AvalonBay Communities Q1 2022 Earnings Call Transcript


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Participants

Corporate Executives

  • Jason Reilley
    Vice President, Investor Relations
  • Benjamin W. Schall
    Chief Executive Officer and President
  • Matthew H. Birenbaum
    Chief Investment Officer
  • Kevin P. O'Shea
    Chief Financial Officer
  • Sean J. Breslin
    Chief Operating Officer

Analysts

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the AvalonBay Communities First Quarter 2022 Earnings Conference Call. [Operator Instructions]

Your host for today's conference is Mr. Jason Reilley, Vice President of Investor Relations. Mr. Reilley, you may begin your conference.

Jason Reilley
Vice President, Investor Relations at AvalonBay Communities

Thank you, Jay, and welcome to the AvalonBay Communities First Quarter 2022 Earnings Conference Call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10-K and Form 10-Q filed with the SEC.

As usual, this press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during the review of our operating results and financial performance. And with that, I'll turn the call over to Ben Schall, Chief Executive Officer and President of AvalonBay Communities, for his remarks. Ben?

Benjamin W. Schall
Chief Executive Officer and President at AvalonBay Communities

Thanks, Jason, and thanks all for joining us on today's call. Matt and I will open with some prepared remarks, and we're joined by Kevin and Sean for Q&A. Starting on Slide four of our presentation. Q1 was a very strong start to what we continue to expect to be a very strong year of operating results. Core FFO per share came in at $2.26, a 15.9% year-over-year increase and $0.06 above the midpoint of our guidance. I'll dive deeper into the drivers of that outperformance in a moment.

On the capital allocation front, our industry-leading development platform continues to drive meaningful earnings growth and value creation, with a very robust 6.9% yield on developments completed this quarter. For the year, we're projecting about $700 million of completions at an average yield of 6.3%, which represents a substantial spread to current market cap rates.

As we grow, we're also optimizing the portfolio through the selective sale of older, slower-growth assets from our established regions, this quarter with $270 million of dispositions at a high 3% cap rate, with the intention to then redeploy this capital primarily into acquisitions in our expansion markets. And in April, we executed on an equity forward for $495 million as an expected source of capital to opportunistically draw down through the end of 2023 and locking in our cost of capital for future development activity and what we expect to be accretive spreads.

Turning to Slide five. GAAP residential revenue increased 8.5% on a year-over-year basis, led by about a 6% increase in effective lease rates and a 100 basis point improvement in net bad debt. On a cash basis, residential revenue increased almost 10%. As shown on Slide six, the 8.5% GAAP revenue growth was 150 basis points greater than the 7% increase we assumed in Q1 guidance, with lease rates and occupancy above our prior guidance, and while still at elevated levels, better-than-expected bad debt and rent relief collections driving the bulk of the outperformance relative to our expectations.

Portfolio performance has been supported by a number of tailwinds as detailed on Slide seven. Starting with Chart one, we continue to see elevated move-ins from greater than 150 miles away, which speaks to a continued flow of residents back to our established markets and is particularly -- is a particularly positive indicator for our urban and job-centered suburban communities.

In Chart two, we also continue to see de-densification, with less roommates and the desire for more space, leading to fewer adults per apartment and is a driver of incremental demand across our portfolio. As rents continue to grow, they are supported by greater household income from new residents, which was up 12% in Q1 relative to the prior year period, as shown on Chart three.

And finally, on Chart four, rent-versus-own economics, the monthly cost of renting versus the cost of owning a home materially favors renting in our markets, with a difference of almost $1,000 per month, a historically high level and one which provides a meaningful cushion and support to our rent growth. As shown on Slide eight, this backdrop is translating into continued momentum in like-term effective rent change, which accelerated throughout Q1 and continued into April at 13.7%.

Looking forward, our portfolio is positioned extremely well, heading into the peak leasing season. As shown on Slide nine, occupancy remains strong and steady at about 96.5%. Annualized turnover remains very low relative to historic figures. And 30-day availability, effectively the near-term inventory that's available for lease, remains limited at less than 5% of our units. And while we continue to capture meaningful loss-to-lease as existing resident leases expire, our portfolio-wide loss-to-lease remains high, currently at 14%, which has been supported by a 4% increase in asking rates since the beginning of the year. Turning to Slide 10.

