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spk13: All right. If I could have everybody's attention, please. We'll get things underway here. My name is Jason Riley, head of investor relations for Avalon Bay. I want to welcome you to the management presentation portion of our investor day. I just need to make a few quick announcements before we officially get this underway. If you need any assistance today, please feel free to reach out to myself or pretty much anybody with the blue name tag on. They should be able to direct you. You should have received hard copies of the presentation in the bags, but if you do not have a hard copy of the presentation, just raise your hand. We'll get one over to you very shortly. This event is being webcasted and recorded. If you are participating in the webcast and wish to submit any questions, please feel free to email IR at avalonbay.com, and we will do our best to respond to those questions. And lastly, this presentation does include forward-looking statements. There are a number of risk and uncertainties associated with forward-looking statements. And there is a discussion of these forward-looking statements on pages two and three of your presentation. And we encourage you to review that information.
spk37: And with that, I'll hand it over to Ben. BEN COLLINS- Thank you, Jason.
spk16: And really great to see everyone. A terrific turnout, which we Very much appreciate, and we're excited to spend the afternoon together. 30 years ago this month, Avalon Properties went public, and one of my favorite quotes from that period of time was from Dick Michaud, who was one of our original founders and our first CEO, who said the following about us being public. We want to be a great public company that happens to be in real estate, an evergreen company that is built to last. I firmly believe we've lived up to that objective and I'm thrilled and I'm honored, along with the team here today, to share our vision on how we're going to continue to evolve Avalon Bay for amazing success in the years ahead. At the center of our success over the last 30 years has been two key elements, two key ingredients, our purpose, which is creating a better way to live, and our evergreen culture, which is rooted in our core values spirit of caring, integrity, and continuous improvement. We wake up every day focused on that purpose, headed towards those core values. We'll continue down our path to success. And that purpose and those core values, that's what energized me, that's what energized our team, and it will keep us connected and aligned throughout the organization as we continue to grow. We're in front of you today as the country's largest public apartment company. with enterprise value north of $30 billion. We own and operate close to 300 apartment communities in 10 of the strongest regions around the country. 70% of our portfolio is located in attractive suburban markets, steady demand, limited amounts of new supply. And as we've grown over the last 30 years, we've delivered outstanding, really remarkable results for our shareholders. Total cumulative returns north of 2,000%. and an annualized total return of 11.2%. And as we've delivered for our shareholders, we've also importantly delivered for our other key stakeholders. Our residents, who serve each and every day, our associates, 3,000 Avalon Bay associates who make it all happen, and giving back to the wider communities in which we operate. Along this journey, we as an organization have build a set of unique and differentiating capabilities, what I refer to as our foundational strengths, that I believe we'll continue to benefit from and be able to continue to leverage in the years ahead. So I'm going to start with those, and then we'll build from there. First, we are an organization with deep roots and a strong commitment to operating excellence and operating innovation. We've substantially evolved our service offering to residents over time. We've substantially evolved our service offering to residents over the last five years. And it's a core part of who we are. Second, our portfolio quality is unmatched. In addition to being in the strongest regions in the country, we're unique in that we've developed over 50% of our portfolio ourselves. No one else comes anywhere close to that. And it's allowed us to tailor those communities, evolve what we build over time to maximize their performance. Brings me to our third foundational strength, our development platform. And our development expertise and our development execution is really unrivaled. And it's been and has been and will continue to be a powerful driver of earnings and value creation going forward. And then fueling all this growth has been our balance sheet and our resolute commitment to maintaining one of the strongest balance sheets in the entire REIT sector. So those are four foundational strengths to call out for you. And I really do believe we're going to continue to benefit and leverage them in the years ahead. But on their own are not enough. We can't stay static. We need to continue to evolve because the environment around us has and will continue to change. We need to meet the elevated expectations of our customers. we recognize the opportunity to take advantage of rapid advancements in technology. We recognize the need to shift our portfolio, given population and demographic shifts that are underway, in addition to mitigate against certain risks. All of which brings me to our key objective for today, which is to leave you, our shareholders, with a deeper understanding of how we're going to continue to evolve, and in certain areas, transform Avalon Bay to deliver superior growth in the years ahead. We've structured our time today to go deep into four strategic focus areas. Four strategic focus areas that we believe will deliver this superior growth. And the beauty of it is each one of these strategic focus areas stems out of one of our foundational strengths. Our operating model transformation, our portfolio optimization initiatives, our development growth engine, and our growth-oriented balance sheet. That's what's going to be driving our success and driving our growth going forward. So let me set the table on each one of those a little bit further. At