Avalonbay Communities Inc (AVB) — Q2 2024 Earnings Call Transcript

Thank you, Paul, and welcome to AvalonBay Communities Second Quarter 2024 Earnings Conference Call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10-K and Form 10-Q filed with the SEC. As usual, the press release 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'll turn the call over to Ben Schall, CEO and President of AvalonBay Communities for his remarks. Ben?

Thanks, Jason, and thank you, everyone, for joining us today. I'm here with Kevin O'Shea, our Chief Financial Officer; Sean Breslin, our Chief Operating Officer; and Matt Birenbaum, our Chief Investment Officer. I will start by emphasizing a number of key themes that are top of mind and that we believe are important drivers of our continued outperformance and then turn it to Kevin, Sean, and Matt to go deeper. Our operating momentum continued in the second quarter with us exceeding revenue expectations and also successfully managing operating expenses lower. Based on this momentum, we further raised our guidance for the year and are projecting sector-leading full-year core FFO and same-store revenue growth among our closest peers. Our operating momentum through the first half of the year has been driven by better-than-expected demand with our core renter, the knowledge-based worker in a relatively strong position right now. Sectors of the economy that encompass our core customer are at effectively full employment with stable job and income prospects. We also continue to benefit from customers' strong tilt towards renting versus buying a home, given the lack of for-sale inventory and unaffordability. We continue to benefit from the low levels of new supply in our suburban coastal markets, a dynamic that should continue to benefit our portfolio versus most of the rest of the sector for another 12 to 18 months at least. Our strong internal growth is also being fueled by our continued progress with our operating model transformation. As we detailed at our Investor Day last November, our collective set of initiatives, from our investments in technology and centralization to our reimagined operating neighborhoods, are driving meaningful operating efficiencies and allowing us to drive healthy increases in ancillary revenue streams. We're on track with these operating initiatives for 2024 with a strong runway of future earnings growth ahead of us. Importantly, we're also increasingly tapping these operating capabilities to drive outsized yields and returns on new developments and acquisitions. Further to that point, our platform is uniquely positioned to continue to drive incremental earnings growth and value creation from our external investment activity. Our developments underway continue to outperform. During the quarter, we completed three new development communities at an impressive initial stabilized yield of 7.7% as noted on Slide 5. We are also incrementally more optimistic about new development, adding two additional developments to this year's starts for a total just north of $1 billion. We're underwriting mid-6% yields on this set of new projects well within our strike zone of having 100 to 150 basis points of spread relative to market cap rates and our cost of borrowing. As we head towards a more attractive environment, we believe we are moving towards a beneficial period for executing on this repositioning, particularly with the froth in rents and cap rates off in our Sun Belt expansion regions. We're also tailoring our portfolio in our expansion markets with lower density and lower price point assets at an attractive basis. At the bottom of Page 5, $500 million of the $900 million of capital raised year-to-date has been from asset sales at an average cap rate of 5.1%, which we are then reallocating into acquisitions in our expansion markets. The remaining $400 million was from our prior unsecured debt deal with an effective rate of 5.05%, including the benefits of swaps we had in place, highlighting our relative cost of capital advantage. Before turning it to Kevin to discuss our updated guidance, let me touch on a couple of the details of our Q2 results. Page 6 provides the detail of our $0.09 core FFO outperformance in Q2, broken down by category. Please take note that $0.02 of this $0.09 outperformance was timing-related and costs we expect to incur in the second half of the year. Slide 7 zooms in on our Q2 revenue outperformance with better-than-expected outcomes on lease rates, occupancy, and other rental revenue, partially offset by bad debt staying more elevated than we had hoped. Other than bad debt, our revenue momentum was strong, which is a nice segue to Kevin to discuss our updated and increased guidance for the year.

