AvalonBay Communities Q4 2022 Earnings Call Transcript

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Provided by Quartr
February 9, 2023

Key Takeaways

  • 2022 financial results: AvalonBay delivered 10.9% same-store NOI growth and 18.5% core FFO growth, ending the year at $9.79 per share—$0.24 above initial guidance.
  • Enhanced liquidity and capital allocation: The company raised $500 million of forward equity, pivoted from a $275 million net buyer to a $400 million net seller, and fully match-funded its development pipeline.
  • Operating model transformation drove ~$11 million of incremental NOI in 2022 and is projected to add another $11 million in 2023 through digital initiatives like Avalon Connect and managed Wi-Fi.
  • Development pipeline strength: $2.4 billion under construction at a 5.8% yield, match-funded with yesterday’s capital costs, and ~$875 million of new starts planned in 2023.
  • 2023 guidance calls for 5.3% core FFO per share growth, 5% revenue growth, 6.5% operating expense growth, 4.25% same-store NOI growth, and $21 million of NOI from lease-up communities.
AI Generated. May Contain Errors.
Earnings Conference Call
AvalonBay Communities Q4 2022
00:00 / 00:00

There are 17 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to AvalonBay Communities 4th Quarter 2022 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. And have your cell phones turned off during the question and answer session. Your host for today's conference call is Mr.

Operator

Jason Riley, Vice President of Investor Relations. Mr. Reilly, you may begin your conference.

Speaker 1

Thank you, Doug, and welcome to AvalonBay Communities 4th 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 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

Speaker 2

www.avalonbay.com/earnings,

Speaker 1

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 3

Thank you, Jason, and hello, everyone. I'm joined by Kevin, Sean and Matt. And after our prepared remarks, we will open the line for questions. I'll start by quickly summarizing our 2022 results and highlighting our progress on a number of strategic focus areas. As shown on slide 4, from an operating results perspective, 2022 was a phenomenal year and one of the strongest in the company's history With 10.9% same store NOI growth and 18.5% core FFO growth.

Speaker 3

We ended the year with core FFO of $9.79 per share, Just to reflect back, it was $0.24 above our initial guidance at the beginning of 2022. On the capital allocation front, We proactively adjusted during 2022 as the environment and our cost of capital changed. In April, we raised approximately $500,000,000 of forward equity At a spot price of $2.55 per share, which is still fully available. As the year progressed, we pivoted from our original expectation Being a $275,000,000 net buyer to ending the year as a $400,000,000 net seller, a shift of roughly $700,000,000 in total. We also ratcheted down new development starts given the shifting environment to $730,000,000 from our original guidance of 1,150,000,000 Collectively, these moves put us in an extremely strong liquidity position and fully match funded with capital secured for all of the development we have underway.

Speaker 3

We also made significant progress during 2022 on our strategic focus areas, 3 of which I want to highlight today. First, as detailed on Slide 5, we continue to make very strong inroads on the transformation of our operating model. We captured approximately $11,000,000 of incremental NOI from our operating initiatives in 2022. In 2023, We're projecting an additional $11,000,000 of incremental NOI from these initiatives and looking further out expect meaningful contributions in 2024 and beyond. This uplift is being driven by a number of initiatives, including our Avalon Connect offering, which is our package of seamless bulk Internet And a new development is Managed WiFi, which we have now deployed to over 20,000 homes and expect to be at over 50,000 homes by the end of 2023.

Speaker 3

During 2022, we revamped our website and fully digitized our application and leasing process. What used to take 30 plus minutes of associates' time We also rolled out our mobile maintenance platform across the entire portfolio, allowing our residents and maintenance associates to interact much more efficiently and seamlessly. As a result of these initiatives, we believe we are enhancing the customer experience, While also driving operating efficiencies, which over the past few years has resulted in a roughly 15% improvement in the number of units managed per on-site FTE. Turning to slide 6. As a second strategic area, we are focused on optimizing our portfolio as we grow.

Speaker 3

Our goal is to shift 25 percent of our portfolio to our 6 expansion markets over the next 6 to 7 years. In addition to diversifying our portfolio, this shift reflects the reality that more and more of ABB's core customer, knowledge based workers are increasingly in these markets.

Speaker 4

At the

Speaker 3

end of 2022, including our development currently underway, we increased our expansion market exposure to 7%. And subject to the capital allocation environment this year, we expect to be at 10% by the end of 2023. We're funding a large portion of this shift through dispositions in our established regions, which also allows us to prune the portfolio of slower growth assets And or those with higher CapEx profiles, which should lead to stronger cash flow growth in the portfolio in the years ahead. A third strategic focus area has been on leveraging our development expertise at new ways and in ways that drive additional earnings growth. More specifically, as detailed on slide 7, we're expanding our program of providing capital to 3rd party developers, primarily as a way to accelerate our presence In 2022, this included a project start in Durham, North Carolina and a new commitment in Charlotte.

Speaker 3

During 2022, we also successfully launched our structured investment business with over $90,000,000 of preferred equity or mezzanine loan commitments made during the year. We believe that both of these programs will be increasingly attractive to 3rd party developers in 2023. We're also fortunate to be building these books of business now at today's economics and basis versus in yesterday's environment. Before turning it to Kevin to provide the specifics of our 2023 guidance, I want to provide some additional context on our underlying economic assumptions for the year. From a forecasting perspective, we are overlaying the consensus forecast From the National Association of Business Economists or NAB on top of our proprietary submarket by submarket research data and model.

Speaker 3

The Nave consensus assumes a significant slowing in job growth during the year, down to about 50,000 jobs per month by the 3rd quarter And a total of approximately $1,000,000 of net job growth in 2023. The output of our models is a forecast of market rent growth of 3% during the year. In a year in which we will need to be prepared for a wider set of potential outcomes than usual, there are a number of attributes of our portfolio And particularly our concentration in suburban coastal markets that we expect to serve as a ballast in a potentially softening economic environment. As shown on Slide 8, the cost of a median price home relative to median income in our markets continues to serve as a barrier to homeownership and support demand for our apartment communities. This is in addition to the repercussions of today's higher mortgage rates, which make the economics of renting significantly more attractive.

Speaker 3

The other side of the equation is supply. In softening times, having existing asset that is in direct competition with a recently built nearby project and lease up Can be particularly challenging. Our portfolio has some of the lowest levels of directly competitive new supply across the peer group at only 1.4% of stock, which we believe positions us well. And with that, I'll turn it to Kevin to detail our 2023 guidance.

Speaker 5

Thanks, Ben. On slide 9, we provide our operating and financial outlook for 2023. For the year, using the midpoint of guidance, we expect 5.3% growth in core FFO per share, driven primarily by our same store portfolio as well as by stabilizing development. In our same store residential portfolio, we expect revenue growth of 5%, operating expense growth of 6.5% And NOI growth of up 4.25 percent for the year. For development, we expect new development starts of about $875,000,000 this year And we expect to generate $21,000,000 in residential NOI from development communities currently under construction and undergoing lease up during 2023.