We're making meaningful progress in the transformation of our operating platform as we drive toward our goal of improving margins by 200 basis points or an additional $40 million to $50 million of NOI, with approximately $10 million generated to date. This slide highlights three of our many initiatives, including bulk Internet and managed WiFi, which is projected to ultimately deliver $25 million of incremental annual NOI; smart home technology, which unlocks both operating efficiencies and revenue opportunities going forward; and third, our digital mobile maintenance platform, which will not only enhance our resident's experience with us, but also deliver material value via enhanced operational efficiency.

Before turning it to Matt, Slide 11 provides our updated full year guidance, with projected 16% core FFO growth, reflecting our strong momentum in Q1 and incorporating our increased outlook for same-store revenue and NOI growth. We've also updated our guidance to take into account a couple of factors. On the operating side, while core operating performance is quite strong, there continues to be some uncertainty about net bad debt in certain markets, particularly in Southern California and Alameda County in Northern California. And in some other markets, while eviction moratoria have expired, the core processes are moving slowly. As a result, some of the growth we are expecting in the back half of 2022 may get pushed in 2023, which we have assumed in our updated guidance.

As it relates to our projected core FFO growth for the year, we've scaled back our assumption for acquisition activity for 2022 based on where we stand through today as we keep a close eye on cap rates, fund flows and assess any shifts in the transaction markets. While we remain active, including another acquisition we recently put under contract, we've updated our guidance from being a net buyer in 2022, to an assumption of balancing acquisition volume with disposition volume before taking into account proceeds from Columbus Circle. And with that, I'll turn it to Matt to delve further into our development and capital allocation activities.

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

All right. Great. Thanks, Ben. Turning to Slide 12. Our development activity continues to generate outstanding results. The five consolidated communities currently in lease-up, which are widely dispersed across five different regions, have rents which are currently $230 or 9% above pro forma, which in turn is contributing to yields that are 40 basis points ahead of our initial expectations at 6.1%.

With an estimated value on completion in excess of $1 billion and a cost basis of $690 million, this provides roughly $360 million in value creation for an exceptional profit margin of 52%. While hard costs are certainly trending up, there is plenty of room for margins to compress from these elevated levels and still provide strong risk-adjusted returns going forward. As we mentioned on last quarter's call, our teams have also been very active in sourcing new development opportunities as shown on Slide 13. At the end of the first quarter, our development rights pipeline had grown to $4 billion, up from $3.3 billion at the start of the year, with new sites added in our expansion regions of Denver and Austin as well as established regions in New England and Northern California.

All of these new development rights are in suburban locations. And with a total pipeline weighted 75% suburban and 25% urban, our stabilized portfolio will likely trend towards that mix over time as well. The chart in the lower right-hand corner of this slide provides an illustration of how inflationary pressures on both NOIs and the hard costs would typically flow through to development yields. This is an increasingly important issue in the current environment. Our development rights pipeline is underwritten to a current average yield on cost of roughly 5.5%. The chart shows how a change of plus or minus 10% to both hard costs and NOIs would impact that yield, holding all else constant.

Because hard costs represent 60% of total capital costs on new development, with variances depending on the specific site, you can see that rising NOIs have roughly twice as much of an impact on yield as rising hard costs of a similar magnitude. As a reminder, we underwrite all of our development on a current basis and typically do not trend either NOIs or costs. And even in the current environment, with hard cost inflation running at a high level, this gives us a measure of safety. This math suggests even if hard costs rise by 10% from current levels, the 5.5% yield can still be preserved with just a 6% increase in NOI. Slide 14 provides a quick update on our progress in our expansion markets of Denver and Southeast Florida.

We have been measured in our approach to building diversified portfolios in these regions, investing through a combination of acquisitions, funding local third-party developers and developing our own communities directly as we do in our established regions. This has allowed us to put together portfolios that we believe will be optimized for future revenue growth as well as initial investment return, with strong locations in both urban and suburban submarkets in both regions.