Turning to Slide 7. You will see our updated 2024 full-year financial and operating outlook. Based on our performance to date and our expectations for the remainder of the year, we are raising our projection for full-year core FFO per share by $0.11 to $11.02 per share. This represents a year-over-year growth rate of 3.7%, which is a healthy 100 basis point increase relative to our outlook in April and a 220 basis point increase relative to our January outlook. We're also favorably adjusting our expectations for full-year same-store revenue, operating expense, and NOI growth. We now expect revenue growth of 3.5% and same-store NOI growth of 2.9% in 2024, which are favorable increases of 40 basis points and 80 basis points, respectively, relative to our prior outlook in April. Lastly, our midyear forecast includes a strong increase in new development starts of nearly $200 million to just over $1 billion of new starts in 2024. Matt will provide additional details on this activity in a few moments. Slide 8 highlights the drivers of the $0.11 increase to our full-year projected core FFO per share midpoint relative to our April outlook. Encouragingly and importantly, strong performance within the same-store portfolio is driving most of the increase. In addition, we are benefiting from outperformance at our lease-up communities. These amounts are partially offset by other items, including minor adjustments in capital markets activity and overhead. Slide 9 provides a roadmap from our second quarter core FFO per share to our third quarter projected core FFO per share midpoint. Looking at the components of the sequential quarterly change, we expect revenue growth from the same-store portfolio and NOI contributions from lease activity and other stabilized communities to drive $0.08 of sequential core FFO per share growth. These contributions will be affected by a combination of higher same-store operating expense growth in the third quarter, which we expect will increase about 6% on a year-over-year basis. Adjustments in capital markets and transaction market activities are primarily driven by recent net disposition activity in the last month, consistent with our sell-first and buy-later transaction strategy and by adjustments in overhead expenses. In the fourth quarter, we expect reduced same-store operating expense growth. For the full year 2024, we now expect same-store operating expense growth of 4.8%, which is a 60 basis point decrease from our last quarter outlook and an 80 basis point decrease from our January outlook. Based on our performance to date and our projected core FFO per share midpoint for the third quarter, the implied projected core FFO per share midpoint for the fourth quarter is $2.84 per share. Notably, this strong sequential growth in Q4 is primarily driven by our growth from our same-store portfolio and our lease-up communities during the fourth quarter. I will now turn the call over to Sean.