the top of our list today, top priority for us, we want to showcase our leading operating platform, our operating prowess, and the details behind our operating model transformation. Our vision for the future of operations is to deliver seamless, personalized experiences made easy, and made easy for both our customer and our associates. And on the customer side, just to translate that in my own words, we need to meet the customer where and when the customer wants to be met. And for most customers, most of the time, when you think about the rest of our consumer experiences, that increasingly means a mobile and digital-based experience. And for the department industry and for Avalon Bay, also increasingly a self-service-oriented model. So to accomplish that, we've had to go through and re-envision every step of the customer journey. and figure out ways where we can digitize huge components of that journey by developing new suites of digital tools. Looking forward, operating leadership in my mind is also going to mean leading in centralized services. And this is an area where Avalon Bay has been a longstanding leader in the sector. We're the first centralized service center in the sector going back to 2007. And we've been evolving and refining it ever since. And as we look forward in centralized services, Those services are gonna be increasingly powered by processing large proprietary data sets through the use of automation and through the use of artificial intelligence. Also looking forward, operating leadership is gonna increasingly mean tapping into and benefiting from our scale. And we're utilizing our scale in many of our sub-markets to shift our operational model to what we refer to as our neighborhood approach. We now have teams of associates handling five to eight assets per neighborhood, which is allowing us to optimize our delivery of services to residents while also driving meaningful operating efficiencies. Those are the three components of the operating model transformation, the digitization, the leveraging of centralized services, and the neighborhood approach. What we're most proud of is that operating model transformation is delivering tangible results to the bottom line, and results that I'll stack up against any of our peers. We are well on our way towards and really outpacing our progress towards our target of $55 million of NOI uplift from these operating model transformation activities. And we're excited today we're taking it up another level. We're taking it now to $80 million that we can achieve over the next couple of years. So that's a lot of time for me to start on operations, and we're overweighting our time today on operations as well, given how critical we believe it is to driving our future success.
spk37: We spent a couple minutes on our other strategic focus areas.
spk16: We moved to portfolio optimization. I want you to leave today with a deeper understanding of why we've made the conscious shift to the suburbs. How we're going about shifting even further from 70% to 80% of our portfolio in those markets. I want you to leave today with a deeper understanding of the why behind our expansion market growth. Why we're headed there. How we set the target for 25%. and how our growth activities in those markets are different than our peers. We're also going to spend time today on the reinvestments we're making in our existing portfolio with some very accretive returns. So all of those portfolio optimization activities are another key component of optimizing our future growth. Third is development, and we are the industry leader hands down. It's a long-standing capability, very difficult to replicate, Unique not just within the multi-family sector, but fairly unique within the wider REIT universe. I want to make sure you lead today better understanding how that development leadership translates down into earnings and value creation. In the near term, we're going to have the benefit of development NOI from projects in lease up, which will be a nice lift over the next couple of years. And new development starts no doubt are challenging today and could be challenging for a period of time. This is a capability that we invest in to be able to harvest value over time and throughout cycles. We're also fortunate to be tapping into this capability for new sources of growth, and we'll spend time with you today on our developer funding program and our structured investment program. I want to stop for a minute here, and I want to connect our development leadership with our operating leadership. We have a very powerful flywheel that exists there, and really one that only we have. We develop our assets to own and operate them for the long term. And what it allows us to do is have our teams together, focused on how we're going to evolve our product to respond to customer feedback, how we're going to evolve our product to minimize future operating expenses, to minimize future capital expenditures, and to evolve our product to facilitate the future of operations. So to give you one timely example, think about self-guided touring, a key experience, particularly going forward. Our operating teams, our development teams, our technology teams, they're all working side by side today to reimagine both the technology part of that experience and the physical part of that experience to be able to deliver a seamless experience to our residents and prospects. Those are the types of investments that we're making today to optimize our future growth. Our four strategic focus areas, our balance sheet, and Kevin and the team are going to lift the hood today. I'll give you a deeper look at our capital allocation frameworks, how we're thinking about capital allocations, uses, sources. Particularly in today's environment, we remain very focused on adjusting our capital allocation activities based on changes in the market and changes in our cost of capital. We feel like we've done that well over the last couple years, and it continues to be a focus going forward. And while it may not be today, I am confident over the coming years, we will be able to step into attractive opportunities where we can both use our balance sheet strength and flexibility and tap into our strategic capabilities in a meaningful way.