Critically, we are also focused on getting the products we want, that we'll be well positioned to take advantage of demographic trends like the aging of the millennials and the increase in work-from-home as reflected in the larger-than-typical average unit size and young average asset age shown on the chart. We expect to follow a similar trajectory as we ramp up our investment activity in our newest expansion regions of North Carolina and Texas and make steady progress towards our goal of a 25% allocation to these expansion regions.

Turning to Slide 15. We also launched a new investment vehicle in the first quarter, which we are calling our Structured Investment Program, or SIP. This is a mezzanine lending platform that provides short-term construction financing to local third-party developers in our established regions, plus Denver and Florida, with our position in the capital stack between the primary construction loan and the sponsor equity. The SIP provides another way for us to leverage our deep expertise in development, construction and operations to generate attractive risk-adjusted returns for our shareholders, and we expect to build this program to a $300 million to $500 million total investment level over the next few years. And with that, I'll turn it back to Ben for some closing remarks.

Benjamin W. Schall
Chief Executive Officer and President at AvalonBay Communities

Thanks, Matt. To wrap up and summarize key themes. Q1 was a strong start to the year, with several tailwinds continuing to support our operating fundamentals which are some of the strongest we've experienced and have us well positioned going into the peak leasing season. We continue to invest in our operating platform with the teams executing across a number of transformative initiatives over 2022, including both WiFi, smart access and mobile maintenance.

As you heard, we continue to lean into our development platform with lease-ups outperforming and generating meaningful earnings growth and value creation. We're also building our development rights pipeline, now up to $4 billion, providing options on future value creation, including significant investment in our established regions at accretive returns as well as a continued focus on optimizing the portfolio by growing in our expansion markets. And finally, we continue to look to tap our company's strengths, with our Structured Investment Program being our latest offering, by tapping into our development, construction and financial know-how to grow earnings and create value. With that, I'll turn it to the operator for questions.

Questions and Answers

Operator

[Operator Instructions] We will begin with Nicholas Joseph with Citi.

Nicholas Joseph
Analyst at Smith Barney Citigroup

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

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

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

Nicholas Joseph
Analyst at Smith Barney Citigroup

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

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

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

Nicholas Joseph
Analyst at Smith Barney Citigroup

Competition.

Benjamin W. Schall
Chief Executive Officer and President at AvalonBay Communities

So the competition.

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

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

Benjamin W. Schall
Chief Executive Officer and President at AvalonBay Communities

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

Nicholas Joseph
Analyst at Smith Barney Citigroup

Thank you.

Operator

Now we'll move to a question from Rich Hill with Morgan Stanley.

Rich Hill
Analyst at Morgan Stanley

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

Kevin P. O'Shea
Chief Financial Officer at AvalonBay Communities

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

Benjamin W. Schall
Chief Executive Officer and President at AvalonBay Communities

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

Rich Hill
Analyst at Morgan Stanley

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

Benjamin W. Schall
Chief Executive Officer and President at AvalonBay Communities

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

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

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

Rich Hill
Analyst at Morgan Stanley

Thanks guys. That's all for me.

Operator

We'll now move to Stephen Sakwa with Evercore ISI.

Stephen Sakwa
Analyst at Evercore ISI

Thanks. Good Afternoon. I was wondering, first, if we could just start on kind of the renewals that you're sending out for, I guess, either May, June, July, and how those stack up the first quarter in April.

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

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

Stephen Sakwa
Analyst at Evercore ISI

Okay. And Sean, are the take rates -- is there any change in kind of the attitude or acceptance from kind of consumer or so once they shop the market, realize it's kind of no better anywhere else, they kind of come back and sign?

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

Yes. I mean I think as what was reflected on the slide that Ben presented, as it relates to turnover, the acceptance rates on renewals as well as lease breaks, which typically account for about 1/3 of move-outs, both of those are down pretty materially. I mean turnover is down, call it, 20% year-over-year, but it's down 15% to 16% compared to kind of pre-COVID norms when you look at Q4 and then again in Q1 of this year. So pricing power is strong for us. I think when people get a renewal offer and they go shop it, to use your phrase, I think they see that we're -- the selling value. And there's transition costs. So if I'm going to go out, I'm basically going to pay roughly the same. And then I've got moving costs or switching costs. People are inclined just to stay where they are.