All right. Thanks, Kevin. Turning to Slide 10. Key portfolio indicators were strong during Q2, and we're off to a good start in Q3. In Chart 1, turnover remains well below historical norms in part supported by a lower level of move-outs to purchase a home. In Q2 specifically, turnover was down 600 basis points year-over-year or roughly 12% and was lower than last year in every region. Lower turnover supported relatively stable occupancy and drove higher rent change as we move through the quarter. Effective rent change increased from 3.2% in April to 4% in June before moderating into the high 3% range during July. As expected, our East Coast regions delivered the strongest rent change in Q2 of 4.2%, with our Mid-Atlantic portfolio leading the way at roughly 5.5%. Our Northern Virginia and suburban Maryland assets continue to demonstrate strong momentum, but the District of Columbia is still lagging due to weaker demand, which is partly due to the federal government's return to the office policies and ongoing supply, which is projected to be roughly 4% of existing inventory this year before declining to approximately 2.5% in 2025. Our Boston portfolio, which represents high-quality assets in predominantly supply-protected suburban submarkets, produced rent change in the high 4s during the quarter. New supply in Boston has declined from the low 2% range a year ago to roughly 1.5% this year and is expected to decline to just above 1% next year, with urban supply projected to be substantially higher than suburban supply. Assuming a relatively static demand environment, the outlook for our suburban Boston portfolio remains quite positive. The Metro New York and New Jersey portfolio, two-thirds of which is diversified across various suburban submarkets in Westchester, Long Island, and Central and Northern New Jersey, delivered 4% rent change during the quarter. Recently, the strongest growth has occurred across the various submarkets in New York City, Northern New Jersey, and Long Island. Some of the more distant locations in Central New Jersey have lagged as employees increase their in-office workday requirements in the city. The West Coast established regions produced rent change in the 3% range; our Seattle portfolio, which is primarily located in east side and north-end submarkets led the way with 6% rent change during the quarter. While there are some pockets of new supply in select suburban submarkets, notably Redmond, most of the new inventory is concentrated in urban submarkets and is not competitive with our portfolio. On the demand front, major employers like Microsoft and Amazon requiring more in-person work have supported the increased demand we've experienced throughout the first half of the year. Northern and Southern California lag behind Seattle, with rent change in the mid-2% range. In Northern California, we had better momentum in San Francisco and San Jose, with 3.2% and 4% rent change, respectively, during Q2. However, the East Bay remains soft with a rent change of 50 basis points in the quarter. Given the supply is projected to be below 1% of stock across the major markets in Northern California for this year and next year, trends could continue to improve in the near future to the extent we realize a modestly stronger level of demand. Moving down to Southern California, Orange County produced the strongest rent change at 4.2%, followed by San Diego at roughly 3% and L.A. in the 2% range. Orange County and San Diego have been healthy markets year-to-date, but performance across various submarkets in L.A. has been choppy and highly correlated with the volume of inventory returning to the submarket from nonpaying residents. As it relates to bad debt, which is depicted in Chart 4 on Slide 10, while we're encouraged by the year-to-date trends in underlying bad debt across our same-store portfolio, results were choppy during the second quarter. We're still expecting bad debt to average roughly 1.7% for the full year 2024, representing an approximately 60 basis point improvement from 2023. As we've stated previously, prepandemic bad debt for our portfolio was 50 to 70 basis points. To the extent we reach that level, we would realize an incremental $25 million in revenue or more over the next several quarters. Transitioning to Slide 11 to address our updated revenue outlook for the year, we now expect same-store revenue growth of 3.5% for 2024, an increase of 40 basis points from our most recent outlook. This increased outlook is primarily driven by stronger lease rates, as lower turnover and stronger occupancy in the first half of the year allowed us to achieve higher rental rates than originally anticipated, a trend we expect to continue. We now expect like-term effective rent change in the 3% range for the full year 2024, up roughly 100 basis points from the 2% level we expected at the beginning of the year. We realized 3% rent change in the first half of the year and expect to produce similar performance in the second half. We've seen rent change begin to moderate at the start of the third quarter and, consistent with seasonal norms, expect it to decelerate through the back half of the year. We expect renewals in the mid-4% range for the balance of the year, while new move-ins averaged roughly 1.5%. The near-term outlook for lease renewals remains healthy with offers in the low 6% range for August and September. Moving to Slide 12, you can see where we're projecting stronger revenue performance relative to our prior outlook. In our established regions, we're expecting substantially stronger growth in New England, the Mid-Atlantic and Pacific Northwest. We're expecting modestly better growth in New York, New Jersey, and almost no change in Northern and Southern California. In our expansion regions, Denver and Southeast Florida are expected to perform slightly better than we originally anticipated, but our other expansion regions of Dallas and Charlotte are projected to be weaker primarily as a result of the continued challenging levels of new supply in those markets. Finally, finishing on Slide 13, we're on track to realize roughly $10 million of incremental NOI from our operating initiatives in 2024. You can see those results in our same-store portfolio in two areas: first, the expected contribution from other rental revenue, which is projected to increase by 14% year-over-year; second, highly constrained payroll costs, which have declined year-to-date and are expected to grow at roughly 1% for 2024, which is well below the average merit increase of approximately 4% and is related to a reduction in the number of on-site positions. These reductions relate to the enhanced efficiency of our teams, supported by our digital efforts and enabled by our new labor strategy. From a broader perspective, we're on track with the Horizon 1 and 2 financial objectives we communicated during our Investor Day last year, which reflect generating an incremental $80 million NOI from our portfolio. At year-end 2024, we expect to have achieved roughly $37 million of that $80 million and look forward to producing the balance of it over the next few years. We'll continue to keep you informed about our efforts and achievements as we innovate further in the future. Now I'll turn it over to Matt to address recently set performance, development starts, and capital recycling activities.