spk37: So here's how it all comes together.
spk16: It goes back to our purpose, our culture, drawing on and benefiting from our key foundational strengths, recognizing the need to continue to evolve, and then focusing on four key strategic focus areas that are going to drive superior growth. That's what we're excited about. That's what's going to determine our future success. We've structured our time today to go deep into each one of these areas. We also naturally want to make sure we spend time engaging with you. And we've structured in Q&A throughout the day. Very excited, thrilled on where we're headed as an organization. And let's dig in. Look forward to digging in with you. And we're going to start with our first strategic focus area, our operating model transformation.
spk37: I have Sean and team come up on stage. All right. Thank you, Ben.
spk22: Good afternoon, everyone. Thanks for coming to our investor day. Appreciate that. So I'm Sean Breslin, the Chief Operating Officer for Avalon Bay, and I've been with the company for about 20 years. With me today, Rajiv Verma, who's our Senior Vice President of Revenue Management, who's been with the company for 25 years. Lisa Bongart, Senior Vice President of Property Operations, who's been here 18 years. And Ruka Sassi, who's the rookie of the bunch, he's been with us for four years. He's the Senior Vice President and also our Chief Digital Officer. So we're going to cover several topics this afternoon. First, I'm going to share a little bit about our track record of operating excellence and innovation and some of the key capabilities behind it. Then I'm going to provide sort of a high-level strategy on the operating model transformation that Ben referred to and some of the key elements associated with it. I'm going to then hand it off to Rajiv and Lisa. They're going to go deeper into very specific elements of the transformation so that you get a very real understanding of what we're actually doing and the impact across the business. And then Rukas is going to share a little bit about the substantial technology capabilities we've developed over the last few years and how it's not only enabling what we're doing today in terms of our operating model transformation, but how we expect it to be a critical sort of differentiated capability for us in the future. So with that, why don't we get started. So as it relates to our track record of operating excellence and innovation, It's really a combination of two things that makes that happen. First is our culture, which is highly engaged associates with a focus on the customer, a real disciplined approach to innovation, and a significant drive for results. And our capabilities. Capabilities include our corporate functions that lead with data and analytics. Our regional and onsite teams are really focused on delivering experiences that customers value. And then our centralized services team. is really helping to drive efficiency across the platform. And so what I'd like to do is share three examples with you as it relates to how the culture and capabilities work together in a collaborative way across the organization to drive business results and then share a few metrics associated with those outcomes. So the first is how we manage revenue. Revenue management, driving revenue out performance. Starts with our market research team. They forecast demand in our various markets and sub-markets based on job, wage growth, and other regional factors that we've learned about over time that drive demand. They also forecast supply in conjunction with our local on-the-ground development and construction teams so we understand what's going to be delivered in the coming weeks, months, and quarters ahead and how that may impact performance. The output of what they produce is called a parameter ratings model, and every one of our assets is classified within a framework on sort of a one to five scale from what we expect to be either a weaker submarket going forward up to a super strong submarket moving forward. That is all fed into our revenue management platform and their models, and it really helps dictate move-in pricing. So our revenue management teams absorb all the market research information in terms of how we expect the sub-market to perform. They have a lot of great data about our assets and how they perform through time in stronger cycles and weaker cycles. And that helps calibrate move-in pricing, whether we should be driving harder on move-in pricing or in a weakening environment or weaker sub-market, should we be yielding on move-in pricing and maybe extending lease duration to protect occupancy. As it relates to lease renewals, Our data science team has created renewal optimization models for every single asset in the portfolio. Those models reflect both property-specific information in terms of how an asset performs through various times in the cycle, through months of the year, the seasonal changes in certain markets. It also reflects certain customer data in terms of their engagement with us through their residency so we have a better sense of their renewal propensity The combination of those property-specific factors and the customer factors work together to deliver a renewal offer to a customer we think is the right one. Of course, all that is supported by our regional on-site and centralized associates who provide invaluable insights. As it relates to our on-site teams, they're providing a lot of great information in terms of what's happening