appreciate any insights from historical data to gauge the potential downside risk.

Yes. Austin, this is Sean. I'll take that one. Regarding the earn-in, there is still a significant amount of leasing to do and many transactions to complete before the end of the year. My guidance is that entering 2022, the earn-in was approximately 2.5%. Looking ahead to 2023, considering the leases we have executed so far this year, you can expect that the earn-in going into 2023 will be significantly higher than what we started with in 2022. It's important to remember that this is just one element of the overall picture. There are additional factors that could either hinder or help, including the normalization of bad debt and underlying collection rates, which should provide some support. However, the loss of rent relief from this year will pose a challenge. You need to consider all these elements when evaluating how the growth will impact total revenue growth for next year. Regarding your question about our loss to leases and potential outcomes, I agree that even if the overall economic environment worsens, there is still considerable space between current rents and the levels they would need to drop to, especially considering the timing of our lease expirations. It would likely require a severe economic downturn to experience negative revenue growth rapidly, given the substantial cushion between us and any potential decline in revenue growth. That’s how I would characterize the situation.

Great. That's helpful. And then just secondly, you guys had talked about a NAREIT 2023 starts in the $1.3 billion to $1.8 billion range sort of depending on the environment. Obviously, some deals got pushed into next year. So is that upside to the $1.3 billion, $1.8 billion? So could you provide an update there? And then just also curious how you're thinking about the additional debt capacity that you have today given leverage is below the low end of your range?

Sure, Austin. This is Matt. I can address the development volume, and then maybe Kevin can discuss the debt aspect of your question. Our development starts this year are going to be lower than we initially anticipated due to some specific deal-related factors. All else being equal, that activity would shift to 2023. Additionally, our development rights pipeline grew to $4.7 billion this quarter, which is the highest it has ever been. If the deals proceed and their economics remain attractive, we could potentially start between $1 billion to $2 billion next year, depending on how those deals materialize once we have final costs. We are focused on maintaining flexibility in case we see changes, but that possibility is definitely there. We also have the equity forward, so a significant amount of that capital is already in place. Kevin, would you like to add something?

Sure, thanks, Matt. Austin, you raise a good point. The first thing I want to mention is that we are entering the current environment with a strong balance sheet. As you noted, our leverage is below our target range of 5 to 6 times. In a typical market, our free cash flow is usually around $300 million a year, combined with asset sales for retained capital, which typically range from $400 million to $700 million. Additionally, normal EBITDA growth can contribute another $300 million to $500 million. This results in roughly $1.25 billion or more in leverage-neutral funding capacity for investments, mainly in development, during a typical year. With the significant NOI and EBITDA growth we are currently experiencing, we actually have the potential for even greater capacity beyond that $1.25 billion for 2023 by increasing our debt issuance. However, current interest rates are less attractive compared to a year ago, with a 10-year debt at about 4% given today's treasury rates. While this rate is relatively reasonable compared to the last decade, it appears high when we consider the last 20 years. Nonetheless, it's still attractive for development uses. As we prepare our capital plan for 2023, we have numerous options such as free cash flow, asset sales, the equity forward that Matt mentioned, and our ability to increase leverage. The amount of debt we take on will depend on the attractiveness of debt costs in relation to development yields and our insights regarding other capital market options.

Austin, this is Ben. I'll add a couple of comments that speak both to your question, Sean, on operating fundamentals and then also how we're looking forward next year in terms of development starts. And what I'd emphasize around our strength is also our portfolio positioning and particularly our orientation to the suburbs. With 2/3 of our portfolio in the suburban markets, we believe that's going to provide a level of durability that may not be seen in other markets. Demand drivers, our expectation is going to continue to be relatively strong there. And then supply relative to national averages is definitely low. It's projected to be in the range of 1.5% of stock. So on the operating side, we think that provides us with some additional resiliency and durability going into next year. And then from a development perspective, as you've seen from us over the really over the last couple of years, the bulk of our new development activity will continue to be in the suburban markets.

Sean, I was wondering if you could just provide a little color on where you're sending out renewal notices for, I guess, what you got in July and maybe August, September, and kind of what your thoughts are for the balance of the year?

Sure, Steve, happy to address that. I mean July, we were basically in the low double-digit range in terms of where the offers went out. And that remains relatively constant as we look forward over the next 60 to 90 days kind of in that low double-digit range. And keep in mind that as it relates to renewals, we are slightly more constrained than normal given some of the COVID overlay regulations that remain in place in markets like California, as an example. So there's more to come on renewals, but it's probably going to be in the next year before we're able to get all of it is the way I'd probably describe that to you, Steve.

Okay. Returning to Page 15, we've received several questions about development. I'm curious about major input costs, such as lumber, steel, and concrete. What are you observing regarding inflation in these areas? I understand that the current development benefits from higher rents with costs from one or two years ago, but the environment at the start of '23 is different. How much have yields decreased in the future pipeline, and how are you anticipating costs for next year?

