AvalonBay Communities Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 1, 2024

There are 18 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to AvalonBay Communities 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. Following remarks by the company, we will conduct a question and answer session. Your host for today's conference call is Mr. Jason Riley, Vice President of Investor Relations.

Operator

Mr. Riley, you may begin your conference.

Speaker 1

Well, thank you, operator, and welcome to AvalonBay Communities 4th Quarter 2023 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 ks 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 may be used in today's discussion.

Speaker 1

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?

Speaker 2

Thank you, Jason. I'm joined today by Kevin O'Shea, our CFO Matt Birenbaum, our Chief Investment and Sean Breslin, our Chief Operating Officer. We'd like to start by thanking our 3,000 AvalonBay associates for delivering exceptional results in 2023. Your efforts and dedication are what make it happen and your commitment to our purpose and culture makes us who we are as an organization. Thank you.

Speaker 2

As a brief recap on last year, as shown on Slide 4, we achieved 8.6% core FFO growth for the year, a testament to our ability to grow earnings through unique internal and external drivers. Through the proactive management of our assets, Same store revenue ended the year up 6.3% and NOI increased by 6.2%. For external growth, Our developments underway continue to outperform with $575,000,000 of completions across 6 projects delivering outsized stabilized yields of 7.1%. We're particularly proud of the results from our operating model transformation where we are delivering value to customers and driving meaningful efficiencies. As highlighted on Slide 5, our operating initiatives exceeded expectations in 2023, delivering $19,000,000 of incremental annual NOI to the bottom line, which was $7,000,000 or almost 60% higher than anticipated.

Speaker 2

Moving to Slide 6 and capital allocation. We remain nimble in 2023, having shifted to being a net seller during the year with 4 dispositions from our established regions for $445,000,000 $275,000,000 of which we'd redeployed into acquisitions in our expansion regions. We also started $800,000,000 of profitable new development during the year, including $300,000,000 of starts in the 4th quarter at an initial projected yield of 6.7%. We also continue to build our structured investment business this year in which we provide preferred equity or mezzanine loans to 3rd parties for new multifamily construction. We're well positioned to underwrite this business given our development and construction expertise and our live proprietary data.

Speaker 2

And we're fortunate to be building this book of business in today's environment, reflecting today's rates and asset values. The commitments we made in 2022 2023, which now total $192,000,000 are set to deliver an uplift in earnings this year and going forward. Our balance sheet is as strong as it has ever been with the key metrics summarized on Slide 7, providing strength as we manage the business and flexibility as we consider accretive opportunities that may arise during 2024. Among a set of peers with strong balance sheets, we continue to experience some of the tightest credit spreads among all REITs, providing a meaningful financial advantage. Slide 8 highlights our strategic focus areas for 2024.

Speaker 2

These focus areas draw upon our foundational strengths as an organization, while also recognizing our commitment to continue to evolve and are areas we are confident will drive superior growth over a multiyear period. Front and center are the next steps in our operating model transformation. At our Investor Day, we raised our target for incremental annual NOI to from our operating initiatives to $80,000,000 $55,000,000 of NOI from Horizon 1 $25,000,000 from Horizon 2. 2nd, we will continue to drive differentiated growth from our development and construction leadership. The near term focus is on execution of our projects underway, ensuring they deliver outsized value for shareholders.

Speaker 2

And while new start economics are challenging in certain of our markets, this is the type of environment in which we've typically found some of our most attractive development opportunities. 3rd, as a continued multi year approach, we have set a target of shifting 80% of the portfolio to the suburbs from 70% today and set a target of having 25% of our portfolio in our expansion regions, up meaningfully from 8% today. And given the cooling of fundamentals in the Sunbelt, we believe we can make this transition at a more attractive basis than we were able to a couple of years ago. We're also making significant and very accretive investments in the existing portfolio this year, ranging from apartment renovations to the creation of new are confident that there will be opportunities for us to both utilize our balance sheet capacity and bring our strategic capabilities to bear, be it operational, development or by utilizing our scale to generate value for shareholders. As we assess the year ahead and moving to Slide 9, our baseline expectation is for a slowing economic environment this year.

Speaker 2

As we have in the past, we start with consensus estimates from the National Association For Business Economics or NAB, which forecasts positive but very modest job growth in 2024 of 55,000 jobs per month. This muted growth tempers housing demand, while other factors such as rent versus own economics should serve as a ballast to apartment demand, particularly in our established regions, where it is now $2,500 per month more expensive to buy than to rent. Nevertheless, given mixed signals and what we believe is higher uncertainty in the economy and capital markets, our approach is to remain nimble and be ready to proactively adjust based on how

Speaker 3

2024 evolves.

Speaker 2

In an environment of uncertainty, one known factor is new multifamily supply. In our established regions, we expect new apartment deliveries of 1.6 percent of existing stock in 2024 and expect this figure to further decline to 1.4% in 2025. Importantly, these figures are in line with historical averages for these coastal markets. And this is quite a contrast with supply dynamics in the Sunbelt, which will have twice the level of supply. And this elevated supply dynamic in the Sunbelt is to continue at least through 2025, simply a function of the reality that it generally takes 2 plus years to complete and stabilize a new development project.

Speaker 2

And so as we assess 2024, we expect to be relatively well positioned given the stable demand and limited supply outlook in our established regions, but are forecasting a slower year of growth. I'll now turn it to Kevin to provide an overview of our guidance for the year and the building blocks of earnings growth.

Speaker 4

Thanks, Ben. On slide 11, we provide our operating and financial outlook for 2024. For the year, using the midpoint of guidance, We expect 1.4% growth in core FFO per share, driven by our same store portfolio and by stabilizing lease up communities, partially offset by the impact of capital markets and transaction activity as well as by slightly higher overhead costs. In our same store residential portfolio, we expect revenue growth of 2.6% and NOI growth of 1.25% for the year. And for our capital plan, we anticipate total capital uses of $1,400,000,000 in 2024, consisting of $1,100,000,000 in investment spend and $300,000,000 in debt maturities.

Speaker 4

For our capital sources, we expect to benefit from nearly $400,000,000 in projected free cash flow after dividends and to source $850,000,000 in new capital, which we currently assume will be unsecured debt issued later this year. In this regard, thanks to our balance sheet strength and our A- and A3 credit rating, We enjoy attractively priced debt today at around 5% on a 10 year unsecured debt that we can invest in development yielding in the mid-six range to support future earnings growth. We also project drawing upon $175,000,000 of the $400,000,000 in unrestricted cash on hand at year end 2023, resulting in projected unrestricted cash at the end of this year of about $225,000,000 On slide 12, we illustrate the components of our expected 1.4% growth in core FFO per share. We expect $0.15 per share earnings growth to come from NOI growth in our same store and redevelopment portfolios. And we expect another $0.36 per share of earnings growth from communities undergoing lease up in our development and other stabilized portfolios.