All right. Great. Thanks, Sean. Turning to our development communities. You can see Slide 14 details the continued impressive results being generated by our lease-ups. The six development communities that had active leasing in the second quarter are delivering rents $320 per month or 11% above our initial underwriting, translating into a 40 basis points increase in yield. This performance is being supported by strong leasing velocity with these assets averaging 37 net leases per month, which was an all-time company record driving our increased guidance for lease-up NOI for the year by roughly $4 million. On the strength of these results and with the transaction market providing more insight into current asset values, we are also increasing our projected development start volume for the year, as shown on Slide 15. We now expect to break ground on nine new communities this year for a total projected capital cost of $1.05 billion, with the vast majority of these starts in either expansion regions or the Northeast and almost exclusively in suburban submarkets. Three of these starts occurred in the second quarter, with most of the others expected in Q3. Based on today's rents, operating expenses, and construction costs, these developments are underwriting to a projected yield of 6.4%, generating our target spread of 100 to 150 basis points over current cap rates. We control a total development rights pipeline of roughly $4.5 billion, providing plenty of opportunities for future profitable growth in years to come. Turning to Slide 16. After several quiet quarters, we have also been active in the transaction market recently, closing on five dispositions since our last call for aggregate sales proceeds of $515 million. All of these dispositions were in our established coastal regions and priced at a weighted average cap rate of 5.1%, reflecting an average price per home of $475,000. Three of the five sales were also in urban submarkets, where we're seeing better investor interest after several years where these locations were heavily out of favor with institutional capital. We've reinvested a bit less than half of this capital so far into three acquisitions in our expansion regions at an average price per home of $260,000, as we are starting to find attractive opportunities to buy at low replacement costs in desirable submarkets and assets that we like. Our asset trading activity continues to move us closer to our long-term portfolio allocation goals of having 25% of our portfolio in expansion regions and 80% in suburban submarkets. We will look to redeploy more of those proceeds before the end of the year as well as bring several additional assets to market as we continue to focus on optimizing our portfolio as we grow. And with that, I'll turn it back to Ben.

Thanks, Matt. I'll wrap up on Slide 17 with the highlights from our recent ESG report. Our efforts on sustainability are led by Katie Rotenberg and her team, but it is a full commitment across the entire organization that enables us to continue to make meaningful progress on these collective initiatives, from reducing our operating costs and environmental impact to making AvalonBay more inclusive and diverse, and to all of the time invested via volunteering by our local teams. A huge thanks to all AvalonBay associates. And with that, I'll turn the call to the operator to facilitate questions.

You mentioned in your remarks the strong growth you're seeing in the fourth quarter. Specifically, I was just wondering if that's a good run rate for us to think about as you go into 2025 or if there's something in that number that wouldn't maybe carry over like lower seasonal costs. Just because you brought up the remarks, I don't know if you were trying to signal something about your earnings growth going forward.

Yes, Eric, this is Kevin. I'll take a crack at this one. Others may want to jump in. We weren't trying to signal anything about '25 in terms of our guidance yet. It's a little bit early at this point in the year to do that. Rather, we were just noting that the fourth quarter would be expected to have a sequential increase in earnings to get from that third quarter to midpoint core FFO per share guidance of $2.71 to the implied midpoint in the fourth quarter of $2.84. That 13% pickup is primarily driven by sequential growth from 3Q to the fourth quarter in the same-store portfolio. Much of it is a seasonal decline in operating expenses, but some of it is a sequential continued increase in same-store revenue items, as Sean alluded to in his remarks as well as some other adjustments. So that was really all we were trying to signal and roadmap to investors is the growth from 3Q to 4Q and the components and sources of that growth primarily coming from same-store as well as continued growth from our lease-up portfolio.

Got it. That's helpful. And then in the presentation, you had some comments about the sort of unevenness in buyback. Can you talk about what you're seeing there, why you're seeing it, and what you're seeing sort of suggests that it might be harder to eventually get back to that normal long-term average that you typically run at?

Yes, Eric, it's Sean. Overall, what I'd say is you sit back and look at it relative to what we've seen in the last couple of years, things are absolutely trending in the right direction. So it's 2.3% last year. We're looking in terms of underlying bad debt, and we're expecting that to decline down to roughly 1.7% for 2024. So it's moved in the right direction. Each month, each quarter it can be a little bit bumpy based on underlying activity, but I think we're trending in the right direction. We've not provided a precise forecast as to when we would expect it to get back to normal levels just based on the underlying activity that has to manifest itself in actually happening, which relates to court cases and various things like that. We'll certainly provide our best insight as we turn the quarter towards 2025, but you feel good about the overall change from '23 to '24 at this point in time.

Is it fair to say that based on some of the lease rate growth data that you provided for what you expect for the back half of the year, in that 3%-ish range that the earn-in heading into next year should be around that mid-1% range, maybe a little bit below that heading into 2025?

Yes, Austin, it's Sean. Given where we sit here with kind of half the year left to go, it wouldn't be appropriate to make comments as it relates to what we think the earnings are going to be in January. But you can sort of do some math based on rent change last year versus this year and try to reach your own conclusion on that.