Stephen Sakwa
Analyst at Evercore ISI

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

Kevin P. O'Shea
Chief Financial Officer at AvalonBay Communities

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

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

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

Stephen Sakwa
Analyst at Evercore ISI

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

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

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

Stephen Sakwa
Analyst at Evercore ISI

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

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

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

Stephen Sakwa
Analyst at Evercore ISI

Great, Thanks that's good for me.

Operator

We'll now take a question from Austin Wurschmidt with KeyBanc Capital Markets.

Austin Wurschmidt
Analyst at KeyBanc Capital Markets

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

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

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

Austin Wurschmidt
Analyst at KeyBanc Capital Markets

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

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

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

Austin Wurschmidt
Analyst at KeyBanc Capital Markets

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

Kevin P. O'Shea
Chief Financial Officer at AvalonBay Communities

Yes. Thanks, Austin. It's Kevin. So yes, I mean, the short answer is our capital plan has changed a little bit, not a lot. So you're correct. When we began the year, our initial outlook was for $880 million of external capital, most of which, at that time, was planned to be sourced for the issuance of unsecured debt. At this point, our current capital plan calls for just under $700 million of external capital. So we're down, call it, $200 million overall relative to our initial outlook. And of that, nearly $700 million of external capital that we currently expect for the year, about half is expected to come through net disposition proceeds from sales of -- from Columbus Circle as well as a little bit of disposition -- only on dispositions, which is much more of a -- closer to a push, as it's been alluded to a moment ago, and then the other half from newly issued unsecured debt, against which we have $150 million of hedges in place at a forward starting swap rate of 1.37%, so about 150 basis points below where treasuries are today. And then just to kind of put that in perspective, what needs to still be sourced, of the $700 million of external capital, as you can see from our earnings materials, we sourced $270 million in Q1, less a $95 million acquisition in Q1, for about 1/4 of the anticipated external capital needs in Q1, with 3/4 left to go in the year. And then just as a reminder, at the moment, as I mentioned a while ago, we do not plan, at this point in any way, on drawing down capital on the record in 2022, but rather to currently expect to do so in 2023 to start the guidance for that year.

Austin Wurschmidt
Analyst at KeyBanc Capital Markets

Great, very helpful. Thank you.

Operator

And now, we'll take a question from Chandni Luthra with Goldman Sachs.

Chandni Luthra
Analyst at The Goldman Sachs Group

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

Kevin P. O'Shea
Chief Financial Officer at AvalonBay Communities

So high end -- so Chandni, we had a hard time hearing. This is Kevin...

Chandni Luthra
Analyst at The Goldman Sachs Group

I'm very sorry. My thoughts are really messed up. I can repeat.

Kevin P. O'Shea
Chief Financial Officer at AvalonBay Communities

No, no. I think I've got it. I think you want to know what could drive us to the high end of our range of $9.78 versus the midpoint, $9.58. I think the answer primarily is an increase in expected rental revenue received over the course of the year. There could be other signs, including acquisition activity and so forth, but they probably would be -- have a smaller impact. I mean up and down the P&L, there could be changes. But anything that would drive us toward the high end of the range would be primarily driven by an expectation for much higher rental rate growth than we're currently seeing the growth in other known acquisitions as well.

Chandni Luthra
Analyst at The Goldman Sachs Group

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

Kevin P. O'Shea
Chief Financial Officer at AvalonBay Communities

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

Chandni Luthra
Analyst at The Goldman Sachs Group

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

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

Yes, this is Sean. Good question. I would say it is not changing materially in terms of behavior. If you look at people that are moving out for a rent increase or some other financial reason, it's up very modestly on a year-over-year basis. And probably, importantly, the reason we're not experiencing that is wage growth has been quite robust. And if you look at wage growth, particularly across the occupations that are represented primarily by our residents, it is not uncommon to find high single-digit, low double-digit numbers out there for people in those sectors. And I think that's consistent, even with some of the movements that we're seeing, that Ben referenced in his prepared remarks, where people that are moving in this quarter as opposed to the same quarter last year, with incomes up 12%

, 13% range, that's pretty good, especially in an environment where people are generally spending less from a discretionary income standpoint on various items. So, so far, there's not much stress in the system if that's kind of the main purpose of the question.