Speaker 4

Partially offsetting these sources of growth

Speaker 5

is a

Speaker 4

$0.29 impact from capital markets and transaction activity. Included within this is a $0.12 impact from lower interest income in 2024 from having higher cash balances due to our early settlement of our equity forward in April 2023 and a $0.05 impact from increased share count between the 2. And with that summary of our outlook, I'll turn it over to Sean to discuss our operating business.

Speaker 6

All right. Thanks, Kevin. Turning to Slide 13. Three primary drivers will support same store revenue growth in 2024. 1st embedded rent roll growth of 1%, down approximately 50 basis points from where it was at the end of Q3 2023, which is consistent with historical trends, plus incremental lease rate growth throughout the year.

Speaker 6

2nd, an outsized contribution of roughly 80 basis points from the projected 13% increase in other rental revenue, which is derived from our operating initiatives and third, about a 60 basis point improvement in underlying bad debt from residents from 2.4% in 2023 to an expected 1.8% in 2024. The cumulative growth from those 3 primary drivers is expected to be partially offset by a 30 basis point headwind from the projected $6,000,000 year over year reduction in rent relief and a modest drag from net concessions and economic occupancy. To provide a little more detail on underlying bad debt trends from residents, While we're expecting a 60 basis point improvement year over year, our forecast reflects an underlying bad debt rate of roughly 1.6% At year end 2024, we're still more than double our historical pre COVID rate. Moving to Slide 14, we expect revenue growth in our established regions to be more than double that of our expansion regions, Within our established regions, we expect better demand supply fundamentals on the East Coast as compared to the West Coast. Southern California is expected to produce the strongest same store revenue growth, which is primarily the result of a substantial improvement and underlying bad debt on a year over year basis.

Speaker 6

Transitioning to Slide 15 to address our operating model transformation. We're tremendously proud of our team's focus and efforts over the last couple of years, which have produced approximately $27,000,000 in incremental NOI. We expect to recognize another roughly $9,000,000 benefit in our consolidated portfolio during 2024. The key drivers in 2024 include Avalon Connect, our bulk Internet and managed Wi Fi deployments along with smart access features. In addition, we expect an incremental benefit from our shift to a new organizational model, which reflects neighborhood staffing supported by centralized teams.

Speaker 6

While we have specific plans for 2024, our focus in these areas and others will continue to deliver additional value for associates, residents and shareholders for years to come. Turning to Slide 16 to address our same store operating expense outlook. We expect roughly 3.40 basis points of organic expense growth, another approximately 140 basis points from profitable operating initiatives and roughly 75 basis points from the expiration of various tax abatement programs in the portfolio, primarily in New York City. As it relates to our initiatives, the 140 basis point increase is driven by 170 basis points from our Avalon Connect offering, which I mentioned earlier, partially offset by reductions in payroll. As I've noted in the past, the deployment of our Avalon Connect offering, which will ultimately enhance portfolio NOI by more than $30,000,000 will pressure expense growth during the deployment period.

Speaker 6

We expect to be fully deployed by the end of 2024, so the operating expense impact will diminish materially as we move into 2025. So now I'll turn it over to Matt to address our capital allocation activity. Matt?

Speaker 7

All right. Great. Thanks, Sean. Turning to slide 17. We're planning another year of accretive activity across all of our various investment platforms in 2024.

Speaker 7

We expect to break ground on 7 new developments, representing $870,000,000 of investment at a weighted average yield in the mid-six percent range, grow our SiP business by another $75,000,000 with rates on new originations in excess of 12% and expand our investments in our existing portfolio that we discussed a bit at our Investor Day, where we see opportunity to further increase our activity to roughly $100,000,000 at yields of roughly 10%. The investment sales market, activity levels are still low, but most market participants do expect a gradual increase in transactions as the year progresses. Our plan is to access this market as part of our portfolio management strategy, selling assets in our established regions and redeploying that capital into acquisitions in our expansion regions. We expect this activity to be roughly neutral on both the volume and return basis, buying and selling in equal amounts and at equivalent yields. As Ben mentioned, the dynamics of this trading activity look to be more favorable in to acquire assets significantly below replacement cost.

Speaker 7

Of course, the market for all of our investment activities is highly dynamic, and we are prepared to pivot and adjust our plan in response to potential changes in the macro environment as the year evolves. Turning to our existing development underway, Slide 18 details the impressive results that continue to be generated by our current lease ups. The 4 development communities that had active leasing in Q4 delivering rents $2.60 per month or 8.4 percent above our initial underwriting, which is translating into a 20 basis point increase in yield. As a reminder, in general, the rents we quote on our developments are current market rents as of the time we break ground we do not trend or update these rents until we achieve significant actual leasing velocity close to completion of the project. While market rents certainly didn't grow as much in 2023 as in prior years, there is still some lift to come when we mark the rents to market on the $855,000,000 of lease ups we expect to open throughout the course of 2024.

Speaker 7

We estimate this increase at roughly 5% based on where market rents are today at these specific communities, which would provide those deals with about 30 basis points of increased yield as well. And with that, I'll turn it over to Ben to wrap things up.

Speaker 2

Matt, Slide 19 provides our key takeaways. We were very pleased with our execution in 2023 and expect to continue to be relatively well positioned in a year of slower growth in 2024. We will continue to evolve and execute against our strategic focus areas, including harvesting tangible benefits from the investments we are making in the transformation of our operating model. And on the capital front, we will remain nimble, adjusting to the environment as it unfolds, while also being on the lookout and ready to take advantage of accretive opportunities that may present themselves this year, opportunities where we can utilize our leading balance sheet and draw upon our unique strategic capabilities. And with that, I'll turn it to the operator to open the line for questions.

Operator

Thank you. We will now be conducting our question and answer session. Our first question comes from the line of Jamie Feldman with Wells Fargo. Please proceed with your question.

Speaker 8

Great. Thank you. Good afternoon. So I'd like to go back to Slide 14, and I was hoping you could talk us through what your blended rent outlook looks like in each of these regions or broken out by these regions. And then if you could talk about how you think it might be different in the first half versus the back half of the year, just given the pace of supply coming online?