Speaker 5

As for our capital plan, we expect to fund most of this year's capital uses with capital that we sourced During last year's much more attractive cost of capital environment. Specifically, we anticipate total capital uses of $1,800,000,000 in 2023 Consisting of $1,200,000,000 of investment spend and $600,000,000 in debt maturities. For capital sources, we expect to utilize $550,000,000 Of the $613,000,000 in unrestricted cash on hand at year end 2022, dollars 350,000,000 of projected free cash flow after dividends and $490,000,000 from our outstanding forward equity contract from last year. This leaves only $400,000,000 in remaining capital to be sourced, which we plan to obtain primarily from unsecured debt issuance later in 2023. From a transaction market perspective, We currently plan on being a roughly net neutral seller and buyer in 2023.

Speaker 5

With a continued focus on selling communities in our established markets and on buying communities in our expansion markets, while being prepared to adjust our transaction volume and timing in response to evolving market conditions. On slide 10, we illustrate the components of our expected 5.3% growth in core FFO per share. Nearly all of our expected earnings growth of $0.52 per share is expected to come from NOI growth in our same store and redevelopment portfolios, which are expected to contribute $0.50 per share. Elsewhere, NOI from investment activity and from overhead JV income and management fees are expected to And we will now

Speaker 6

begin the call to

Speaker 7

provide a brief update

Speaker 5

on our financial results. And our first question comes from the line of John. Thank you, And from higher variable rate interest expense, resulting in an expected $0.02 per share net earnings growth from these other parts of our business. On slide 11, we show the quarterly cadence of apartment deliveries from development communities under construction for 2022 And on a projected basis for 2023 2024. As you can see on this slide, new deliveries declined in 2022 and remain relatively low as we begin 2023.

Speaker 5

This recent decline in deliveries was due to our decision during the early days of the pandemic To reduce wholly owned development starts to $220,000,000 in 2020 before resuming higher levels of development starts thereafter in 2021. As a result, development NOI for this year is expected to be below trend at $21,000,000 versus $42,000,000 last year. However, new deliveries are expected to increase significantly later in the year and into next year, which should set the stage for more robust NOI growth from development communities next year. And with that summary of our outlook, I'll turn it over to Sean to discuss operations.

Speaker 2

All right. Thank you, Kevin. Moving to Slide 12, in terms of our operating environment. After a very strong first half of the year, we ended 2022 with several of our key operating metrics, including occupancy, availability and turnover trending to what we consider more normal levels. In addition, following 2 years of abnormal patterns, Rent seasonality returned with peak values being achieved during Q2 and Q3 before easing in the back half of the year.

Speaker 2

More recently, the volume of prospective renters visiting our communities increased in January as compared to what we experienced in November December, which translated into a modest lift in occupancy and we do see amount of available inventory to lease as we entered February. Additionally, asking rents have increased about 100 basis points since the beginning of the year, which is beginning to flow into rent change. Based on signed leases that take effect in February, we're expecting light term effective rent change

Speaker 6

to be in

Speaker 2

the low 4% range. Turning to Slide 13. The midpoint of our outlook reflects same store revenue growth of 5% for the full year of 2023. Growth in lease rates is driving the majority of our revenue growth for the year, which includes 3.5% embedded growth from 2022 And an expectation of roughly 3% effective rent growth for 2023, which contributes about 150 basis points to our full year growth rate. We expect additional contributions from other rental revenue, which is projected to grow by roughly 16%, About 2 thirds of which is driven by our operating initiatives, a modest improvement in uncollectible lease revenue And slight tailwind from the reduced impact of amortized concessions.

Speaker 2

We're assuming that uncollectible lease revenue improves from 3.7% For the full year 2022 to 2.8% for the calendar year 2023. Of course, this improvement is more than offset by a projected $36,000,000 reduction in the amount of rent relief we expect to recognize in 2023. The combination of the 2 reflects a projected 80 basis point headwind from net bad debt for the full year 2023. Moving to slide 14, we expect our East Coast regions to produce revenue growth slightly above the portfolio average, While the West Coast markets are projected to fall below the portfolio average and our expansion markets are projected to produce the strongest year over year revenue growth for the portfolio. One point to highlight is that the reduction in rent relief will have a more material impact on our reported 2020 3, revenue growth in certain regions and markets, for example, Southern California and Los Angeles.

Speaker 2

We've footnoted the projected impact for each region at the bottom of slide 14 and enhanced our disclosure in the earnings supplemental, Everyone has visibility into the impact of the change in rent relief as compared to underlying market fundamentals. Turning to slide 15, same store operating expense growth is projected to be elevated in 2023 due to a variety of factors. The first is just the underlying inflation in the macro environment, which is impacting several categories, including utilities, wage rates, etcetera. 2nd, we're expecting greater pressure on insurance rates given the increase in the number and severity of various disasters over the past couple of years, combined with a relatively light year of claims activity in 2022. We're rolling all that cost pressure into the organic growth rate of 4.8% You see on the table on slide 15.

Speaker 2

In addition to the organic pressure in the business, about 170 basis points of additional operating expense growth This is coming from the phase out of property tax abatement programs, primarily in New York City and NOI accretive initiatives. The phase out of the property tax abatement programs is projected to add about 70 basis points to our total operating expense growth for the year. While we'll generate some incremental revenue during the phase out period, the ultimate benefit will be the extinguishment of the rent stabilized program For those units in a particularly challenging regulatory environment. The impact from initiatives reflects a few key elements of our operating model transformation, Including our bulk Internet, managed Wi Fi and smart access offering, which as Ben referenced, is bundled and marketed as Avalon Connect. While we expect to recognize an incremental $5,000,000 profit from that specific initiative in 2023, it's It's adding about 150 basis points to OpEx growth for the full year.

Speaker 2

There's a modest impact from our on demand furnished housing initiative, which is also generating a profit for 2023. And finally, we expect additional labor efficiencies to offset some of the growth in other areas of the business As we continue to digitalize and centralize various customer interactions. And then if you move to Slide 16, you can see the progress we've made to date Each one of these three initiatives and a projected incremental impact for 2023. As I mentioned, our Avalon Connect offering is projected to deliver about $5,000,000 in 2023. Furnished housing is contributing another $1,000,000 and our digitalization efforts are projected to Generate an incremental $5,000,000 benefit in 2023.

Speaker 2

In aggregate, we're expecting an additional $11,000,000 in NOI from 3 strategic priorities in 2023 with a lot more to come in future years from these initiatives and others. Now I'll turn it to Matt to address development.

Speaker 6

All right. Thanks, Sean. Just broadly speaking, development continues to be driver of earnings growth and value creation for the company. At year end, we had $2,400,000,000 in development underway, most of which was still in the earlier stages of construction. The projected yield on this book of business is 5.8% And it's worth noting that our conservative underwriting does not include any trending in rents.

Speaker 6

We do not mark rents to current market levels until leasing is well underway. On this quarter's release, only 4 of the 18 projects underway reflect this mark to market, but those 4 are generating rents $3.95 per month above pro form a, which in turn is lifting their yields by 30 basis points. We expect to see similar lift at many of the 14 other deals as they open for leasing over the next few years. And of course, this portfolio is 100% match funded with capital that was sourced Yesterday's capital markets when cap rates and interest rates were significantly lower than they are today. If you turn to Slide 17, we do expect roughly $900,000,000 in development starts this year across 7 different projects With roughly half in our new expansion regions and we will continue to target yields at 100 to 150 basis point spread over prevailing cap rates.