Sure, Steve. This is Matt. As it relates to cost inflation, it's still out there. It's still significant. It feels like we're at the top and then it may be starting to downshift. For sure, obviously, lumber prices are down. For sales starts, seem like they're coming off pretty quickly now. So I guess I'd say I'm guardedly optimistic that buyout will start to become a little more favorable. I don't think that means hard costs are necessarily going to drop. But the days of 1% per month increase are maybe behind us, maybe not in all markets, but definitely in some markets. As it relates to how that affects the economics of our development book, our development rights pipeline today on today's rents and today's hard cost is running into kind of a typical mid-5% yield. And if you look at the developments that we're starting this year, that's probably around where they are as well, the 3 or 4 we've started so far and the 2 or 3 we expect to start in the second half of the year. Compared to 2 years ago, that was probably high 5s. So it is probably down 30, 40 basis points, but that still provides a pretty strong spread. And I do think that those cap rates are probably representative of where they are today. Frankly, the development that we completed late last year, the cap rates were probably sub-4%, but we're always a little conservative in how we quote these things. So I'd say 4% cap's probably a good representation for our best guess as to where those deals would trade today if they were stabilized in the market.

And Steve, from a sensitivity standpoint, we emphasized this last quarter, but just to reiterate it again, as you think about hard cost increases, rent increases and NOI increases, roughly, if you're keeping pace with 10% construction cost increases and hard costs being 60% of our overall project cost, you need approximately 6% NOI uplift. And so if you get both of those in those levels, you're able to maintain yields at that 5.5% type of range that Matt referenced.

Could you guys talk about what you're seeing in your sort of more tech-oriented markets, if there have been any signs of the broader malaise that we are seeing everywhere reflect in the business? Any early reads around that?

Yes. Chandni, this is Sean. At this point, the answer is no. We're kind of reading in the media the same things you are in terms of particularly some of the start-ups trying to lean things out, some of the larger companies slowing the pace of hiring. But based on the demand that we're experiencing coming in the front door, it is not impacting the renter population in terms of their desire for the types of apartments that we offer.

Understood. And my follow-up question, in the event of a recession, how would you view the relative positioning of development versus acquisitions if we go into a tougher economic backdrop?

Chandni, I'll begin. This is Ben. Our acquisition activity so far is expected to continue, but it may change if the market becomes more unstable. Our strategy focuses on trading assets by selling in our established regions and reinvesting that capital back into those same areas. This approach aligns closely with our portfolio optimization and diversification efforts. On the development side, our capital allocation involves evaluating opportunities. As Matt mentioned, we need to maintain certain spreads. We're aiming for a spread in the range of 100 to 150 basis points to ensure we get appropriate returns on the risks taken. Additionally, we need to assess how attractive a particular development is compared to other options. We will continue to consider these two factors along with our capital sources in our future capital allocation decisions.

Are there any lessons to take from the last financial crisis as we think about the relative positioning of those 2 areas of capital allocation?

In terms of acquisitions versus development?

Yes.

I believe the key lesson we have learned is to always maintain a prepared balance sheet to seize opportunities as they arise in the market. In a typical operating environment, we focus on development, which is our primary means of creating shareholder value. However, in a disrupted market, attractive acquisition opportunities can present themselves, as we experienced in 2020. This is why we are currently operating below our target leverage level with significant excess liquidity. It’s important to be ready to respond to various macroeconomic scenarios. While we can take a cautious approach if necessary, we are more likely to capitalize on potential investments that may come up over the next year.

Chandni, one thing just to add to that. Keep in mind on the development book. And this is not just a reflection of our experience following the GFC, but prior downturns. As it relates to development, those typically are some very good times for us as it relates to new land deals, either renegotiating deals that we have, sourcing new land. And importantly, if there is a reset in construction costs, as Matt pointed out, that is a very good time to buy out jobs. You only buy it at once, you only build it once, you release it every year, so that tends to be a very good time for us to source opportunities and get them started. And then when they would mature and deliver, they tend to be very, very nice yields on that book of business. So that is one thing that is relevant to the development side of the equation.

On the delayed starts, is there anything in common with those? Is there something that's specific to each of them individually? And I guess what's the likelihood that we'll see further delays next quarter from projects that are further out, et cetera?

Matt, I wouldn’t say there’s anything specific to each delayed start. What we are seeing is a common trend where jurisdictions are backed up, and even the design professionals are experiencing some delays in final permit drawings. This trend seems to be widespread and likely to continue. We have started to take this into account when considering start activity and predevelopment schedules, recognizing that things are taking longer to process. However, the deals planned for the second half of the year are all on track, and I don’t foresee any additional delays at this time.

Sean, can you remind us the magnitude of the year-over-year reduction in on-site headcount that's helping keep overall payroll costs only growing at 1% year-to-date? Are you guys anticipating any additional reductions over the next year?

Yes, Alan and Sean. The numbers I mentioned indicate that on the office side, headcount was down about 6% in the second quarter. For maintenance, it was about 4%. As we look ahead, Ben covered this in his prepared remarks regarding the benefits we expect from our ongoing initiatives, particularly the digital initiatives, which will lead to more efficiencies at the site level for both office and maintenance over the next couple of years.