Speaker 6

Yes, Jamie, this is Sean. Why don't I give you the sort of blended rent change we expect across the portfolio for the year, so that we can talk about All the individual regions, that's a lot of data. We might want to do that offline. But in terms of the broader portfolio, our expectation is to deliver rent change of roughly 2% in 2024, which would reflect renewals at roughly 4% and new move ins at essentially flat. And as it relates to the first half versus the second half, If you think back to 2023, where we achieved 3.4 percent rent change, a good portion of that rent change, stronger portion was in the first half of the year.

Speaker 6

So we do expect to see some acceleration in rent change, all else being equal in the second half of twenty twenty four relative to the first half, Assuming that obviously the economic environment is consistent with our expectations.

Speaker 8

Okay. Thank you for that. And then we appreciate the detailed build up to your revenue and your expense side. But as you think about each of those buckets, mean, where do you think there's the most variability? Where do you have the most opportunity to maybe push a little more?

Speaker 8

Where do you think you could pull back maybe on the spending side just to by the time year end rolls around?

Speaker 6

Yes. No, good question. Taking them in the two pieces on the revenue side, Obviously, a significant driver is the macroeconomic environment. And we provided and Ben referred to some of our assumptions. And so we are expecting a slowdown given the roughly 2,700,000 jobs that were produced in 2023 as compared to the current expectation for 24 being close to 700,000.

Speaker 6

So that's outside our control, but obviously we're well positioned to the extent things accelerate. And we think we're also well positioned somewhat defensively given our portfolio if things deteriorate. So Outside of that, I'd say what we would see is a more substantial improvement in bad debt would certainly be a tailwind. Over the last several months, bad debt rate from residents has sort of flattened out a bit, primarily as a result what's been happening in the court system, residents that are behind getting free legal device and things of that sort. So we started to see greater improvement in the court system in places like the Greater New York region, parts of the Mid Atlantic, etcetera.

Speaker 6

That would certainly give us a significant benefit outside of just the macroeconomic view and whether we're able to push rents harder or softer in the environment. On the expense side, a good portion of it is baked in terms of what we have. There's about 2 thirds of it. Our expected year over year increase is driven by number 1 utilities, which is really where our Avalon Connect offering comes through and that's a pretty embedded program. We're on plan.

Speaker 6

We expect that to be where we thought it would be. Property taxes, There's a portion of that related to the pilots, but obviously to the extent assessments come in at different levels or rates throughout the during the year that would certainly help us out. The rest of it is kind of ins and outs in different areas. And so I wouldn't expect a significant shift, but there are modest shifts from line item to line item that might move around with payroll benefits and things like that.

Speaker 8

Okay. Yes, very helpful. I guess lots to keep our eye on. Thank you.

Operator

Our next question comes from the line of Adam Kramer with Morgan Stanley. Please proceed with your question.

Speaker 9

Hey, guys. Thanks for the time. Just wondering in terms of Kind of puts and takes the $870,000,000 of development starts. Just kind of what can maybe drive that to the high end, what would cause you to maybe pull back and push some of that out to 2025? And if you think about kind of timing during the year, what's kind of the view on those starts in

Speaker 5

As it relates to the pace of

Speaker 7

development starts across the year, it is more back half loaded. I don't think that we maybe have any starts in Q1 or maybe 1. So, we'll see how that develops across the course of the year. It really is idiosyncratic though based on the timing, permits, buyout of various projects. The things that might cause it to ramp up or down is really just changes to the deal economics.

Speaker 7

If rents accelerate or degrade more quickly than we expect in any particular submarket where we're planning to start a deal or if hard costs surprise us either to good or the bad that could cause us to either pull some deals forward and start more or conversely push some deals further out. Yes, Adam, this is Ben.

Speaker 2

Just to reiterate some of our key themes from prior conversations and we remain very focused on the spread between our development yields and underlying market cap rates, right? That's the value we create and we need to be appropriately compensated for the development risk. And then the other component is obviously we're raising the capital both the source of it and the cost of that capital. So those are the higher level elements that we triangulate around and then there's the deal specifics that Matt referred to.

Speaker 9

Great. Thanks guys. And just on the January light term effective rent I guess the new rent specifically and not asking for kind of each of your markets individually, maybe just at a high level, if you could I don't know if you want to kind of go through West Coast versus East Coast versus kind of Sunbelt, maybe just kind of general trends breaking down that January new lease number, I think, would be helpful.

Speaker 6

Yes. Why don't I give it to you by coast? So on the East Coast, we're trending sort of in that low 2% range. The West Coast was modestly positive about 50 basis points and the expansion region is essentially flat.

Speaker 3

Great.

Speaker 9

Thanks guys.

Operator

Thank you. Our next question comes the line of Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.

Speaker 10

Great. Thanks. Good afternoon, everybody. Sean, Appreciate the same store revenue growth guidance breakout between the established and expansion markets. I think you referenced that that's primarily supply driving the delta between those two projections.

Speaker 10

But I guess if you remove some of the bad debt improvement, some of the other initiatives and just focus More so on that lease rate growth piece, how do those two regions stack up versus one another?

Speaker 6

Yes. I mean, probably the best way to look at it is I refer you back to the slide, that we showed the revenue decomposition there. And first, I mean, what I would say is that reflects more than 90% of our portfolio coming from the established regions at this point. But in terms of just broader demand supply fundamentals, we definitely expect much better performance out of our established regions, generally speaking. The one question that we have, I'd say, that we think we reflected appropriately is in Northern California, which has been weaker for us recently.

Speaker 6

And I think it's just a question of how the job environment unfolds. We we've modeled that appropriately. But if you look at that slide, you can kind of see what's happening in Northern California. It is not benefiting nearly as much Southern California in terms of the bad debt contribution. So I think on par, it's a little more reflective of apples to apples with our expansion regions.

Speaker 6

So overall, demand supply much better in the established regions, maybe a little bit of a question around Northern California.

Speaker 10

And then just focused on kind of the urban versus suburban, you continue to kind of talk about the strategic focus of shifting into more urban markets and sort of a preferred incremental investment there. So what's sort of the expectation for lease rate growth when you look at those 2, urban versus suburban for the year? Thank you.

Speaker 6

Yes, we haven't broken it out between urban and suburban in terms of the forecast. I could tell you in Q4, We certainly saw better growth out of our suburban portfolio, which is about 200 basis points. The urban portfolio was essentially flat. I did provide sort of the breakout in January as well from east and west. But in terms of urban, suburban, we've not traditionally broken that out.