Speaker 6

We expect the majority of this start activity in the second half of the year and are hopeful that we will be able to take advantage of moderating hard costs across our markets as these budgets are finalized. We have started to see early signs of this in a few of our latest construction buyouts as selected trade contractors have become much more motivated to secure new work. As always, we will continue to be disciplined in our capital allocation and our projected start activity could vary significantly from our current expectations depending on how interest rates, asset values and construction costs all evolve over the course of the year. Turning to slide 18. While our recent start activity has been modest, we've been building a robust book of future opportunities that could drive significant earnings and NAV growth well into the next cycle.

Speaker 6

We've increased our development rights pipeline to roughly 40 individual projects, balanced between our established coastal regions and our new expansion regions, providing a deep opportunity set across our expanded footprint. Most of these development rights are structured as longer term option contracts, We're not required to close until on the land until all entitlements are secured. In addition, in the current environment, We're certainly seeing more flexibility from land sellers who are willing to give us more time as cost and deal economics adjust to all of the changes in the market. We continue to control this book of business with a very modest investment of just $240,000,000 including land held for development and capitalized pursuit costs as of year end. For historical context, as shown on the chart on the right hand side of the slide, this is a lower balance than we averaged through the middle part of the last cycle from 2013 to 2016, Even though the dollar value of the total pipeline controlled is larger today than it was then, providing tremendous leverage on our investment in future business.

Speaker 6

And with that, I'll turn it back to Ben for some closing remarks.

Speaker 3

Thanks, Matt. To conclude, Slide 19 recaps our successes during 2022 and highlights our priorities for 2023. All this is only possible based on the tireless efforts of our AvalonBay associate base, 3,000 strong. A personal thank you to each of you for your dedication in making AvalonBay even stronger as we continue to fulfill our mission of creating a better way to live. You're the heart and soul of our culture and we thank you.

Speaker 3

With that, I'll turn it to the operator for questions.

Speaker 7

Thank you.

Operator

A confirmation tone will indicate your line is in the question Our first question comes from the line of Nick Joseph with Citi.

Speaker 8

Thanks. And thanks for the call presentation. It is always helpful. It has a lot of additional info. So Always appreciate that.

Speaker 8

Maybe just starting on development in the transaction market. You mentioned the 100 basis points to 150 basis point spread. Can you quantify expected yields on the 23 starts? And maybe what the current transaction cap rates are you're seeing in your markets?

Speaker 6

Sure. Henrik, it's Matt. As I'm sure you're hearing from others as well, not a lot is transacting in the current In the current environment, so there is I think everybody is kind of interested to see how the transaction market evolves over the course of the year. What is trading seems to be trading in, call it, the mid to high 4% cap rate range, depending on the market. And there's certainly assets that are not trading.

Speaker 6

But as best we can tell, that's kind of where most transactions in our market Seem to be settling out today. And just as a point of reference, the development we expect to start this year, Those yields are underwriting to around a 6 low 6s today. So that's very consistent with the spread, right in Very solidly in that 100 to 150 basis point range that I mentioned.

Speaker 8

Thanks. That's helpful. And then just on the, I guess, Continued reallocation of the capital into these expansion regions. Do you expect any difference in cap rates Between the buys and sells or as you allocate that capital this year? And then where should we expect any asset sales to occur from which established markets?

Speaker 6

Yes. So, I would say, if you look back at what we've done over the last 4 or 5 years, We have rotated quite a bit of capital, and it is kind of over weighted to the Northeast. And I think you can expect that To continue, there will be continued asset sales out of the New York metropolitan area, A little bit out of Boston, some out of the Mid Atlantic and then selectively a little bit on the West Coast as well, but predominantly that kind of that Northeast corridor. The cap rate spread, we'll see. I would say that that cap rate spread has probably tightened some over the last year or 2 because there's that had more embedded growth in the rent roll and lower cap rates a year or 2 ago.

Speaker 6

So as interest rates have risen, Basically, a lot of the markets where we're selling, the buyers were already kind of buying for yield as opposed to growth. So, there's probably been a little bit less adjustment there. So, I think there might be a little bit of dilution, but I would say probably less than what we've seen in the last couple of years. And then the other part of it is tactically, we have shifted From kind of buying and then essentially doing a reverse exchange by picking an asset off the bench to sell to fund that, mid last year we shifted our tactics there to sell first, so that we knew where that dispo was pricing. And then that in turn informed our view of how much we're willing On the buy side, so we've shifted to a sell first, buy second.

Speaker 3

And Nick, in terms of the environment today, I just want to make sure you have the right expectations For our activity now versus later in the year, we're testing the market with a couple of potential asset sales generally on the sideline On acquisitions until we see how those assets, 1, if we decide to trade on them and how the pricing is and then we'll evaluate the potential trade into the expansion market Through other acquisitions or potentially use those proceeds for other capital allocation decisions.

Speaker 8

Thanks. Those ones being tested are in the Northeast.

Speaker 6

They are 1 in the Northeast and 1 in the Mid Atlantic.

Speaker 8

Thank you.

Operator

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

Speaker 9

Yes, thanks. Good afternoon. I guess on Page 13, you kind of break out all the drivers of growth. I was just Hoping you could maybe tell me the areas where you have kind of the most confidence and the least confidence, where there could be Side downside and if you also think about that by region, I guess what areas are you thinking there could be upside in your forecast and potential downside?

Speaker 2

Yes. Steve, this is Sean. I'll take that one. So in terms of upside and downside, first, across the various categories Reflected on Slide 13, there's a couple of things I'd point to. First is, on the lease rent side, as Ben mentioned, Yes, we have a certain macroeconomic assumption, job growth, income growth, etcetera, that's reflected in our models from Nave that drives that, Obviously, to the extent that, we see either more or less improvement in the economic environment, that's going to Have an impact on that and then the timing with which that occurs.

Speaker 2

So if we don't see much of an impact in terms decelerating macro environment until late this year that it really would impact more 2024 than 2023. And then as it relates To the other areas, I'd probably point to bad debt has really been one of the other components that I think we're all trying to estimate the likely impact of what we're going to see in certain markets. But it is one of those items that is a little more challenging to forecast. We're starting the year at roughly 3.1% Underlying bad debt here and we expect to get down to about 2.3% by the end of the year in terms of the pace of improvement And more of the improvement in the second half than the first half, just given some of the issues in L. A.

Speaker 2

And some of the Sluggishness in the courts in the Northeast. That's the other thing I'd point to as a category that would likely Move the needle one way or another depending on how things unfold. There could be some upside there since while there has been some extensions recently like in Los Angeles County, The extensions are getting shorter and I think people see that they're sort of getting to the end of the tunnel on this. So at the margin, we've incorporated that, But maybe it improves. It's hard to tell.