That's fair. Based on the expected increase in same-store revenue growth from the third quarter to the fourth quarter, you mentioned that it picks up a bit, and you highlighted this in the presentation. I understand you want to limit guidance for 2025, but is that the general direction you anticipate for next year, considering the growth in the second half of the year in lease rates and the supply situation? Or is there something particular in the fourth quarter that’s driving this reacceleration?

Yes. I think for the most part, Austin, if you think back to Q4 of last year, we have a little bit softer comps when we get to Q4 of this year, and that is in part producing the expectation for a slightly better revenue growth in Q4, as well as the continued activity in a couple of areas. One, from an operating initiative standpoint, we continue to drive other rental revenue. We continue to push that and see that increasing sequentially as we move quarter-to-quarter. Then consistent with my last comment, we do expect bad debt in the second half of the year, potentially by Q4 to be a little bit better compared to where we've been. So there are a few things that are contributing to it. But I would say the softer comp from last year is really the primary reason.

Kevin, you mentioned that you expect same-store expense to rise, I think, in the third quarter to 6% before moderating back down again in the fourth quarter. Can you just explain that dynamic?

Sure. John, it's Kevin. Sean may want to jump in here a little bit. Essentially, what you've got going on in the second quarter and third quarter is a seasonal uptick in the number of the OpEx categories, particularly redecorating utilities and marketing expenses, as well as a timing-related increase in nonroutine expenses. What you're seeing, you're going through the second quarter, third quarter, essentially a $0.09 sequential increase in OpEx in the same-store portfolio. In the fourth quarter, you see that seasonal reversal in the fourth quarter where operating expenses appear to reverse, going to be a sort of a $0.07 sequential decline from the fourth quarter in OpEx. That's a little bit of the background on that one.

And then I wanted to ask about build to rent. It looks like you have a new project in this category in Dallas. I was wondering how you look at this opportunity going forward and how you anticipate margins in the build-to-rent format versus multifamily?

John, I'll start with a couple of comments, and I appreciate you calling out that new project in Plano. The build-to-rent space, when people talk about build-to-rent, a significant portion of it is townhome development, and that's a product that we're very comfortable with, one we've developed historically and one in which we own, operate, and develop today. It's a product that we like the prospects of going forward, you think about demographics, population shifts, and what’s happening in the for-sale market. We've been active in the townhome space, increasingly active over the last couple of years, and it's some places where we're building townhomes in conjunction with our apartment projects. We actually have some townhome projects that we've built that are full townhome projects. As we go forward, the Plano project sort of fits that type of growth and our growth in build-to-rent, growth in townhome, you should expect to come through our similar channels of how we've been growing, some through our own development, some through funding of other developers, which is what this Plano project was, as well as some potential acquisitions.

But as far as yields and operating margins, do you find it similar to multifamily?

John, it's Matt. Yes, very similar. I mean, again, these are communities with 150 homes in one location with a small amenity package, including a clubhouse and a pool, and the operating margins are very comparable to multifamily communities in that region.

I appreciate your insights on the expected rent change renewals, possibly moving to 4 to 1.5. Could you elaborate on the regional differences, particularly in major areas like the Northeast and West or between coastal and Sunbelt regions? Additionally, how does your visibility this year compare to the same period last year? We're entering a slower season, but what feels different to you?

Yes. Jim, it's Sean. Why don't I take your second question first? Just from a macro perspective, I think we feel generally pretty good about the outlook that we provided. I would say just relative to last year, there are different things happening in terms of the general outlook, but overall, each time we present our forecast, we think it is the most realistic case for that forecast, and the environment sort of dictates that. I wouldn't say we're more or less confident this year than last year, per se, there are a lot of things happening out there that you could point to that can create concerns or create optimism, we try not to get caught up in that. As it relates to the outlook for the market, I'll try to keep it at a high level as opposed to going through all the regions, but we do expect continued outperformance across our established East Coast regions in the second half of the year relative to the Sunbelt and relative to the West Coast regions, generally speaking, with one exception potentially being Seattle, which has surprised most of us to the upside in the first half of the year and expect solid growth in Seattle in the back half of the year. So without going through every region, I would think of it as East established, West established, followed by the expansion regions in terms of performance.