on the ground in the sub-markets, what are prospects saying as they come through the door when they tour our product, Are they reacting to price? What are they saying about concessions in the local market? That comes back through our revenue management teams. And then our centralized services team, particularly our centralized renewals team, they provide not only some anecdotal feedback but hard data about what customers are doing and what they're saying about their renewal offer so we can day by day and week by week continuously adjust our parameters to try and drive renewal acceptance. We record all the calls. We have all the email data. we can see the trends in consumer sentiment and how that may impact future renewal acceptance. And so when we think about driving revenue, it's meticulously managed and measured, monitored across our teams on a daily, weekly, monthly basis. Our teams have access to multiple dashboards that provide tons of information, not only just snapshot data, but predictive data in terms of not only where is occupancy today, but where do we think it's going to be three weeks from now, based on availability, based on historical lease breaks during this time of year, what's happening with renewal acceptance, and not just renewal acceptance overall at the portfolio level, but at the various cohorts. There's gain to lease, there's loss to lease, people on a premium to market, people on a discount to market. And so they measure it at the cohort level so we understand exactly what we might be tweaking in a particular asset, particular floor plan to drive renewal acceptance in a different way. And most importantly is we continuously benchmark our performance through time using historical data from third-party sources. So in the past, we've been doing this for more than 15 years. We've used Reese, we've used Axiometrics, we've used CoStar and others. I'm sure a lot of the data sources that many of you reach out to to get information on what's happening in the market. So for our teams, we continuously benchmark our performance against those local competitors in our sub-markets to determine whether they're outperforming or underperforming by how much And our teams, their incentive compensation is tied to it, both in absolute and relative terms. So it's a real focus for our teams. So the second example of the culture and capabilities working together is how we think about customer satisfaction and how it drives business value. So first, we measure customer satisfaction at multiple touch points from the time someone moves in to the time they move out and multiple touch points in between. Renewals, service interactions, various others. Our teams have access to dashboards that provide good information about the scores that people are giving us in each one of those touch points. But most importantly, what they get is the insight from the customer about why they gave us that rating in the first place. I didn't like this service interaction because of something that happened. So it's actionable for our teams. They can decide what to do to do it better next time. And what's important about this is Customer satisfaction really does drive business value. We use NPS, or Net Promoter Score, as our primary customer metric. And we know that promoters are five times more likely to renew than a detractor. Five times. That's huge. And so for us, we know that delivers business value because they tend to stay longer, they pay higher rents, there's no vacancy costs, there's no turn costs, there's real economic value there. We also know that historically between 15 to 20% of our new leases have been sourced by either referrals or from repeat customers. That's zero marketing costs. Again, zero turn costs. All that drives economic value. So if you wonder about why we think it's important to measure that, that's an important reason. And then the third example of the culture and capabilities working together to drive business value is our centralized services function. As Ben mentioned, we've had a customer care center since 2007. I know centralization has become a hot topic in the last couple of years. But for us, I mean, we've been doing this for more than 15 years. That's refining the efficiency of that organization, expanding the suite of services that they execute. There's about 230 people that are primarily focused on back office transactions. It's a very highly disciplined operation. Everything is measured down to the minute. You associate scorecards. Call quality, queue time, handling time, everything else is measured. They're very effective at it. They're very good at it. As Lisa will talk about here in a few minutes, we are going to pivot some of our resources there to continue to focus on or pivot towards front office transactions or interactions with customers as opposed to just back office. And our centralized renewal team is an example of that, and Lisa will share a little bit more about that. But we think we realize, you know, continuous ongoing benefit from the customer care center is referred to it as. About $15 million per year in incremental benefit as compared to those transactions being executed either on site or somewhere else. So recurring annual benefit of $15 million. Again, since 2007, that's a pretty significant number. So with that, you might say, that's great, John. I understand all the information. It's helpful. But what has that actually led to in terms of business performance? And so I wanted to share kind of