Speaker 2

And then geographically, I'd say certainly it's been more sluggish in the Tech markets in Northern California and Seattle is an example, maybe to a lesser extent here in the Mid Atlantic in terms of the government not being back in the office and things of that sort. So depending on how the tech market unfolds here, that would be the likely impact In those regions. And then the other regions, we're seeing strong performance out of New York City, out of Boston, generally pretty good in Southern California. Right now, as you look at it, there's probably, I'd say, maybe a little more risk on the tech side of things really decelerate, but we do have some stabilizers in Some of these other regions. So on par, it probably is kind of a net neutral when you add it all up.

Speaker 9

Okay, thanks. And then just on development maybe for Matt, as you think about construction costs and what's happened with inflation and I assume that that's starting to moderate, but How did that get factored into the $900,000,000 of starts and presumably the yields are Somewhere in that 6% to 6.5% range on what you're going to start, but I guess what kind of cushion or upside could you possibly see if inflation continues to moderate?

Speaker 6

Yes. I guess it's a question, Steve, of which slows down more hard costs or rents. I think at this point, we think hard costs are moderating More. So I would agree with you that it's very hard Now where hard costs truly are today until you have a hard set of plans to bid and you're truly ready to start. So what we're starting to see is on a couple of projects that we started In Q3 and Q4, once we actually start moving dirt and the subcontractors see the deal is real, They are coming back with more aggressive pricing and we are starting to see some savings on the buyout, whereas A year or 2 ago, we were scrambling.

Speaker 6

The number was going up 1% a month. That's definitely not happening, and it is starting to move the other direction. And it's regional, so it really does depend on the region you're in and how much subcontractor capacity there is. Sorry, we got something going on here.

Speaker 2

But

Speaker 6

we do expect That hard costs in many of the regions that we're looking to start business in over the next year or this year, I would take the under on where they're going to be relative to where they would have been say Q3, Q4 of last year. And so what we mentioned that our starts are This year, some of that is just the natural evolution of these deals, but some of that is actually strategic as well on our part to say, we think that we'll have a better Sean, it will be a better environment to buy out some of these trades over the summer once they've kind of felt the pressure of running out of work and Starts decelerating pretty dramatically.

Speaker 9

Great. Thanks. That's it for me.

Speaker 7

Our next question comes from

Operator

the line of Austin Wurschmidt with KeyBanc. Please proceed with your question.

Speaker 10

Hey, good afternoon everybody. Ben, just going back a little bit to your comments on the capital recycling side. I'm just curious how significant the volume of assets Are on the market within your expansion markets that meet your underwriting criteria from a location quality perspective? And Also curious if that 6 to 7 year timeframe you outlined, to achieve that rotation into the Is that just a function of what you can sell in any given year?

Speaker 3

Yes. Thanks for that Austin. So On the transaction side, as I mentioned, we're out in the market with a couple of assets for potential sale. Our transactions team is Obviously, staying close to the buying side of the market, but we're not currently actively underwriting any particular deals. We do have very detailed market by market Analytics that are driving which submarkets we have our close eye on type of product across various price points.

Speaker 3

So once we're ready to And if during this year we decide to get back into our trading activity, we'll be ready to ramp that activity back up. In terms of your kind of broader question, The time period, we've set the broad target of getting to 25% over the next 6 to 7 years. I think we've been making some good inroads over the last couple of years Through trading, through our acquisition activity and then increasingly through our development funding program. We're hopeful that in an environment like this, capital less abundant, maybe some dislocation that there'll be opportunities for us to step in and potentially Accelerate that activity. Our cost of capital obviously will need to be there to support that.

Speaker 3

But we could be in a window later this year where those types of opportunities Start to present themselves.

Speaker 10

Yes, that's helpful. And then I'm also just curious with the available dry powder that you have exiting This year, I'm curious what's sort of the most development you'd be comfortable starting in a given year? As you guys highlighted, you do have significant deliveries in 2024, which will accelerate the NOI contribution. And I'm just curious what kind of volume we could see you do maybe as you get into Next year and beyond if the environment is sort of appropriate for accelerating starts?

Speaker 3

Yes. Broad strokes, Austin, I'd guide you. This is not a hard and fast sort of area, but in the range of 10% Upper enterprise value that we want to have under construction at a particular period of time, we're in light of that today. That we have retrenched on development starts over the last couple of years, given the operating environment. Yes, we've got the opportunity set that's there.

Speaker 3

Matt described that. So we have the pipeline. We control that pipeline at a relatively limited cost. We're spending a lot of time right now restructuring deals to our benefit because the land market has changed. So that's there.

Speaker 3

Got a phenomenal team that's been doing this a long time. So an element will be how do we think about the spreads, right? How do we think about Matt was talking the And rental the trend lines on rents relative to the trend line on costs, how we think about maintaining 100 basis points to 150 basis Spreads underlying cap rates and our cost of capital that will be those will be the signals where we start to lean in more fully.

Speaker 5

Maybe Austin just to add, this is Kevin here. Obviously, as we talked about in the past, the development activity in terms of what we start is a function typically of 3 variables, the opportunity set, Our organizational capacity and then our funding capacity. And on that last point, our funding capacity, we're probably set up to be able to start and self through free cash flow, asset sales and leverage EBITDA growth somewhere between $1,000,000,000 $1,500,000,000 worth of new development a year. And of course, if the equity market is there, we can flex that number up. But that's probably what we sort of aim for somewhere in there $1,000,000,000 to $1,500,000,000 From a funding side plus whatever we can additionally fund from the equity markets to the extent the opportunity set in the organizational capacity is also there.

Speaker 10

Got it. But it's fair to assume with where leverage is today that capacity may be a little bit greater?

Speaker 5

Potentially, if you can find yes, certainly from a leverage capacity standpoint, we're at, as you know, 4.5 times net debt to EBITDA, our target range is 5 To 6 times. So we certainly have borrowing capacity here to be to play offense quite a bit if we see opportunities in the development So out of the house or in the transaction markets, of course, we all just have to look at sort of where the cost of debt is for to fund that activity. And Fortunately, we have among the lowest costs of debt capital in the REIT industry. And today, we could probably fund 10 year debt somewhere around 4.7%. So That would be also a relevant factor as we think about the degree to which we want to lean into our leverage capacity to support additional investment.

Speaker 3

Helpful. Thank you.

Speaker 7

Our next question comes from

Operator

the line of Chaney Luthra with Goldman Sachs. Please proceed with your question.

Speaker 11

Hi. Thank you for taking my question. In terms of your outlook for your structured investment program, Are you seeing any deals in the market that are in distress or might be in the need for capital and could be opportunities for you? And then what gives you confidence on generating returns of 12%?

Speaker 6

Yes. I can take the first one. I'm not sure I heard the second one, confidence in return

Speaker 3

to 12%.

Speaker 6

So I think that. Okay. Yes, sure. So, yes, it's Matt here. Are we seeing distress?

Speaker 6

No, but we're not really in that market, I would say, in the sense that the SIP is really targeted at providing Mez Finance Capital, either mez or preferred equity for new construction merchant builders building New apartment communities in our markets. So we're coming at the beginning of the story When they're putting together the capital stack to build the project and what we're seeing there is given where Interest rates have gone and given what's happened to proceeds, their construction loan proceeds is coming down. So developers are looking to Fill that gap where maybe they were getting 60%, 65% construction loan before, now they're only getting 50% or 55%. So we have seen kind of our investment Move from maybe 65% to 85% of that stack down to call it 55% to 70% or 75%. And the rate has gone up.