Speaker 6

If you look at it On a blended basis, as I mentioned before, it was 2%. If you think across the markets, It's really kind of market specific. It's more of the driver than urban suburban in many cases. So for example, in the New York metro area, We're expecting better growth out of this city in Northern New Jersey, less growth really in Westchester, Long Island, Central Jersey. If you go to the mid Atlantic, it's very different.

Speaker 6

We're expecting challenged growth in the district, but better growth in Northern Virginia and suburban Maryland. On the West Coast, fortunately, we don't have a lot in urban Seattle, but urban Seattle is pretty rough right now, I would say. More of our North and East side portfolio is performing much better. And then generally down in the Bay Area, I think we're all familiar with the challenges in San Francisco. We certainly expect it to lag and a similar theme in LA.

Speaker 6

So I think you have to kind of go through each market individually to look at it, but that gives you hopefully some color by region.

Speaker 10

Do you think that 200 basis points in the 4th quarter is a decent proxy for what you see moving forward in the, call it, medium term?

Speaker 6

Yes. I probably wouldn't extrapolate that going forward right at this point. I think it's a good kind of point for where we were in Q4. We do expect based on what I just said, a lot of these suburban markets will hold up better in some of these specific regions, but I wouldn't necessarily count on it being a 200 basis point as you move through the full year.

Speaker 10

Okay. Sounds like seasonality is a little bit of a factor. Thank you.

Operator

Thank you. Our next question comes from the line of Eric Wolf with Citi.

Speaker 11

I think at your Investor Day, you gave an estimate around 175 basis points of annual earnings contribution from your development pipeline. I was hoping you could just give an estimate for the contribution this year and if there's just anything that might be more this year versus a typical year and if it's just going to kind of be maybe a bigger contribution in 2025 as you lease up the communities that are delivering?

Speaker 4

Yes, sure. Eric, this is Kevin. It's a good question and perhaps one we're a little bit of time on. Upfront, I'll give you the punch line and give you a couple of ways to think about The earnings accretion this year from development undergoing lease up that produces an estimate of about $0.18 of accretion per share this year give or take, which equates to about 170 basis points of earnings growth in 2024, which is consistent with the typical level of earnings growth we get from development in most years and in line with the 150 to 200 basis point earnings contribution to growth that we outlined at Investor Day last November. So maybe just before we get a couple of contextual comments, which won't surprise you, but might be helpful just For the broader audience, first, as you know, when you look at our investment in capital activity, we do have a broad set of investment uses even if developments are primary use of capital, and we have multiple sources of capital.

Speaker 4

So as a result, since cash is fungible, attributing specific capital sources to the specific capital uses to isolate a discrete earnings impact in a period over period basis requires making some reasonable estimates and assumptions. 2nd, as you know, since we substantially match fund our development starts with long term capital when we start those projects and we started the $1,600,000,000 or so of projects under lease up 2 to 3 years ago. The reality is that we sourced much of that capital 2 to 3 years ago. So the 3rd, when you kind of look go back and look at the capital we've raised over the last, say, 3 years, You'd find that to fund the whole business, we raised $2,100,000,000 at a blended initial cost of 2.9% in 2021, $1,500,000,000 in 2022 at a blended initial cost of 4.1 percent and $1,400,000,000 last year at a blended initial cost of 4 point 6%. So some portion of the capital in those prior years was used to fund the $1,600,000,000 that began lease up last year and is being leased up this year as well.

Speaker 4

Obviously, we have another $850,000,000 that's in the plan for this year at kind of roughly around a 5% cost of capital, which is relevant as you look at sort of earnings growth and so forth for your modeling purposes. But And the reality is that capital isn't going to be sourced to pay for the developments already completed in the lease up. And so as you look at the $1,600,000,000 in lease up currently has around a yield of about 6%. And if you just conservatively just look at this from an economic point of view, which is sort of the first way to look at this and say you had $1,600,000,000 development at a 6% yield and say it was funded with some portion of the capital, the $3,000,000,000 or so the rigs over the last 2 years at, call it, an average 4.4% initial cost, which translates into about $25,500,000 of annualized profit or about $0.18 of annualized growth, which in turn equates to about 170 basis points of earnings growth on last year's core FFO. The reality is kind of using that way and the reality is that the lease up profitability started to feather in last year and this year, but that's probably the best way to look at the earnings contribution from the lease up activity underway by matching it with the capital that we likely applied to it.

Speaker 4

But if you're looking instead at the earnings impact on a specific calendar year basis, this year, for example, against last year, and you're looking at the $0.29 of headwind that we call out on Slide 12 from our capital markets transaction activity in our earnings deck. So that may be a little bit longer conversation, happy to take it offline with you or anyone else. But I think the short answer there is of that $0.29 you can probably attribute about $0.18 of that to funding our investment activity after you subtract the $0.12 associated with the lower interest income this year, ignore the $0.08 from the SIP activity and then take the $0.11 of financing and refinancing costs and ascribe say $0.07 of that to the refinancing of $600,000,000 of debt last year and the balance of $0.04 to investment activity. So What you're left with to drive that $0.18 is about $0.05 from share count, dollars 0.05 from net dispo activity, dollars 0.04 from lower capitalized interest expense and then $0.04 of the $0.11 of refinancing costs and financing costs that you see there in that slide. So that's the way another way to get at the $0.18 that can give you a sense of comfort that the one way or another what you're looking at is about 150 to 200 basis points of earnings growth contribution from lease up activity this year.

Speaker 11

Okay. That's helpful. And then I guess just a quick one on capitalized interest guidance. And it looks like based on your guidance, the construction progress, your development balance is going down by like $200,000,000 I'm just taking What the kind of interest is divided by your weighted average interest rate to get to that. But is that the right way to think about it?

Speaker 11

And then I guess why would that balance to be going down if it seems like spending is set to accelerate a little bit this year?

Speaker 4

Yes. No, I think that is the right way to look at it. I don't know the exact number, but we have capitalized interest expense going down by $0.04 which is about $5,000,000 year over year and it's at a blended capitalized interest rate of 3.5%. So I think it is going down by a couple of $100,000,000 And the reality is we have and this is the natural ebb and flow of construction in progress. We have more completions this year than deals entering new construction.

Speaker 4

So that will oscillate over time and it creates a little bit of a period over period volatility in the capitalized interest expense calculation, but that's just the nature of that. We don't we start projects when they're ready to go, not at a completely constant even ratable basis over of the years and there's a little bit of CIP decline from 'twenty three moving into 'twenty four.

Speaker 3

Yes. Thank you. Yes.

Operator

Thank you. Our next question comes from the line of Steve Sakwa with Evercore. Please proceed with your question.