Perfect. And just one more on development philosophy question. Ben, you touched on the low end of the range for development economics to continue to pencil being roughly 100 to 150 basis points. Is there a scenario where that spread is tighter than 100 basis points where you would still start a new construction project?

It is possible. That's a general range, so it heavily depends on our perspective regarding specific markets. Our approach will stem from whether we are creating appropriate long-term value relative to the risk. When you get around that range, you will start to pose those tougher questions and ensure that you have a strong conviction regarding the value proposition.

I would like to ask a broader question about rent growth. Historically, pre-COVID, a typical rent growth of around 3% per year seems like a good benchmark to use. We're currently experiencing high inflation, and even as year-over-year numbers start to cool off, inflation levels will likely remain elevated compared to historical standards. I'm curious about your thoughts on what a reasonable rent growth benchmark would be moving forward. Is 3% still appropriate, or should we consider a higher figure? Where do you see rental growth trending in the longer term?

Yes, Adam, this is Sean. I'm glad to begin, and others can join in as well. The number you're mentioning really reflects the underlying inflation in the economy. Over time, if you analyze the situation, rents in our markets among our customer segments have increased at a pace that exceeds inflation. I believe the figure I recall is roughly 70 to 100 basis points above headline inflation, give or take. Throughout a long period of about 40 years, there are instances where these differences narrow and others where they expand. Therefore, it really depends on how you perceive the underlying inflation rate and what you might anticipate for rental rate growth on a nominal basis in our markets that serve our segment. That's the perspective to consider rather than focusing solely on absolute numbers.

That's really helpful. I appreciate the insight. Could you provide a quick follow-up on the expectations for blended lease growth or new lease rate growth in the second half of the year? Also, where do you anticipate both new lease rate growth and blended growth may end up by the end of the year? It would be useful to understand the basis for the second half projections, but also how they might differ from where we conclude the year. I'm considering growth for next year and reflecting on earlier earn-in questions.

Yes. Adam, good question. Essentially, what's built into our reforecast for the second half of the year is some deceleration in like-term effective rent change primarily as a result of the comps from the second half of 2021. I think as I referenced earlier, if you look at what happened in 2021, we still had negative rent change through the second quarter. And then it quickly flipped to almost up 8% in the third quarter, so the comps get tougher. As you look into the second half, so our expectation is that you'll see a deceleration on average of roughly 150 basis points from the first half, effective rent change to the second half. That's sort of at a high level how I think about where it's going to trend as we move through the balance of the second half of the year.

Just following up on that last question. What about the timing perspective for the second half? This year presents a challenging comparison that we don't typically face. In absolute dollars, are November rents significantly lower than current rents? Or is the pace of market rent growth simply slowing down while your actual rents are still projected to be higher than they are now?

Yes. Rich, good question. So to date, I've mentioned we've seen a nice run up in asking rents more than 9% since the beginning of the year. So the question you're really asking is maybe around seasonality in terms of what's likely to happen. We do expect some seasonality in the back half of the year. We haven't seen it yet. But in terms of the second half reforecast, what we have assumed is that the normal seasonal decline in that we should see in the absolute level of rents would be about half in 2022 as compared to sort of pre-COVID periods. So if you remember last year, we didn't really see that, rents rose and then they sort of just flatlined the last 4 or 5 months of the year. For this year, we've assumed that they actually will decline, just at a more modest pace than pre-COVID periods would typically dictate. That's an assumption. We'll see if that's the case, but that's the assumption we have made so far for this year.

I have two questions. First, just thinking about the general acquisition market. Has the pullback of levered buyers also extended to merchant developers? And has this given you guys some additional opportunity for acquisitions?

Conor, it's Matt. I would say, typically, the merchant builders, the buyer of those assets since they're brand-new class assets is usually not a highly levered buyer. So there's probably been less of a pullback there than there has been in the value-add space, but there has been some pullback there. And particularly, there are some folks that want to sell early before maybe the lease-up is fully complete. So I think it does create an opportunity for us. And we do feel like that we are better positioned as a buyer going forward, there's less competition. And where for a seller, it's less about getting the absolute highest price as it is about certainty of execution in this environment, and that's something we offer. So I do think that it's going to lead to a more favorable buying opportunity for us.

Okay. Great. And then my second question is you guys have talked about capital allocation of acquisitions and development a couple of times. I was also just wondering how you guys think about your structured investment program. And if you might ramp that up, if you're hitting it on developments or if you wanted to speed up developments once again, if you would kind of carry the same level of the investments within the structured development program?

Connor, this is Ben. To a certain degree, we think about that as a separate business. It's $300 million to $500 million of finite capital, and we'll build that book of business up over the next couple of years. We may pull a little bit harder, a little bit less based on the environment. But I would expect a pretty consistent approach there to the fill out of that business.

Thank you, and thank you again for joining us today. We appreciate your support and engagement, and have a wonderful rest of the summer.