Chandni Luthra
Analyst at The Goldman Sachs Group

Yes, Thank you so much.

Operator

And the next question will come from John Pawlowski with Green Street.

John Pawlowski
Analyst at Green Street

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

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

Yes. It's interesting, John. I don't know that it will suddenly correct and that there will be -- I think what's more likely to happen is you're going to see supply bleed in over a longer period of time. So it's going to extend out that delivery pipeline. It will get there eventually. So maybe it gives those markets a little more time to absorb it, but people are starting just as much. So I don't -- a, I don't think it's going to change anytime soon to some of these issues, particularly when it's jurisdictions or it's utilities. Those are structural issues. Those types of entities don't suddenly go and hire a bunch of new people. So if you spend time in Austin today, for example, which is one of the markets that's got the most new supply coming in on the way, you'll hear all the developers and contractors talk about how a job that should take two years from start to finish is taking 2.5 to three. But there's tons of starts there. So I don't think -- I think it's just going to extend out the delivery times in general. And among our markets, including our expansion markets, the two that I would say are probably most stretched that way are probably Denver and Austin. I don't know that there's a lot of supply in some other markets we're not in, that I've read about, but those are the two of the top that I would say where we're seeing the most in terms of those kind of pressures on the system, just not being able to keep up with the amount of supply, not in terms of demand, in terms of deliveries and kind of like final inspections, in general, there.

John Pawlowski
Analyst at Green Street

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

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

Yes, John, it's Sean. I would say it's a little bit of a blend of both. Certainly, the market fundamentals, and pick the stores that you want to use, have been quite healthy, with significant market rent growth as you move through, particularly the back half of 2021, that's currently being captured in early '22. But there are -- I would say there's a couple of different assets out of that, again small pools you referenced, that we felt had a compelling opportunity when we bought the asset in terms of how it's managed, whether it was how the parking garage is managed at one case, how the pricing was managed in terms of revenue management in another case, that have probably given us a little bit of a lift. But I would say market fundamentals have been very robust and you would still see pretty robust numbers come out of Southeast Florida, maybe the high-teens range or something like that, low 20s. It depends on that sort of management value-add, if you want to call it that.

John Pawlowski
Analyst at Green Street

Ok, Alright. Great. Thank you.

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

Yeah.

Operator

Now we'll move to Brad Heffern with RBC Capital Markets.

Brad Heffern
Analyst at RBC Capital Markets

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

Benjamin W. Schall
Chief Executive Officer and President at AvalonBay Communities

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

Brad Heffern
Analyst at RBC Capital Markets

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

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

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

Benjamin W. Schall
Chief Executive Officer and President at AvalonBay Communities

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

Brad Heffern
Analyst at RBC Capital Markets

Ok, Thank you.

Operator

Now moving to Rich Anderson with SMBC.

Rich Anderson
Analyst at SMBC

Thanks. So I recognize you're the...

Benjamin W. Schall
Chief Executive Officer and President at AvalonBay Communities

Hey, Rich, we're having a -- you're very soft on the phone.

Rich Anderson
Analyst at SMBC

Hey, my headset stopped working. So can you hear me now?

Benjamin W. Schall
Chief Executive Officer and President at AvalonBay Communities

There you go. Yes.

Rich Anderson
Analyst at SMBC

Okay. It's been a series of calls today. So I recognize what you're doing on the acquisition side, sort of waiting to see how that market plays out. But if I were to extrapolate that conversation into development, obviously, there's no funding issues from your perspective. But at what point do you have your pulse on things? We got a GDP print in negative territory for the first quarter just today. Obviously inflation and the war escalating, a lot of things going on around us that could play a role in property values here at home. So I'm just curious. How is your perspective about expanding development? Obviously, you're doing that. But how could it change in the future? And what factors are you looking at to say, well, maybe we should -- not perhaps to take a pause in development, but introduce a little bit more caution. What factors are you looking for to come to that conclusion, even though it's not happening right now?