Okay. And then thinking about the Dallas or the Plano asset, just how are you thinking about putting capital to work in development through infusions in balance sheets versus on your own balance sheet? Is there something changing given rates are on their way down that seems like people are getting more positive on late '25 and '26 looking ahead? Do you think you pare back maybe some of these more capital infusion type investments versus just doing everything on your own balance sheet or keep the same mix?

Jamie, what I would call out as different going forward is we have, to a certain degree, institutionalized our programs providing capital to third-party developers. We think about that as additive to the external investment activity that we make through our own teams. As we look out over the next number of months and quarters, you can hear from us, we are incrementally more positive about the prospects on development. We're excited about the DFP program because it potentially allows us to accelerate external investment activity, calling it earlier in that development cycle.

Just one thing I'd add there, Jamie, for clarity, whether we're doing it as AvalonBay or DFP, they're both on balance sheet. We're both match funding them and they're being reported as consolidated communities. The only difference is that, in one case, our development and construction teams are actually executing on it. In the other case, there's a third-party developer. But from a capitalization point of view, they are the same.

Great. Just wondering where you guys are going out with renewals for August, December, and maybe even October, if you have that?

Yes, Adam, it's Sean. We've mentioned that for August and September, renewals went out in the low 6s, which is the visibility that we have today.

Got it. Helpful. And then just kind of a backward-looking basis, just thinking about the cadence of particularly new and blended lease growth in May, June, and July. Looks like a nice acceleration into June and then a little bit of a deceleration into July. Just wondering if you could comment on what happened? Was this a typical seasonal pattern? Was this something different? Was this a pull forward of seasonality? Just interested to hear on a backward basis what happened in the last few months.

Yes, Adam, it's Sean again. I mean, I think the way it lays out is pretty consistent with historical seasonal patterns. If you think about where you start the year in January, asking rents typically rise up through early July. The average is usually around 6% to 7%, and then you see a deceleration in the back half of the year, also consistent with seasonal norms. The acceleration that we saw was a combination of two things: seasonal factors and our overall revenue management approach. The strong performance in the first quarter led us to increase our asking rents, which you saw manifest in both renewals and new move-ins. As you see the seasonal peak in rents, to maintain stable occupancy, you start to see a deceleration from July to August. Overall, from June to July, some markets were up slightly, some were down slightly. Overall, it was net down 30 basis points from June to July, but that's not material in the whole scheme of things. We expect continued seasonal deceleration as we move through August and into the remainder of the year.

Matt, a question for you on just to get a sense of how the economics of the development rights pipeline compare to the starts this year. If you started an additional $1 billion of starts, how would yield compared to the 6.4% you're expecting for 2024 starts?

Yes, John, it really depends on the geography. So the next $1 billion of starts would yield differently based on their location. In the mid-Atlantic and North to Boston, suburban medium density to lower density products are yielding in the mid- to high 6s, even pushing 7 or a little bit north of 7 in some of our Jersey starts. In the expansion regions, yields are kind of around 6%, low 6s. But again, cap rates are lower there as well, so we still have that spread. On the West Coast, it's hard to find deals that yield into the 6s, which is why very little of our start activity is in those regions. It really depends on the mix of business. Hard costs are moving and you won't know how much until you actually bring the jobs to bid. Some deals are starting to pencil a little better than we thought, as we have more visibility into those that are closer to the start than those that aren't. Some deals may not be ready to start for another year or two, where, based on hard costs we looked at 12 months ago, they might have been in the 5s, but based on our current hard costs, they might be in the 6s.

Okay, that's helpful. But there's nothing unique or maybe a stale land basis that you've seen for the 6.4% yield on 2024 starts. Is there anything unique that's inflating the expected yields on this year's starts?

No. In fact, if anything, it's the inverse. The newer deals we're signing up have a lower land basis that is more reflective of where today's market is.

Okay. Great. Last question on acquisitions. Could you share the average cap rate on the three deals you acquired in recent months? And what's a reasonable base case of acquisition volume we should expect this year?

Yes. The three we bought so far had cap rates around 5. Again, we sold at a cap rate just slightly north of that at 5.1. That spread has actually come in some. I looked at last year, it was about 40 basis points. That's one reason why we're looking to be more active because we feel like the trade looks a little better. We're hoping to do at least another $300 million or so of acquisitions before the end of the year. We could certainly do more, and we have more assets that we're going to bring to sale in the disposition market as well. But it depends on if we find assets that we like.