Speaker 10

Yes, thanks. Good afternoon. First, just on a clarification. I think at the Investor Day, you had talked about an earn in of about 1.5%. And I think now you're talking about an earn in of 1%.

Speaker 10

Is the difference strictly just moving from like a September 30 for Q3 to Q4? Or is there something else that kind of went on in that stat?

Speaker 6

Yes. That's pretty much it, Steve. If think about it, a lot of our growth comes through the 1st 9 months of the year, including short term premiums and other activity that happens in Q2 Q2 and Q3. And then traditionally sort of decelerates as you go through Q4 and land in January.

Speaker 10

Okay. And maybe one for Matt on the developments. You talked about the 870 in the mid-6s and It looks like about a third of the starts are going to be in your expansion market. So just how are you sort of sizing that up just given kind of the supply issues that we're facing in many of the expansion markets today. And you've also benefited from basically conservative underwriting with no increase in rents, rent growth is obviously slowing.

Speaker 10

So I guess, does the mid-6s provide much upside going forward if rent is relatively flat over the next couple of years.

Speaker 7

Yes. Hey, Steve. I would say, and as I kind of mentioned in my prepared remarks, there may be less upside. Historically, if you look back over a long period of time, we tend to deliver yields that are 20 to 30 basis points higher than what our initial underwriting is because we don't trend. Now in the last few years, when rents were rising in double digit rates in 20 21 and 2022, that 20, 30 basis points was more like 70 basis points or 80 basis points.

Speaker 7

But that's why now when you look at, say, the deals leasing up this year, They'll have some of that wind at their back, but it's probably back to that kind of 20 basis points to 30 basis points that's more typical. And that's why we feel like there's an adequate margin of safety in there because we're starting them on today's economics with that 100 basis points to 150 basis points spread to current cap rates that Ben referenced. So the 2 deals we're talking about in expansion regions or the third of the starts this year in the plan happened to be in North Carolina. I think one is in Raleigh Durham and one is in the Charlotte area. And so you have seen rents market rents in those markets decline a little bit in 2023.

Speaker 7

So based on today's rents, There is more supply coming there. There's obviously strong demand too and we're investing over the long term. These are 20 year investments. But I would say that margin of safety would suggest that if you start those next year, they're not going to be in lease up for a year and a half, 2 years after that. We feel pretty confident that we'll be able to hit our NOI numbers, If not, still get a little bit of lift.

Speaker 2

The part Steve I'd add to that is you think about this cohort of projects, starts are definitely coming down this year for financing reasons, economic reasons, but deals that we can make sense of and that we can capitalize in appropriate way have the potential to open up into a pretty nice pocket, pretty nice window when you look out 3 years from now. So tough to forecast a lot of other variables in there. And as you said, we're conservative and underwriting based on today's environment, but We do keep that in mind as well.

Speaker 10

And just a quick clarification, the 8.70, is that mostly back half weighted you think in terms of start to the deliveries or kind of more late 2025 maybe even in the 26?

Speaker 7

Yes, that's accurate, Steve.

Speaker 10

Okay, great. Thanks.

Operator

Thank you. Our next question comes from the line John Kim with BMO Capital Markets. Please proceed with your question.

Speaker 3

Thank you. I'm a little bit confused on the earn in question. So I guess my first question is, can you just let us know how you define that? It's obviously a non GAAP measure. It's a relatively new metric within this industry.

Speaker 3

But I thought that the earn in was kind of locked in at the end of the year on leases you signed last year and what that contributes to revenue growth this year and it doesn't really quite move after that. Your lease growth rates didn't really change during the Q4. So, yes, I'm just questioning how you define that?

Speaker 6

Yes, John, I think it's footnotes on the slide, but just to be specific, when you start the year, it reflects the essentially the rent roll or gross potential is a term for the month of January relative to the average gross potential or rent roll that we had in place for 2023. So as I mentioned earlier in response to Steve's question, you tend to realize A substantial portion, if not all, of your rent roll growth in the 1st 9 months of the year or so. It accelerates in the spring, peaks in the summer and then starts to come down in the fall as a result of not only decelerating like term rent change, But the mix from unlike term rent change where you burn off short term premiums and other things. So essentially In Q4, you don't really see sequentially, if you think about it, any material growth occur during that period of time. So you might have 8 or 9 months that you're up kind of an average of 1.5, like as we were talking about in the last 2 or 3 months is closer to 0 and that's how you get closer to kind of the low ones, but we can certainly walk you through it in more detail offline if you like.

Speaker 3

Yes, absolutely. I think it's Your peers don't define it the same way. So it's worth delving into a little bit. I'll do that offline.

Speaker 6

It's also A timing issue. We described the 0.5 as kind of where we were spot basis at the end of Q3. I know some companies sort of estimate where they think they might be in January and provide that information on their calls. We tend to provide on a spot basis.

Speaker 3

Okay. My second question is on your initiatives, including Avalon Connect and the capital spend you have on that. How much of that do you expense versus capitalized?

Speaker 6

For Avalon Connect specifically, The costs associated with those programs are essentially 100% expense.

Speaker 3

Okay, great. Thank you. Yes.

Operator

Thank you. Our next question comes from the line of Josh Dennerlein with Bank of America. Please proceed with your question.

Speaker 12

Yes. Hey, guys. Appreciate all the color on how the Avalon Connect flows through the same store expenses this year. Is Could you remind us how it's going to flow through the revenue line item this year and what kind of ramp you're assuming?

Speaker 6

Yes. Josh, what I would do is refer you back to the slide on the revenue decomposition and that contribution of 80 basis points from other rental revenue, almost all of it, not all of it, almost all of it is related to Avalon Connect driving other rental revenue up. There's also increase in trash fees and other things that are happening. But most of that increase is related to Avalon Connect.

Speaker 12

Sorry, I guess, maybe on a quarterly basis, because it looks like 1Q you have a big uptick and then it kind of drops off. So just kind of Trying to figure out like the quarterly cadence.

Speaker 6

Yes. Why don't we get back to you on that as Quarter by quarter on the call, if that's okay. We'll ramp up as we move through the year for sure. And essentially what happens is Think about it as mirroring lease expirations because we push that through at the apartment level as leases expire. So that's the way probably to think about how we'll bleed through quarter to quarter at a high level.

Speaker 12

Okay. Okay. That's helpful. And then, maybe just Curious on a breakdown for expense growth kind of like due to subcomponents like utilities, R and M. Could you provide just like your underlying projections for that?