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

Hey, Rich, it's Matt. I'll take a shot at that one, and Ben or others may want to chime in, too. We're always very focused on risk management, and it's kind of built into our DNA. As I mentioned at the beginning, that we -- in my remarks, we never trend. So we're always looking at things on a current spot basis. And we structure our deals where, in the vast majority of cases, we're not closing on the land until we're very close to being renovated ground, if not, when we're breaking ground. So we're very mindful of that. And what I would say is we have a lot of optionality. So today, we control a $4 billion development rights pipeline with a total investment of less than $300 million between the land on the balance sheet and the pursuit costs that are capitalized for land that we don't get -- so that's pretty impressive to be able to control that much opportunity with the investment that we have, and so that gives us the ability to respond accordingly. So right now, the economics of development are very favorable. And we did provide that sensitivity table because we have been getting some questions about that, well, you know what if hard costs keep going up. And the answer is if hard costs grow faster, modestly faster than rents, you can still preserve the yield. At some point, obviously, that equation changes, and we're watching that every day. But I think we're -- and when we do start, we will match-fund it. So if we're match-funding it and if we're being careful on the risk mitigation upfront, basically, the way we think about it is we have options on a lot of good business and we don't really have to make the decision until the quarter the deal starts.

Kevin P. O'Shea
Chief Financial Officer at AvalonBay Communities

And I just would -- I would just add one thing to that and -- to Matt's comments, and that's as we do that, we bring a terrifically strong balance sheet to the equation, both from a leverage standpoint and a liquidity standpoint and a financial flexibility standpoint. As you know, from our earnings materials, our net debt-to-EBITDA is five times, which is at the low end of our target range of five to 6 times. Our unencumbered NOI is 95%, which is probably at an all-time high in the company's history. So we have plenty of flexibility to sort of seek forward financing, and I guess, circumstances should we need it so. And the likelihood to be needed so is very low because we've got $2.5 billion of liquidity, when you look at our line of credit, our cash on hand and the equity forward. So again, to Matt's first point, we do bring the flexibility to all parts of our business, but we also bring a strong balance sheet that gives it plenty of firepower to have the flexibility.

Rich Anderson
Analyst at SMBC

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

Benjamin W. Schall
Chief Executive Officer and President at AvalonBay Communities

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

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

The one thing that I would add, Rich, is a couple of your specific questions, maybe just as a reminder, is that as you look forward, while we're not providing a kind of guidance for 2023, there are still a number of factors that would, if you kind of start to line them all up, would give you a sense that 2023, absent significant macroeconomic shock of some kind, should be a pretty good year, and an above-average year was the phrase I used earlier. Some of the things that I would point to are: one, we've mentioned what our forecast is for bad debt for this year, which is about kind of rough numbers, 2.5%, 2.6%. That's normally 50 basis points or so. It's simply how we're going to unlock all of that versus just when as we move through this year into next year. And then in terms of the increases that we're seeing in rents today, they're pretty robust. But as we pointed out at the beginning of the call, in Ben's prepared remarks, we're seeing pretty good asking rent growth today, which is actually boosting loss-to-lease. And it sets us up pretty well as we move into 2023. And then the other piece I would say is, yes, there still are a couple of markets out there where we're somewhat constrained in terms of the renewal offers that we could send out due to these sort of COVID overlays and regulatory orders that are in place. So there's a few things out there that, absent anything else from occurring, assuming it's a static environment, a pretty good outcome for 2023 is what I would say. So just keep those in mind.

Rich Anderson
Analyst at SMBC

You got it. I'll do that. Thanks.

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

Yeah.

Operator

[Operator Instructions] We'll now move to Alexander Goldfarb with Piper Sandler.

Alexander Goldfarb
Analyst at Piper Sandler Companies

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

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

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

Alexander Goldfarb
Analyst at Piper Sandler Companies

High level is fine. High level is fine.

Kevin P. O'Shea
Chief Financial Officer at AvalonBay Communities

Yes. Yes, maybe just the response to your first question about where the money is coming from overall in terms of the Emergency Rental Assistance Program from the beginning, to where -- through February. So with respect to receivables from 2020, 2021 and through February of 2022, about 2/3 of the funds that we received has come from California. And then about -- the next biggest chunk is 10% from Massachusetts.