I was looking over the ESG slide, and I noticed you highlighted like solar sites your team has activated in 2023. Could you remind us of just your goal on that front? And then any of that income from those solar sites is included in that $80 million of incremental NOI from the operating model transformation? Or is that something else or in addition?

On the second part, Josh, that's a separate bucket of activity. So that's not in the operating model $80 million target. It's part of an NOI-enhancing pool that also has sustainability benefits associated with it. When we talked at the Investor Day around our increased menu and opportunity set to be investing back into the portfolio in the 10% to 14% range, those solar projects were a component of that.

Okay. I appreciate that. And then I just want to follow up on Eric's first question on the seasonality of expenses. You mentioned 4Q is a lower quarter. Could you remind us of the cadence throughout the year? And if there's anything we need to kind of watch out for on a go-forward basis?

I don't believe there's anything to watch for going forward. Typically, as Kevin mentioned earlier, operating expenses tend to increase in the third quarter. This year, the rise from Q2 to Q3 is about one-third due to seasonal increases in utilities like energy and water and sewer, with another third related to seasonal turnover in repairs and maintenance, as has historically been the case, along with a few projects shifting from the first half to the second half, and some minor factors as well. Fourth quarter tends to slow down, which is normal. Looking ahead, as we've discussed previously, several unusual activities that have been impacting the portfolio are expected to decrease in 2025. Our operating expense guidance for the year takes into account some of these identified factors, but there are around 160 basis points of unusual activity included, mostly from the conclusion of various pilot programs, combined with the effects of our operating initiatives in areas like utilities and telecom. The organic run rate for this year is closer to 320 basis points, and as the elevated activities start to decline heading into 2025, we should experience a bit more of a tailwind.

Are you seeing any changes in resident behavior across markets? Or any sort of price sensitivity among your tenants?

Yes, Michael, it's Sean. In terms of movement, if you want to describe it that way, nothing terribly substantial. The only thing that might be worth noting that has continued in Q2, we saw the same in Q1, is that in the tech markets, particularly in Northern California and Seattle, the percentage of new move-ins from a more distant location within that same region is a little bit elevated. People who may have moved to second or third ring out during COVID are moving back closer. It wasn't a move 1,500 miles away, but 150 miles, that type of thing. That's the only thing of note as it relates to movement. On the sort of flip side, the percentage of move-outs related to rent increase is above historical norms. This isn't surprising given the inflationary pressures we've seen across the economy over the last couple of years, but the move-outs to buy a home are significantly below historical norms. Renting is still the more affordable option, particularly in our markets where the spread between medium-priced rent and medium-priced homes is more than $2,000 a month in our established regions. Renting remains the most affordable alternative, so residents may be making different choices in other parts of their daily lives, but that's the only notable point.

Got it. And my follow-up question is, it seems like there's been a push for more supply in New Jersey, suburban markets. Is there a risk that similar supply growth could pop up in some of your other suburban markets?

Michael, it's Matt. It's an interesting question. In Jersey, the recent round of Mount Laurel affordable housing allocations was more aggressive than in the past. We've been the beneficiary of that increase with high-yielding development opportunities. There will be more supply in some of those inland suburban markets than we've seen in the past, but we haven't seen that in Boston. By contrast, the 4B framework has been the same for the last 30 years, and many towns are at their 40-threshold now. Generally, the suburban supply in Boston is pretty muted, and I would expect it to remain that way. Long Island is another market where the ability to push supply is limited by the local governance; several attempts have proven unsuccessful due to pushback from municipalities. It isn’t a concern that there's going to be an onslaught of supply in California anytime soon either, as the legislature’s attempts to approve more housing have not been very effective, making the economics challenging.

Two questions. Just first, going back to the bad debt, it's interesting that you presumably would have a higher, more affluent renter base yet the bad debt remains elevated. It's certainly above what MidAmerica was commenting on their call. Specifically, two markets that jump out are Metro New York, New Jersey, and Mid-Atlantic rivaling Southern California. Can you just give a sense of why your renter base, which presumably has pretty good jobs, has higher delinquency? And then two, what's going on in Metro New York, New Jersey and Mid-Atlantic that's causing delinquencies to be as high?