Speaker 6

Yes. Why don't I give you some high level commentary, That's a lot of categories to go through on the call, but sort of high level things to think about here. Property taxes, overall, we're expecting year over year growth sort of in the mid-four percent range. A substantial portion of that is being driven by the phase out of property tax abatement programs, as I mentioned in my prepared remarks. Insurance, we are expecting another year of kind of double digit growth in insurance given what's happening in the market, which we can certainly talk about if like.

Speaker 6

As it relates to utilities, Avalon Connect, I just mentioned, we're expecting utilities as category to be up sort of in the low double digit range. And again, almost all of that is related to Avalon Connect. Core utilities are actually quite modest in terms of growth rate. And a couple of others maybe to mention are on the payroll side, We've essentially got a merit increase of 4%, that's about 90% of payroll. Benefits are going up about 6%.

Speaker 6

So those two combined 420 basis points, but we're picking up about 100 basis points from our payroll reductions. So that will net out in the low 3s. And then the only other thing of note I would say really that's a little unusual is that our office operations category, It's accounting for 20 to 25 basis points of total expense growth really related to legal and eviction costs That were somewhat elevated last year. We expect them to be elevated a little bit more this year, as we continue to process people who are nonpaying So those are some sort of high level comments. Hopefully those are helpful.

Speaker 12

Yes, super helpful. Thank you.

Speaker 8

Yes.

Operator

Thank you. Our next question comes from the line of Brad Heffern with RBC Capital Markets. Proceed with your question.

Speaker 13

Yes. Thanks, everybody. Can you just talk about how the start of the year has looked so far versus

Speaker 8

the kind

Speaker 13

of normal trends for demand, rent growth off the seasonal trough, etcetera?

Speaker 6

Yes, happy to take that one Brad. I mean pretty much consistent with what we've outlined in terms of our outlook. And I would say relative to historical norms for January growth, it's modestly below. So if you look at the change in asking rent in the month of January, say for the 5 years pre COVID as compared to this January, asking rents are trending up just at a

Speaker 13

Okay, got it. And then I know you gave the blends already, but I was curious

Speaker 6

Yes, we're expecting average asking rent growth throughout the year to be sort of in that 2.25% to 2.5% range And actual rent change in the portfolio to be roughly 2%.

Speaker 12

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.

Speaker 14

Good afternoon. Thanks a lot for taking my question. You use a macro scenario from NAB of like about it seems like 1% GDP growth and 55,000 jobs per month. How sensitive is the rent growth to kind of your underlying macro forecast? Like said another way, If the economy is better, how much more rent growth can you get in the in 2024?

Speaker 14

Thank you.

Speaker 6

Michael, this is Sean. A little bit of a complex answer to that because it depends on a lot of assumptions. The things you would think about are How significant how significantly different is it from our baseline forecast in terms of job and wage growth? And where does it occur? And when does it occur?

Speaker 6

So if we see acceleration, but it happens in August, it doesn't do a lot for us because we will have signed leases Through July offers are out for August, September, October in some markets. So I would say it probably helps you as a better setup for 2025, if you saw that happen in the second half of the year. If we saw a significant acceleration in the macro environment In the next 60 days, as an example, beyond what we forecasted, that should play out better for us as we get into peak leasing season. I think you just have to remember that if silver market move ins to market kind of 30 days before they move in as an example, But those renewal offers are in most markets from a regulatory standpoint, they're out 60 to 90 days in advance. And once it's out, you're not going back and saying, Oops, sorry, I'm going to change rent and move it up.

Speaker 14

Got it. That's helpful. And then just based on current conditions, How far along do you think that we are in this post COVID recovery in the Northern California and Seattle regions?

Speaker 6

Yes, good question. When I talk about it in the context of maybe rent basis, I would say Northern California still long ways to go. We have rents that are essentially asking rents today that are down roughly 10% from sort of pre COVID peak levels. That's primarily driven by San Francisco being 12%, 13% below peak, which is that's a pretty significant number. And what I would say is that, while I think we're seeing Some green shoots in San Francisco in terms of what's happening with, say, AI as an example.

Speaker 6

There's a long ways to go in terms of getting the sort of quality of the built environment at a place where people are comfortable, office leaders, business leaders kind of calling people back to the office and or people wanting to migrate to the city and be able to feel comfortable with what they're doing. So I'd say there is a lag there. How long it takes to play out? I think these things take a fair bit of time when you're talking about quality of life issues, crime issues, things of that sort. So I don't think this is necessarily a couple quarter type of issue.

Speaker 6

I think this is several quarters, depending on the political will of what happens to actually see it sort of trend in the right direction for us in a more meaningful way. In terms of Seattle, I think a couple of things to think about as it relates to Seattle. Seattle rent levels for us are up about 8% from pre COVID peak levels, but it is a very bifurcated market. The urban core Of Seattle, whether it's right downtown, South Lake Union, Capitol, etcetera, are much more challenged because of not only the quality of life issues that I mentioned that you have in San Francisco also in play there. But there is a meaningful amount of supply being delivered more in 2024 than was delivered in 2023, which will compound the issue versus if you're mainly suburban, north end, the east side, You're much more well positioned.

Speaker 6

That's where majority of our assets are, in Seattle.

Speaker 14

Thank you very much.

Speaker 15

Okay.

Operator

Thank you. Our next question comes from the line of Richard Anderson with Wedbush. Please proceed with your question.

Speaker 15

Thanks. Good afternoon. Sort of an open ended question, but see if you can get a response out of you. New York Community Bank Yesterday had its debacle, former Signature Bank, both of them had multifamily Emily as part of their problem in terms of loan losses and whatnot. I think we had to distinguish between rent regulated and market rate, but still in the rent regulated is really what's causing the problem.

Speaker 15

But I'm curious if you're seeing anything new on the ground from your point of view. Perhaps this creates business sort of growth opportunities for you, but are there operating disruptions that are happening in neighboring assets as a result of all this just sort of bad operating behaviors and kind of a distressed situation. Are you seeing anything along those lines that we should be concerned about from this banking perspective, lending perspective?

Speaker 2

Yes, Rich. We are not seeing significant distress in the There obviously is the potential wave of maturities that's being highlighted by folks. For the most part, at least in our markets and the assets that we're spending time in and around, we're seeing lenders agree to extend out loans. We're seeing equity and put up more capital. Now not all debt providers and equity providers are able to do that.