Speaker 6

And we there are deals getting done in that 12% range. There are folks out there looking for short term bridge money Who started jobs 2 3 years ago and their first their construction loans are coming due and they don't have enough refi proceeds to pay that off and their mezz. So there is a little bit, I don't know if I call that distress, but there's a little bit of a recapitalization of newly built asset opportunity out there. That is not a market that we have gone to at this point. We're pretty much focused on the new construction side of this.

Speaker 3

And Johnny, just Just to emphasize sort of the broader market, we do expect our capital through our SIP to be more attractive to developers this It has been over the last couple of years, which inherently then means we're going to have the opportunity to be more selective, right, about Quality of the sponsor, amount of capital they're putting in, our views on the underlying real estate, and we're not entering into these SiP deals With the prospect of owning the assets at the end, but we do very detailed underwriting to make sure that we're comfortable with the prospect of owning the assets if we need to.

Speaker 11

Great. And then as we think about tech layoff headlines, obviously, January was a very big month. We saw a big bump in layoffs in January and that was significantly higher than November, which obviously when you think about the impact of November, December, everybody you guys talked about sort of seeing a slowdown, but then you talked about towards the end of January rents accelerated a little bit. So as we think about the fact that we are only sort of just coming off these headlines that keep hitting our screens Every day this morning we saw from Disney. Are you seeing any early signs in your conversations with Tenants, be it around move outs or lease negotiations, any notices, I mean, what gives you confidence that Things are in sort of on the right path and we are not looking at things just falling off a cliff.

Speaker 2

Yes. Johnny, that's a good question. I'm not sure there's a notable answer to it. I can tell you about what we're seeing, but In terms of how it unfolds, I think that's what everybody is trying to understand well. What I would say is just based on the data that we Collect from residents as it relates to relocation, rent increase, etcetera, etcetera.

Speaker 2

We're not seeing anything that's material at this point that would indicate that there is a Significant issue underlying the economy and some of the tech markets. Relocation has actually come down in terms of reason for move out. Rent increase is up a little bit, But not surprising, rents have gone up quite a bit over the last 12 to 14 months. So I don't think those are Indicators that are a surprise to us and there's nothing yet in the data that would tell us, that there's a significant Underlying issue. Now the question I think that a lot of people have is severance, Employment, etcetera, etcetera is that sort of supporting people for a period of time.

Speaker 2

And they are in fact transitioning into new roles in other organizations. There's a little bit of this sort of rotational effect from maybe some of the tech companies that took on more Employees that they needed to during the pandemic and now they're rotating into other organizations, more mainstream corporate America. It's hard to tell all that, We're not seeing anything specifically in the data and we're not hearing a lot anecdotally from our teams on the ground saying that there's a significant issue there. I was in San Jose last week Speaking to our teams, talking to people on the ground and they're just not seeing it yet. The sandbox and the headlines are there in terms of layoffs, But it's not showing up in terms of the front door yet.

Speaker 2

So we're being proactive in some of those markets in terms of how we're thinking about lease duration, have a look at lease termination fees and other things to hedge a little bit, but thus far it's not showing up in the data.

Speaker 11

Excellent. Thank you.

Speaker 7

Our next question comes from

Operator

the line of Adam Kramer with Morgan Stanley. Please proceed with your question.

Speaker 8

Hey, guys. Just wanted to ask about the same store expense guide. I think I really appreciate kind of The deck overall, but I think specifically that slide in the deck kind of breaking out the different components. Specifically on the tax abatements, wondering, kind of If that's a one timer, or if that's kind of going to repeat in future years and again just trying to figure out What is kind of the proper recurring or run rate kind of same store expense number to kind of use as a proxy?

Speaker 2

Yes, Adam, good question. And what I can tell you because things do change in terms of The assets that we have in the portfolio, what we trade and sell out of, etcetera, etcetera. But for the assets that are contributing to the Phase out of the tax abatements in our 23 same store bucket, 1 does phase out by the end of 2023, 2 phase out by the end of 2024 and then the other 4 extend out another 2 or 3 years. So you're going to see a little lumpiness over the next few years as some assets slowly drop out of that phase out. Now as I mentioned, there are some benefits we get along the way in terms of an incremental fee each year of the phase out.

Speaker 2

And then ultimately, in what people would consider as New York is a pretty challenging market from a regulatory standpoint, eventually, we just get off that program at the end of the phase out and there should be a nice a pretty nice lift there in terms of rents. So that's sort of the way to think about it a little bit. I can't give precise sort of guidance as to what to expect for Years beyond 2024 in terms of what the headwind might be from that activity, but there will be some kind of headwind for the next few years.

Speaker 8

That's really helpful. Thank you. And just a follow-up, thinking through the expansion markets, recognizing potentially better job growth there, I think that A lot of sense. But just thinking about the supply side of things, right? And look, I think it's kind of well publicized that some of the dispensary market Sunbelt broadly, you can see elevated supply, call it maybe for the next 12 months or so.

Speaker 8

How are you guys thinking through that? Is that kind of just weather the By storm and probably less supply on the other side given financing challenges today for kind of development starting today for others out there? Or is it maybe the supply thing is overblown and actually the next 12 months is not going to have as much supply as maybe people think?

Speaker 3

Yes. Let me handle it a big picture and others can add on. The first comment I'd make, our portfolio allocation objectives, These are long term objectives, right? We're setting these because we think they're the appropriate allocation to have over the next 20 to 30 years, Right. Not necessarily based on the supply and demand dynamics out of the next couple of years.

Speaker 3

With that said, we do expect the next couple of years Potentially with some reversion to the mean on the rent side and the high levels of supply could lead to more muted growth in some of these high growth markets. We're fortunate we don't have any new deliveries. We have very limited deliveries coming online over the next couple of years. So most of our activity that you hear us talking about, including Our own development, which we're now starting and our developer funding program, those are projects that are going to be coming online in 2025, 2026, Which currently looks like could be some lighter years from a supply perspective.

Speaker 6

Yes. I'd just add one other thing to that, which is We are conscious of submarket selection as well as market selection as we build the portfolio in these markets. So If you look and I would point you to our Denver portfolio is a good example. It's been a great market. Our portfolio, I think, It's done even better than the market.

Speaker 6

And if you look at where we bought assets, it's mostly been suburban garden assets In jurisdictions where it is more supply constrained, there's a lot of supply in Denver, but the vast majority of it is within the city of Denver proper. And we have not bought an asset endeavor. We completed one lease up development deal there in Rhino last year and we have another one under But we're balancing that out with a suburban heavy acquisition strategy.

Speaker 8

Thank you so much. Really appreciate all the time.

Speaker 7

Our next question comes from

Operator

the line of John Kim with BMO Capital Markets. Please proceed with your question.

Speaker 12

Thank you. Thanks for all the color and additional disclosure on uncollectible lease revenue. It did strike us as surprisingly high in New York and Southeast Florida. And I was wondering if you can comment on that. Is this due to affordability?