four metrics that I think are representative of it so you have some good takeaways as it relates to what is actually delivered. First, we are a leading brand as recognized by both associates and residents. As it relates to associates, high engagement scores drives a lot for the business. It drives our customers in the regions and on-site wanting to deliver those experiences that customers value. They're passionate about it. It really matters to them. For the corporate functions, a lot of people you hear from today, as an example, they really do lead with data and analytics, and you'll see that represented in what we talk about. And they really want to drive business value. A lot of people have been here a long time, and it really does matter to them. As it relates to customers on-site, as I mentioned earlier, there's significant business impact from having satisfied customers. We've been the number one rated REIT for online reputation for more than five years running. Again, that's important for all the reasons I mentioned earlier. We continue to maintain that leadership. Second is the second metric, revenue outperformance. So as I mentioned earlier, we track revenue versus the local comps and have done so for more than 15 years using a variety of the data sources as I mentioned. And what we have observed through time, regardless of the data source that we use, is that when we bring our platform and our capabilities to a market and a sub-market, we typically generate about 70 basis points of outperformance in terms of revenue growth as compared to simply just owning the asset, in that market. You buy the asset, you own the asset, you get some return. We bring our platform, our capabilities, we're enhancing that by about 70 basis points. It's been pretty consistent over time. Third is just driving the efficiency across our platform. Just even in the last five or six years, we've been able to increase the efficiency of the platform by about 20%. And what you're going to hear about today, we continue to expect to drive additional efficiency across the organization as a result. And then the last one, maybe most importantly to the audience here, on a relative basis, is how we think about margins, particularly related to our closest peers. And we think about it a little bit differently than maybe some of the peers. So I want to make sure I walk through this and I'm clear about it so that you understand how we think about it. Because there are differences that are important to reconcile, and we try to walk through that. So if you really start with all the revenue that we generate from our portfolio of communities across the country, First thing that you deduct is all the property level expenses that are allocated to the community P&L statements. So that includes none of the on-site office associates there, the on-site maintenance associates doing the work. There's the turn cost for turning the vacant unit. There's the plumbing break, all the things that happen at a community and all the P&L costs. That's the first piece of it. Second piece is expense overhead. That includes like the regional property management teams, the support services that we have at our corporate office. It includes G&A. And importantly, what it does include is some costs that are in expense to overhead for some companies that are allocated to communities for others. What does that mean? That means like technology licensing costs, lead management costs for call centers, things of that sort. Some companies allocate that to the property or asset P&L. For other companies, it's embedded in expense to overhead. So if you're trying to do an apples-to-apples comparison, you've got to account for both. The third piece of that is recurring capex. When we think about managing and maintaining a portfolio, bar size, similar to us and our peers, you have to think about the recurring capex because those costs are treated differently. And what am I talking about? I'm talking about carpet and tile in the unit, countertops, various appliances, HVAC condensing units, things that occur every month, every week, every year. I'm not talking about the massive redevelopments of changing the facade at a high-rise building or something like that. We take a look at sort of the trailing five-year average of that sort of steady recurring capex that occurs every year for every company, and we account for those costs because for some folks, they capitalize those costs, and for other companies, some of those things are expense. So again, to do apples to apples, you really want to account for all those costs, and that's how we think about it at least. So I think if you look at all the costs associated with managing and maintaining a multifamily portfolio, regardless of whether allocated across the P&L, we think we're one of the leading REITs as it relates to all in margins or fully loaded margins as we refer to it as. Hopefully that gives you a sense of the comparison and there's different ways to approach it, but that's how we think about it in terms of capturing all of those costs. So with that, I do want to, before handing it off to the team, just give sort of the high-level strategies that relates to our operating model transformation and some of the key elements of it that the team's going to go into in more detail. So as Ben mentioned earlier, our sort of North Star vision of the future for our operating model is seamless, personalized experiences made easy. That's what we want our customers to