Speaker 2

So that does create the potential for some dislocation, but we're not necessarily seeing any of size. I'd say we're preparing to be ready to take advantage of it, but not seeing it at this point. Operationally, the theme I would take you to is look back over this last cycle, last decade, world of capital being homogeneous, capital is flowing to all types of players and generally is flowing at a similar cost to all types of players. And so as we think about positioning going forward, there is an element of thinking about how we take advantage or step in opportunities for assets that are being operated by less sophisticated players, players with less scale. And I'll kind of end on the theme of as we're thinking about the opportunity set out there, it's a combination of both places where we can bring our balance sheet to bear and bring our strategic capabilities to bear.

Speaker 2

And we've spent a lot of time on our operating model transformation It's got 2 impacts. 1, it helps us drive internal growth, but we're also bringing those operational capabilities to our external growth.

Speaker 15

Great, great color. Thanks for that Ben. Second question for me. You mentioned and we all know 2x the amount of supply in the Sunbelt versus your established regions. And yet you're still predicting positive revenue growth in your expansion markets.

Speaker 15

And I think it was said, January new lease rent growth in the Sunbelt flat, not even negative. Maybe I got that wrong. But nonetheless, it sounds resilient from a dollars perspective despite the supply. Is that a good way to look at it relatively resilient, I should say? And or are you thinking, well, 2025 could be materially worse the Sunbelt as sort of the supply picture builds on itself and starts to impact revenue maybe to a greater degree next year versus this year.

Speaker 15

Is that the way you kind of think about the Sunbelt today?

Speaker 6

Yes, Rich, this is Sean. Why don't we kind of parse the conversation into our portfolio versus the Sunbelt more broadly. What I indicated for our expansion regions in January is that blended rent change is essentially flat. If you were to parse that Yes, between move ins and renewals, what you would see is that new move ins are negative in the expansion regions down about 150 basis points as compared to kind of low to mid 3% sort of renewals. What I would tell you is that's primarily driven by some assets that we own in Charlotte in the South End.

Speaker 6

There are 3 assets that we acquired in that market a couple of years ago, at a time where we love the environment, great long term neighborhood, But we knew there was a fair amount of supply coming, sort of underwrote it that way. We're seeing the impact of that supply currently as opposed to say Denver where most of the pain and suffering is in the sort of urban core, much more significant pain and suffering given the volume of supply as compared to our broadly distributed portfolio across the suburban markets. So our portfolio, you kind of really A lot of assets you really have to look region by region to understand it. What I would say more broadly about the Sunbelt though is certainly When you think about negative rent change playing through and what it does to revenue and NOI, the first thing that typically happens when you get into a much more competitive As people are starting to have weaker occupancy, we saw that happen in 2023 in terms of the leg down in occupancy, Well, in our established regions in the Sunbelt, but much more significant in the Sunbelt. That starts translating to much heavier discounting in terms of where people are marking their rents to try and occupy those units because some rents better than none, that's what we've started to see in the last few months here and would expect that to continue as you roll through 2024 as those leases expire.

Speaker 6

So the most significant impact on Both revenue and NOI would likely be, all else being equal, 2025 as you roll all those leases through the RevPAR to that lower market rent, that's probably where you'll see the most pronounced impact would be our view.

Speaker 15

Yes, sounds good. Okay, thanks very much.

Speaker 10

Yes.

Operator

Thank you. Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Speaker 16

Hey, good afternoon. Two questions. First, maybe just continuing on with Rich's line of questioning. As you guys look to the Sunbelt, it looks like most of your product, I think, is more suburban. So is that is basically, as you assess opportunities in the expansion markets, Are you really just looking only at suburban or are you looking at urban?

Speaker 16

And what I mean by that is, it seems that a number of the urban markets in the Sunbelt have the same issues that we have in the urban coastal cities, meaning people don't necessarily need to live right next to the office or there may be life quality issues, etcetera, whereas In the suburbs, it seems more fit for Avalon's development model and also closer to recreation and sort of a easier lifestyle, if you will. So just sort of curious how you're shaping out your Sunbelt strategy of urban versus suburban?

Speaker 7

Sure. Hey, Alex, it's Matt. I would generally tend to agree with you that we are very focused on Suburban submarkets, we're focused on our acquisition efforts on suburban submarkets, which have less supply and or product that is not priced at the very top of the market, because that's a price point we can't really access through new development and but we access through acquisitions. And also we're also focused on Garden product because it's simpler to operate and these are markets with higher property taxes and therefore lower operating margins. And one thing that kind of helps counteract that a little bit is Garden product where at least you don't have some of the same operating cost overhang that you would have in say high rise assets.

Speaker 7

So we are tending to favor suburban submarkets. And I think when you look portfolios we've got so far in the expansion regions, they are actually outperforming those markets as a whole because of the assets we own in the submarkets that we owned. And Sean mentioned maybe one of the bigger exceptions, which is the south end of Charlotte. But that's those are almost the only urban assets we've got so far that we bought so far in the expansion regions.

Speaker 16

Okay. And the second question is, In the Q4, it looks like you guys wrote off 4 development deals for $9,000,000 in aggregate, but nothing changed in the pipeline that is the projects that are underway. So maybe just a little bit more color on it sounds like these deals were really in their infancy, but just maybe some color around what caused you to scotch these deals and where they may have been located?

Speaker 7

Yes, sure, Alex. I mean, we did have elevated write offs in 2023 in general. And I think that's just a reflection of the fact that we have been, as we've been talking about adapting our pipeline to reflect the changes in the economic realities as asset values have dropped and cap rates have increased. So we're generally very focused on risk management. We keep a close eye on capitalized pursuit costs in every one of our deals.

Speaker 7

And our risk management has actually been one of the keys to us being able to develop profitably across multiple cycles over really our 30 year history as a public company, 35. The write offs this past quarter actually there was one project in Denver, actually it was in urban Denver, kind of getting back to your first point. The other one was a public private deal in California. And we've had a number of those where the economics have just changed sufficiently that we didn't necessarily see a path to in many cases, we are able to recut the deal and get a path to a revised deal that does make sense. In those particular cases, that wasn't the case.

Speaker 7

So we had to let those go. But I would also just taking a big step back here that if you look at our total book of development rights, We currently have land on the balance sheet of $199,000,000 and we have another $67,000,000 in capitalized pursuit costs. So that's $265,000,000 in total and we're controlling opportunity to build about 11,000 units with that investment, which is pretty strong leverage on that Pursuit capital. And I think compares favorably to a lot of other both public and private players in the space. So, it's that's kind of where it sits today.

Speaker 7

And, I'd say that we've gotten through a lot of the deals that were underwater. And when we look at our pipeline going forward, we feel pretty good about it.

Speaker 3

Thank you.

Operator

And our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.

Speaker 17

Hi, thank you. With new rent growth in January at negative 1.9%, how much more negative would that trend and at what point might it turn positive if you're ending 24 flat?