Speaker 12

And could you see this potentially remaining high just given what's happening in the economy?

Speaker 2

Yes, John, Sean. Yes. New York certainly has been high in certain pockets. Even pre pandemic places like Long Island took forever to get through the court So that's not necessarily a significant surprise. And as you might imagine, the environment Is relatively pro resident friendly.

Speaker 2

And so any opportunity they get to sort of kick the can down the road through the court system, We've generally seen that happen over the last 12 to 14 months. As I mentioned earlier, I think a lot of that is slowly Coming to an end and things are opening up, but it is moving slowly. And you basically have the same phenomenon happening in Florida. Yes, things are moving along. Obviously, it's not as kind of pro tenant friendly as a place like New York by any stretch.

Speaker 2

But courts are backed up as a lot of cases that have just been on the docket for months months It is taking time for things to move through the system at this point in time, just much longer than average. So In terms of, is there a particular reason in Florida? I wouldn't say necessarily that's the case. It's a market that has had higher bad debt historically. So we're not necessarily surprised by that.

Speaker 3

And John, from an overall portfolio perspective, know you know this, but just for the broader audience, I mean, pre pandemic, right, our traditional bad debt number was in the 50 basis point to 75 basis point range. So Still a significant runway from the types of figures we're assuming for this year over the next couple of years. It may take a while given Sean's comments, but we're hopeful we'll be I headed in the right direction.

Speaker 12

Okay. My second question is on Page 11 of your presentation. You show the NOI contribution from development completions, which is very helpful. I'm just curious why you estimate that 23 NOI will be about half of last year's, Just given if you look at the first half of this year's delivery versus the first half last year, it looks about the same.

Speaker 5

Yes, John, this is Kevin. I'll take a crack at this. Others may want to chime in. Essentially, as you build out The model for forecasting NOI from communities undergoing lease up, obviously, you have to start with when we began to Put shovels on the ground. And as I mentioned in my opening remarks, we did start to ramp back up in 2021.

Speaker 5

And usually most developments take 8 to 10 quarters to complete and then that results in deliveries And then that then thereafter results in occupancies, which is where you start to see revenue growth. So there is a little bit of a lag when you play this out. So this is The bar charts here on slide 11 in our deck are not meant to be a coincident proxy for when we expect NOI to ramp rather it's showing deliveries when they ramp. And so therefore, you'll have to have occupancy that follow that and NOI that follows that. So it tends to create a lag effect As you move it through the P and L.

Speaker 12

I'm sure the next question will be earn in on deliveries from last year, but I'll save that for a later call. Thank you.

Speaker 7

Our next question comes from

Operator

the line of Allen Petersen with Green Street. Please proceed with your question. Hey, everyone. Thanks for the time. Just had two quick questions on the transaction market side.

Operator

Matt, in regards to the asset Sale commentary being out of the Northeast Corridor as well as California. When you think about dispositions in California, are they wholly owned positions or would you look to enter into a joint venture for property tax reasons on the West Coast?

Speaker 6

It's a good question. We have so far, the only partial interest sale we've done was the New York JV that we did back in late 2018. So the dispose we've done out of California and there haven't been a lot over the last couple of years, wholly owned dispose. We're just fee simple. We have talked about that, that obviously, if you sell 49% interest, you don't suffer the Prop 13 reset.

Speaker 6

The Prop 13 overhang or reset was probably a lot larger last year at this time when you think about where asset values were than There's been some correction there. So the spread isn't quite as wide as it was, but that is something that we have talked about that we might consider at some point.

Operator

Appreciate that. And then I'm curious whether you're starting to see a portfolio of premiums of old potentially swing to portfolio discounts With the financing markets becoming a little bit more challenging, and whether acquisitions start becoming more attractive to the ABB team there?

Speaker 6

Yes. I would say, the portfolio discount today is 100%, right? There aren't portfolios transacting today for the most part, Because the debt markets, so and what we are seeing is in general right now what's transacting our deals With assumable debt or deals of modest deal size $100,000,000 or $150,000,000 or less. So You're right. A year or 2 ago, the efficiency debt was so cheap and the efficiency of being able to buy a large portfolio, Put a lot of debt on that all at once.

Speaker 6

That's gone into reverse. I think the expectation is as the debt markets Stabilize, you will start to see some more sizable asset sales come to market later in the year. That's kind of what everybody is Waiting for I know there was a lot of talk at NMHC about are you going to go? Are you going to go? So but yes, I would say that I would certainly expect That this year, a much higher percentage of the total transaction volume will

Speaker 9

be 1 offs as opposed to portfolios. Appreciate that commentary. Thanks for the time, guys.

Speaker 7

Our next question comes from

Operator

the line of Rich Anderson with SMBC. Please proceed with your question.

Speaker 13

Thanks. Good afternoon. So back to Slide 11. Can you I got what you said about timing to John's question, but the kind of trend upwards in deliveries, does that Inform us at all about what you're thinking about in terms of the overall macro environment and the economy and potential recession. I assume you prefer to deliver into strength.

Speaker 13

So, can you comment at all on this image and what you're thinking broadly about What the overall landscape will look like by the time 2024 rolls around? Yes.

Speaker 5

Hey, Rich, this is Kevin. Start here. Others may want to join. So in terms of slide 11, just to sort of recap, it shows the timing of apartment deliveries from completing development And over 22 through 24. And that is really a lagged effect of what happened 8 to 10 quarters previously.

Speaker 5

And if you kind Step back and look at the last few years for us and tie it with a comment that I made in Austin's earlier question about kind of our typical start capacity. As We typically try to start somewhere in the $1,000,000,000 to $1,500,000,000 range. If you look over the last 3 years on average, I think we started about $700,000,000 or $800,000,000 when you include the $200,000,000 or so in 2020 $1,700,000,000 or so last year. So it's been a below Trend level of starts over the last few years, which with a lag has created in the last year or so And then probably for maybe the better part of the next year, a little bit of a below average trend NOI Realization from the lease up portfolio. So that's just sort of how the mechanics work.

Speaker 5

In terms of your question about what does this say, I think really Our lower levels of starts is more reflective of the volatility and the uncertainty of the environment over the last few years when we were looking to start jobs. As we look at where we are today, certainly the company is in a terrific financial position to start not just the 875,000,000 That we have in the plan for this year, which as an aside is a below average level of starts generally, but we are in a position to start a whole lot more Not only because our lower level of leverage today, which gives us debt capacity, so we are looking to lean in and increase development starts In the next few years, if the environment is broadly accommodative of our doing so and is a reasonably stable environment from a capital markets perspective And a macroeconomic perspective with respect to the likelihood for realizing decent NOI growth. So that is kind of Our general look at the macro environment, and our capacity is there to sort of ramp things up as we want to do so. As things stand in terms of what's already underway, We are well positioned just on the $2,200,000,000 of development under construction that's essentially paid for to deliver robust NOI growth, Irrespective of what we started in the next year or 2.

Speaker 5

So I don't know, Matt, if you want to add.