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

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

Alexander Goldfarb
Analyst at Piper Sandler Companies

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

Sean J. Breslin
Chief Operating Officer at AvalonBay Communities

And Alex, very specifically about same-store core FFO, what metrics are you talking specifically just so we're clear what you're asking about?

Alexander Goldfarb
Analyst at Piper Sandler Companies

Just your core FFO guidance, the top end of your range is where The Street is. So I'm just sort of curious if there were some things of caution or maybe some bad debt items or onetime items that The Street wouldn't have factored in, that would have had value...

Kevin P. O'Shea
Chief Financial Officer at AvalonBay Communities

So Alex, this is Kevin. And I guess, first of all, it's impossible for me to reconcile our numbers against a dozen or so analyst numbers on some composite basis. As a group, and individually, you all are free and should be free to sort of make your own forecasts. I guess I would make a couple of points. First of all, with respect to Q1, we guided to a midpoint of $2.20 per share. We beat it by $0.06. The Street was at around $2.26, $2.27, which ended up being pretty close to accurate, but we certainly didn't guide The Street there. And so similarly, I guess, The Street may be around $9.63, $9.64, or something for the full year. We never guided The Street to that level. We guided them to $9.55. And frankly, we try not to sandbag our numbers. We're trying to give you an honest expression of where we think the year will shake out based on the assumptions that we have in place in the model today. And as things stand, if things play out based on the kind of business plan that we've just outlined in our updated forecast, we think the balance of risk 50-50 are around $9.55 per share, and that includes kind of the pain point of pulling back a little bit on acquisitions of $0.05. So having not done so, we would probably be at $9.63, right? So maybe that's one way to try to reconcile up to the $9.63. But beyond that, I actually don't know how to compare our assumptions versus a composite of The Street's.

Alexander Goldfarb
Analyst at Piper Sandler Companies

Kevin that's super awesome. So appreciate that.

Operator

Now we'll hear from Joshua Dennerlein with Bank of America.

Joshua Dennerlein
Analyst at Bank of America

Good, Hi everyone. I had a question on the Structured Investment Program. I guess how do you feel like that will influence your capital deployment preferences going forward? And then also just curious why now for launching the program.

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

Hey, Josh, it's Matt. I don't think it will influence our capital deployment strategy. I think it's really more additive. It's just adding -- it's a way, as Ben was saying, to leverage our capabilities and our relationships and our presence in these markets to something else that will be accretive for the shareholders. So I don't -- it's not displacing anything else in our capital plans. Why now? We've been in the market for a while now with our different program, our Developer Funding Program, where we've been providing capital to other developers exclusively in our expansion regions. And as we've been doing that, we've been -- we've learned some things. And one of the things we learned is that the expertise that we do bring is valued. It's valued by potential partners, it's valued by their developers, it's valued by lenders. And so we did see it as, again, a market opportunity to extend those capabilities. And frankly, I think it will be a better environment for placing these kind of investments going forward than it has been in the last couple of years when capital was incredibly cheap and easy. So if anything, I think we're probably in a better position to place this money in competitive terms as I look out over the next couple of years with the rates starting to rise and capital maybe becoming just a little bit more in gear.

Joshua Dennerlein
Analyst at Bank of America

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

Matthew H. Birenbaum
Chief Investment Officer at AvalonBay Communities

I think our first couple of deals that we're looking at now and also the one that we closed are fixed, but it's something we're talking about. And we're going to meet the market where the market is. And when short rates were so incredibly low, fixed was, I think, that would be probably the better way to go for the capital provider. If that shifts, yes, then we'll shift with it.

Joshua Dennerlein
Analyst at Bank of America

Awesome, Thanks guys.

Operator

And ladies and gentlemen, this will conclude your question-and-answer session for today. I would like to turn the call back over to Ben for any additional or closing remarks.

Benjamin W. Schall
Chief Executive Officer and President at AvalonBay Communities

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

Operator

[Operator Closing Remarks]

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