Speaker 6

Yes, good question. What I'd say is seasonally rents start to pick up in January, rent growth typically accelerates asking rent growth this is as we move through the spring and into the summer. So typically what you would see is this would be sort of the low point of the year kind of December, January and then things would improve from here. So certainly, I mentioned, we're talking about basically getting flat for the year. So we've got several months here where It will continue to improve, flatten out.

Speaker 6

And then probably as we get to Q4, you would see it come back down, go slightly negative again, which is not uncommon in kind of an environment. So you start to see sort of positive numbers as you get into Q2 and Q3.

Speaker 17

Thanks for that. And then on Avalon Connect with associated costs going away and revenues coming online, if you want to isolate the impact of that For SS NOI, like how much would that benefit 20 25 SS NOI growth?

Speaker 6

Yes, we're not providing any guidance as it relates to 2025 at this point. I did indicate what it was for 24 as it relates to revenue and the impact on OpEx in my comments, my prepared remarks.

Speaker 17

Thank you.

Operator

And our next question comes from the line of Haendel St. Juste with Mizuho Securities. Please proceed with your question.

Speaker 5

Hey there. Good afternoon. Two questions from me. First is a follow-up on your comments earlier on San Fran and Seattle. Can you outline what your blended rent expectations for those 2 markets are this year?

Speaker 5

It seems like Apply in Seattle is creeping over into the East side in Bellevue where you have more relative exposure, while demand and pricing power still seems pretty evasive in San Fran. Maybe some color on the level of concessions you're offering as well as what you're seeing competitors offer in those markets? Thanks.

Speaker 6

Yes, Haendel, this is Sean. We haven't provided the market level detail for 2024, but I'll give you some recent trend data, if that's helpful. So for Q4 of 2023, Northern California overall, Blended rent change was down 2.8%, which is essentially down 7% on new move ins and positive roughly 2.5 on renewals. In terms of Seattle, new move ins were down about 200 basis points. And actually renewals were up about 200 basis points.

Speaker 6

I'm sorry, I misquoted that. The blended was 200 basis points. It was down 1.9% on new move ins and plus 5.9% on renewals. And so we started to see a pickup in Seattle more recently again in that suburban kind of Northeast Eastside submarkets, not downtown, which has been positive. It's people coming back to work from Microsoft and Amazon in particular having an impact on that.

Speaker 6

And what I would say is we are more optimistic as it relates to what we expect in Seattle given our portfolio in the Seattle market in 2024 as compared to Northern California for the reasons I mentioned earlier.

Speaker 5

Any color on the impact of supply in Bellevue and any color on the concessions?

Speaker 6

Yes. In terms of the supply, Bellevue has actually been holding up quite well. I mean, most of our portfolio, think of it, we have North End, we have a pretty core portfolio in Downtown Bellevue and then also in Redmond. Redmond has actually been a little bit softer with the supply as compared to Bellevue. But I can tell you as it relates to concessions overall across the portfolio is most of the concessions that we experienced in Q4, More than 50% came from the combination of Seattle and Northern California, more skewed to Northern California for us relative to Seattle.

Speaker 6

And it really is a submarket by submarket discussion. I'd say the most competitive submarkets in Seattle are 2 to 3 months free. And that's urban core assets In lease up today and our really close competitors, in the Bay Area, Maybe 2 months will be the high end in Q4 is what we've seen, and that's tapered a little bit in January but pretty similar. So it really is kind of submarket by submarket assessment as to what you see.

Speaker 5

Got it. And last one, just speaking overall on the transaction market. I'm curious, how do you characterize your conversations of late with potential sellers and their cap rate IRR expectations with some hopeful distinction between Coastal and the Sunbelt. I was at National Multi Housing this week as well. And it seemed to be still a fairly wide bid ask spread with buyers sticking clear guns and some waiting to sell in the back half of this year and hoping that lower interest rates would drive lower cap rates.

Speaker 5

I'm curious kind of how those conversations are going, cap rate IRR expectations and any color on coastal versus Sunbelt? Thanks.

Speaker 7

Sure. Hey, Hansel, it's Matt. Yes, there's still I would agree, there's still pretty significant bid as spread for many assets. I mean, we tend to describe it as a market of haves and have nots. And there are lots of assets that would fall into the have not category because those are only going to transact if the cap rate is significantly north of the debt rate and the buyer can get positive arbitrage.

Speaker 7

And so that would be tertiary markets, that would be some out of favor submarkets. And I don't know if it's so much coastal versus Sunbelt as it is kind of primary markets versus secondary, tertiary markets in terms of that distinction. Still plenty of interest in certain Sunbelt markets for sure. The assets that are trading, there is money that seems anxious to get going. And what we're hearing anyway is the cap rate now has to at least be in the 5s.

Speaker 7

And is some debate about what the year one underwriting is because in some markets obviously NOI is starting to decline. So that makes it a little tricky as well. But I would expect you're going to start to see some transactions get signed up here in the next 2 to 3 months at cap rates maybe somewhere between $5,000,000 $5,500,000 That's a pretty big range. But again, only for assets that are considered highly desirable.

Operator

And we have reached the end of our question question and answer session. I'll now turn the call back over to Ben Shaw for closing remarks.

Speaker 2

Great. Well, thank you everyone for joining us today and we look forward to connecting with you over the coming months.

Operator

Thank you for your participation. This does conclude today's conference. You may disconnect your lines at this time.

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Key Takeaways

  • AvalonBay delivered 8.6% core FFO growth in 2023 with same‐store revenue up 6.3% and NOI up 6.2%, while six development completions yielded 7.1% stabilized returns.
  • The company’s operating model transformation generated $19 million of incremental annual NOI in 2023—60% above expectations—and raised its 2024 target to $80 million of additional annual NOI.
  • In 2023 AvalonBay shifted to net sales, disposing $445 million of assets, redeploying $275 million into expansion markets, starting $800 million of new developments (including $300 million at 6.7% yield) and growing its structured investment book to $192 million.
  • For 2024 management guides 1.4% core FFO per share growth, driven by 2.6% same‐store revenue and 1.25% NOI increases, backed by $1.1 billion of investment spend, $400 million of projected free cash flow and $850 million of unsecured debt at ~5%.
  • Looking ahead, modest job gains and limited supply in established coastal regions (1.6% of stock in 2024) should support stable demand, while the Sunbelt faces twice the level of new deliveries and greater rent pressure.
A.I. generated. May contain errors.
Earnings Conference Call
AvalonBay Communities Q4 2023
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