Speaker 6

Yes, Rich, but just to clarify, those deliveries, the way they're shown, that die is already cast. So they'll deliver into the market that it is at that time. We're not smart enough to say, yes, we deliberately plan Have fewer deliveries in 2023 because we thought there might be a recession 2 years ago. It's just playing out that way because we had less start activity a couple of years ago as Kevin said. But Those are all underway and we'll take those deliveries as soon as we can get them.

Speaker 13

Okay. Fair enough. And the second question is on the developer funding program. Can you talk about the economics of that relative to everything being done in house assuming a fee paid to the 3rd party developer and all the different Moving parts there. And if this program is sort of like a stepping stone for you to get into these markets more efficiently and that Over the course of time, you kind of would revert back to the more conventional approach to development longer term.

Speaker 13

Is that the way to think about it?

Speaker 6

Yes. Rich, this is Matt. I can respond to that a little bit and may want to as well. The way we think about that program is the returns are somewhere between a are somewhere between a development and an acquisition because the risk is somewhere between a development and an acquisition.

Speaker 2

Okay.

Speaker 6

So the developer is taking Pursuit cost risk, the construction risk, we're taking the lease up and the capital risk. And so the yields on that are A little bit less than an AVB straight up development, because we are paying fees and then there's an earn out based on how the deal does. But we think it's a good risk adjusted return. And I guess it does 2 things for us. 1, it accelerates our investment activity in the expansion region It does take time to get the teams on the ground and we're further along in some markets than others.

Speaker 6

Where we're doing the DSP so far has been more like say North Carolina where we just started there a year or 2 ago, not so much in Denver where we've been there for 5 years already. But we also view it as a supplement to our own development activity in the sense that it's a dial we can dial up or down More quickly and more opportunistically in response to market conditions and our own cost of capital. So even When we are fully established in these expansion regions, it may well be an additional line of business for us, but it may be a line of business for us that we're more nimble in terms Turning it up and down in our own development.

Speaker 3

No, it's well put. And the last piece I'd add, we definitely also see synergies within a market being able to talk 3rd party developers could be something they've just completed and they're looking to sell, could be a deal they're wanting to develop, but need a piece of capital, Right. And or places where they need a fuller capital stack and we have an interest in owning that asset long term. So that also helps the kind of flywheel Accelerate in these expansion markets.

Speaker 13

Yes, got it. Thanks very much.

Operator

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

Speaker 4

Good afternoon. Thanks a lot for taking my question. Can you talk a little bit about the gap in performance trends for your suburban portfolio relative to the urban? And then kind of connected to that, there's a Shartha says suburban supply growth is 1.2%, while urban supply growth is 1.8%. How does that compare with historical norms?

Speaker 2

Yes. So good questions. As it relates to performance in terms of Suburban versus urban as an example. Certainly, urban as we move through the pandemic took the greatest hit. So as we've continued to recover from that, we have seen stronger growth to date in terms of our urban assets, But they are recovering to keep in mind.

Speaker 2

To give you an example, like in Q4, rent change was a blended 5%. It was about 4.5% in our suburban portfolio, But just north of 6 in the urban portfolio. And I think that's a function of the decline and people coming back to the office slowly and steadily In various urban environments. As it relates to the urban, suburban supply mix, suburban Submarkets within our regions have always been difficult in terms of development. More nimbyism, local jurisdictions Concerned about impacting school districts, etcetera, etcetera.

Speaker 2

It's always been challenging. Coming out of the GFC, there was A little more of a renaissance in terms of the urban environment and all of a sudden economics for urban development made good sense And there was demand there in terms of millennials flocking to urban environments. So that's why you saw a significant pickup in urban supply Over the course of the last cycle, as you look at it today and where we are, from a development standpoint, almost Everything we're doing right now is suburban. But given some things that are happening in the urban environments, there will likely be at some point in time, opportunities to play Urban Development, supply is, right now, if you look at it from an economic standpoint, there's not much of anything that makes sense in an urban environment. So things may over correct there in some cases and there will be opportunities for us to play there.

Speaker 2

But the demographic wave that sort of As part of that is moving on at this point. So we'll probably be more selective than we were in the last cycle in terms of urban development opportunities.

Speaker 4

That's very helpful. And as a follow-up, you started a Canzo project in the quarter. How do construction cost per unit differ for this type of development Relative to a fully amenitized development, how do the runs compare? So essentially, how does the yields compare? And how has the resident reception been to the Canada development?

Speaker 4

Is that a product that will more likely to pencil in maybe just Less certain macro economy. Thank you.

Speaker 6

Yes, sure. This is Matt. I can speak to that one a little bit. We only have a little bit of it out there. The customer reception has been strong and the brand really started with a customer research insights that there are a lot of Customers out there who want a nice new apartment and don't we're over serving as an today that don't value necessarily all the on-site service, don't value all the amenities and the other pieces of the offering that an Avalon provides and a lot of Our goal is to be able to bring that offering in at a rent that is 10% to 15 below the rent of a new fully amenitized Avalon or comparable in the same submarket in the same type of location.

Speaker 6

I think so far the little we've done would suggest that the discount might actually be a little bit less than that. It might be more like 7% or 8%. And the costs, there's really there's savings in the upfront capital cost because you're not building a pool, you're not building a fitness center, Etcetera. And then there's also savings in the ongoing operating expenses because you're not operating and cleaning those spaces and then ultimately in CapEx because you're not remerchandising those spaces. The upfront hard cost savings, it's not I mean, we might typically spend 7,000 to 10,000 a unit on amenities at a community at a new build, maybe a little bit more than that.

Speaker 6

So you're saving most of that. And then on the operating expense side, the savings is at least a couple of 1,000 a door in controllable OpEx. So actually the yield winds up being about the same, But it serves a different customer and it kind of gets us further down the pricing pyramid, so it expands the market.

Speaker 4

Thank you very much.

Speaker 7

Our next question comes from

Operator

the line of Alexander Goldfarb with Piper Sandler.

Speaker 14

Hey, and thank you for taking my question. So two quick ones. First, Initially on the DPE, I think in response to one of the questions, you said that your intent wasn't to own the deal at the end, but then in A subsequent question you referenced, it's a good way to accelerate into the market. So maybe I misheard or maybe it's just a way of how you look at deals In different markets, maybe they're markets that you're looking to more grow and use DP to actually own the deals versus other markets where it's more of just an investment Because you already have an establishment, so just want to get some clarity.

Speaker 6

Yes, Alex, it's Matt. I think you're referring to we really have 2 different programs. The DFP, the developer funding program, those are assets that we own really from the beginning. We fund the construction and those we're taking into our portfolio day The FIP, the Structured Investment Program, that's the mezz lending program. Those are the assets that we're that's really about generating earnings And leveraging our capabilities and that's the program Ed was referring to where we do not expect to own those assets, although we're prepared to if we need to.

Speaker 14

So what's the difference, I mean, because you guys are pretty thorough in your underwriting and how you pick deals, why have 2 different buckets? It would seem like basically it's sort of the same bucket, you're assets that you'd want to own. So why the difference between the 2?

Speaker 6

It's a very different investment profile. The SIP we're lending $20,000,000 to $30,000,000 for 3 years, call it, at 11% or 12%. And then we're getting paid back. And we're actually Focused on doing that in our established regions where we're not necessarily looking from a portfolio allocation point of view to grow the portfolio, but we have the construction and development expertise to Underwrite it and to understand what it takes to do that kind of lending. The DFP is very similar to the way we would underwrite development Or an acquisition that we expect to own for the long term.