Yes, Alex, this is Sean. Happy to take that one. In terms of comparing bad debt across companies, one would say it's probably a little challenging since we don't know everyone's policies. Everyone bills different amounts for different things. When someone doesn't pay us, we bill them for everything: rent, late fees, utilities, lease break fees, legal costs. There are many factors. I can't comment on specific customers. In relation to the markets you mentioned, New York and New Jersey represent 23% of our outstanding accounts; however, they punch above their weight in terms of dollar value, representing about 1/3 of our outstanding receivables. The main issue relates to the pace of the courts, which is the slowest jurisdiction by far in the country. We have almost 400 accounts in the greater NYC area, many sitting in the eviction process for over a year, with faster movement expected primarily in NYC, but it extends to areas like Long Island and Westchester. In the Mid-Atlantic, most delinquency corresponds to accounts in D.C. and Montgomery County, known for their slow processes. Factors such as additional time allowed for tenants contribute to elevated bad debt, while conditions should improve as it diminishes, allowing the process to continue to progress.

Yes. Second question is on dispositions. It jumped out given your established renter base. In looking over your Metro New York portfolio, you have a lot in New Jersey, Long Island, and Connecticut, and you really only have two left: New Canaan and Wilton. I was wondering if Connecticut is just not a desirable market or if you saw an opportunity for dispositions with unacceptable IRRs, while your intention is to bulk up in Connecticut versus New Jersey and Long Island.

Yes, Alex, it's Matt. We're almost complete with exiting the Connecticut market completely. Over the years, we sold about 15 assets in Connecticut. Once you start down that path, it can become operationally inefficient to maintain a few remaining assets. You're right; New Canaan and Wilton were among the most desirable of our Connecticut portfolio, but we've decided to exit that market. Once you only have 2 or 3 assets left, managing them seems less worth it.

I just wanted to ask a question on the regulatory front as you're kind of heading into the election cycle. If you're hearing anything at the state level and maybe some thoughts regarding the Biden proposal to have national rent control?

Yes, this is Sean. I'm happy to take that one. There are various proposals happening across different states. Without being too specific, I’d say the various associations we're involved with are active in engaging with local political figures regarding proposals, ballot initiatives, and other matters. There's a lot of engagement to manage that activity and, most importantly, to educate folks on the pros and cons of various policies. I think the trend we've seen is both political entities and individuals are sensitive to Matt's earlier point about avoiding measures that could negatively impact the future supply of housing. This awareness has been beneficial to the industry over the last couple of years. Regulation could pose challenges, but we believe that national rent control would harm the market for the supply of housing, which is the central issue in question. There's plenty of engagement not only with the current administration but with candidates regarding national policies that could potentially have significant implications.

That's helpful. And then if I may ask one more question. In your expansion markets, are you seeing anything different regarding how the competition is behaving in light of supply deliveries? I know classic concessions are appearing, but anything unusual regarding business practices to shore up their finances that you see?

Not necessarily. This is Sean again. It's typical concessions: 2 months, 3 months, depending on the lease term in hyper-supplied markets like parts of Austin or some areas in Charlotte, but nothing atypical regarding competitive practices in relation to lease-ups.

So in terms of your Sunbelt expansion, obviously, you're not getting any bargains there today. Listening to MidAmerica's call, things are trending in the right direction, at least eventually. Do you feel a sense of urgency to move more now than ever? And part two of that same question: Can you characterize the nature of your sellers? Are you talking to any of the REITs in cases where you're expanding through acquisitions?

Rich, this is Ben. Going back to the first part, I believe it's indeed an opportune time to execute the trade. The upfront dilution has narrowed, bringing us to a position where we can sell older, slower-growth assets from our established regions and then reallocate that capital. However, I don't think that window is closing just yet. The supply dynamics will continue to apply pressure on operating fundamentals in many of those markets, along with the ongoing wave of refinancing. I expect the opportunity window to remain open for a while.

In terms of who the sellers are, what we're finding at least with the assets we've been acquiring and others we've bid on but haven't been successful with, there's a lot of institutional owners who are in funds with limited lifespans, closing out their current funds and sitting on substantial gains from past purchases. While prices are not as high as they were two years ago, they're still in a solid position, thus willing to meet the market demand. However, that's not the majority of the market, and many sellers still hold out for yesterday's prices. The typical buyer profile tends to be a fund sponsor with institutional capital, polishing off the last of their three funds.

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