Speaker 6

And that's 100% focused on the expansion regions.

Speaker 14

Okay. Second question is On the Avalon Connect and the launching of Wi Fi and other connectivity, obviously, we're all familiar with what the White House said and Extra fees, having the regulators look at fees, etcetera, whether it's hotels or apartments, etcetera. Obviously, you guys feel pretty comfortable With what these programs, but do you feel like the regulators are going to look harder at these type of additional fees or your view is That there's already regulation covering this stuff and so it's already sort of covered under existing regulations.

Speaker 2

Yes. Alex, this is Sean. Happy to take that one and a good question. What I would say is 2 things. One is, it's hard to know exactly Where regulators might go in terms of what they're looking for, but this has been addressed by the FTC a couple of different times, including last year In terms of what's appropriate, what's inappropriate with telecom providers and people that are providing this kind of service.

Speaker 2

So at least now, I think it has been addressed. That doesn't mean something might not change in the future, but I think we all have sort of a playing field that we feel has been blessed by the regulators and we're all moving forward under that particular regime, I guess, to the way I describe it.

Speaker 8

Okay. That's helpful. Thank you. Yes.

Speaker 7

Our next question comes from the

Operator

line of Joshua Dennerlein with Bank of America.

Speaker 3

Yes. Thanks, everyone. I wanted to touch base on that Avalon Connect and furnished housing Same store expenses, I like what you broke out on Page 15. How should we think about the associated same store revenue from those programs?

Speaker 2

Yes. No, good question. Based on and I mentioned this in my prepared remarks as it relates to other rental revenue growth. But if you look at it overall, for 2023 on an incremental basis, roughly 60 basis points or so of our revenue growth associated with those various initiatives that I identified.

Speaker 3

So does that include Avalon Connect, First Housing and the labor efficiencies?

Speaker 2

Okay. And Avalon Connect and First Housing, there's no labor efficiencies in revenue.

Speaker 8

Okay.

Speaker 2

That's on the expense side.

Speaker 3

Okay. Yes, that makes sense. For the Avalon Connect and furnished housing, are those kind of One time bumps to same store expenses or is that something that kind of carries through on a go forward basis and You have offsetting same store revenue growth as well?

Speaker 2

Yes. No, good question. I mean, the expectation right now is that for both Avalon Connect and Furnace Housing, And also even on the labor side as well is that, we're going to continue to see Additional enhancements to those programs over the next couple of years. So you'll probably see them stabilize around 20, 5 or so. And at a high level, the way I think about it is, our expectation is that these programs overall will probably contribute about 50,000,000 incremental NOI to the portfolio, of which, if you without getting into detail on the accounting, about $18,000,000 is projected to flow through P and L for 2023.

Speaker 2

So we're about 35% of the way there. There's still a lot to come, but you will see some pressure on OpEx For the next 2 years, specifically for furnished and Avalon Connect until it stabilizes. But again, it's a highly profitable activity That is contributing meaningfully to earnings over the next couple of years when you look at it in aggregate.

Speaker 3

Okay. Appreciate the color. Thank you. Yes.

Speaker 7

Our next question comes from

Operator

the line of Sam Choe with Credit Suisse. Please proceed with your question.

Speaker 15

Hi, guys. I'm on for Tayo today. Just one question. I know your portfolio strategy is to invest in the expansion regions, but just wondering if The rent control and the regulatory, I guess, noise has contributed to any Strategic changes in how ABB is thinking about portfolio construction going forward? Thank you.

Speaker 3

Yes. Thanks, Sam. Short answer is, when we arrived at our portfolio allocation Decisions, a couple of years ago, it incorporated in the prospect of the regulatory environment. And so it continues to be a motivator on why we want to get our exposure in the expansion markets at a minimum for diversification as it relates to Various regulatory dynamics.

Speaker 15

Got it. Thank you so much.

Operator

Our next question comes from the line of Jamie Feldman with Wells Fargo. Please proceed with your question.

Speaker 16

Great. Thank you. I guess sticking with rent control, I mean, have you factored in at all any changes in your 2020 guidance? And where do you see the most risk Whether at the municipal level or state level?

Speaker 2

Hey, Jamie, this is Sean. That is probably a very long answer. What I would say is that Obviously, housing affordability is a significant issue in the country, mainly as a result of just a lack of new supply. So we continue, us, our peers in the industry and various industry associations educate both federal, state and local

Speaker 4

governments about what will work in terms of trying to

Speaker 2

ease some of the It's about what will work in terms of trying to ease some of the issues that they are hearing about from the electorate. So it's going to take continued efforts to make sure that people understand it. In terms of what might happen 2023, that's purely speculative at this point, and wouldn't be appropriate for us to necessarily go there.

Speaker 16

Okay. All right. Thank you. And then if I heard your discussion right, it sounds like you've got the $600,000,000 of unsecured, you plan to take those out And replaced with $400,000,000 of new unsecured. Is there a price point I mean, we'll probably see some volatility here on rates and pricing.

Speaker 16

I mean, is there A price point at which you have to think about other sources than the new $400,000,000 or maybe a comment on what do you think of pricing today or where it may head?

Speaker 5

Yes. I mean, I guess, Jamie, at some level, when you put together a capital plan, you always have that debate What your uses are and then how what's the most efficient source of capital to address those uses. And I think The budget we have today reflects a view that raising that $400,000,000 primarily through the issuance of additional unsecured debt Is today and is likely going to be the most cost effective source of capital for us. Certainly, there There could be other sources that might arise, but basically our choices are relatively straightforward. It's asset sales or common equity and common equity is Unattractively priced today.

Speaker 5

Asset sales could be a potential source, but as we've just discussed, there's less Transparency and liquidity around pricing in that market. So that's why we ended up with Unsecured Choice as our likely expected choice. And so That's we've got some time and room to figure that out. And we've got abundant liquidity with essentially nothing drawn on our $2,250,000,000 line of credit that gives us A lot of time and room to figure out what the right source of capital is to take that maturity out.

Speaker 16

Okay. That makes sense. And then how early can you take out the $600,000,000

Speaker 5

Well, the $600,000,000 consists of 2 pieces of debt, $250,000,000 in March and then $350,000,000 in December. And so they're bond offerings that typically can't be Prepaid materially before they are due absent some yield maintenance payment. So it's just part of our business that as an unsecured borrower, we typically have $600,000,000 to $700,000,000 of debt coming due in any given year. This is a typical year for AvalonBay, so it's not a particular concern. It's just part of the business Of financing our company and we typically have 2 pieces of debt that usually total about $600,000,000 So Kind of a regular way year from our standpoint where we got the first part coming in March and the second one in December.

Speaker 16

Okay, great. Thank you.

Speaker 8

Yes.

Operator

There are no further questions in the queue. I'd like to hand it back to Mr. Scholl for closing remarks.

Speaker 3

All right. Thank you. Thank you for joining us today, and we look forward to visiting with you in person over the coming months.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a

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