feel about us when they engage with Avalon Bay. And that's how we want our associates to think about it in terms of how they use technology, how they engage with customers. and how they do their work. So how do we achieve that? So first, we've mapped out every single journey that a customer experiences with us for the time they search for an apartment home, they may apply for it, they move in, they have a service interaction, maybe a lease renewal, and then they move out. We're building or renting, as Rukus will go through in a minute, digital experiences to address every one of those touch points, every one of those journeys, so that a customer can engage with Avalon Bay not just when the office is open, but 24-7, 365, those digital experiences are available to them to do all the things that I just mentioned. And so the digital experiences will account for a lot of what people do with us every single day, but they're not perfect. They don't account for all the edge cases or all the unique circumstances that a customer may experience. And when we see the future, what we see is that next layer of defense or customer support will be AI-enabled support. whether it's chat, text, email, voice, et cetera. And we expect that the AI is getting pretty darn good, and Rukus will talk about that. It can handle a lot of those sort of edge cases that come in from customers. But it's not perfect. Nothing will ever be perfect. So we do need to have human intervention when it's required. And our new organizational model, Lisa will get into, reflects a combination of both those centralized service associates and our on-site associates. The primary layer of defense for the first line of questioning will be those centralized associates for all the customer interactions that are transaction-based. So they're working through the digital flow, they get stuck somewhere, they go to the AI for help, can't quite get there, centralized associates. But there's no substitute to having an on-site associate available to meet with someone at some scheduled time when they need it. Sometimes it just has to happen, and that's okay. And, of course, all of this will be powered by a robust technology and data layer that Rukus is going to get into in more detail and tell you a little bit about what we're doing there and, again, those capabilities that we've built. So with that, the team's going to go deeper into it. We're going to start with Rajiv. He's going to talk about some of those digital experiences, what we're doing there, before we hand it off to Lisa. Rajiv?
spk36: I'm going to go deeper into three of the experiences that Sean referenced earlier. Let's start with when a resident renews their lease. This is a great example of how we use our homegrown machine learning models trained on our proprietary data to optimize renewals. Our models use five components. The likelihood to renew are based on several factors like length of stay, apartment, and lease details. The renewal price elasticity. Turn costs like vacancy costs, the hard cost to turn an apartment. what residents are paying right now, and what we expect moving rents to be in the future. The models do a really good job of predicting renewals accurately. In fact, 65% of our residents accept these offers, and we experienced a 2% lift in renewal rents compared to the way we were doing things before. We're not done yet. In the future, we believe we can get even better renewal performance through better predictions based on the behavioral data that we gleaned from our digital apps. So now we have the calculated renewal offer. Our residents can view these offers on our digital app for renewals. It's easy and a few taps on the phone. To understand why this matters, before we would call our residents, we'd email them, we'd send them hard copies of their renewal offer, They could only get in touch with us when our on-site leasing offices were open. Now, it's all about self-service. They can view their offers, customize their lease terms, generate their own lease, sign it, and if they need to move out, they can give their notice to vacate on our app. All without an associate's help. Now, if they need help, they can ask for the app and our onsite and centralized teams are there to support them. In the future, actually a little bit about the results, 75% adoption on the app, meaning seven out of 10 residents that accepted their renewal did so online, which is terrific. In the future, we believe that we can nudge even higher renewal conversion pivot on offers when market conditions change, and upsell add-ons like parking and storage, lease break insurance, renter's insurance. More to come on that. Speaking of parking, we're launching our parking experience at the end of the year, which is going to drive parking revenue even further. Managing parking is very labor-intensive. Our associates are dealing with static maps, trying to find a spot for our residents, selling them what it costs, and we're trying to make it self-service. Just like picking a seat online, when you book a flight, our residents can pick a parking spot on an interactive map and add it to their shopping cart. We'll even take care of access controls digitally instead of dealing with hang tags and stickers, fobs and cards, all of which is going to reduce the time that our associates spend on it. It's going to make it easy for our residents. We're projecting a meaningful increase in incremental NOI from parking, around $10 million when fully deployed. In the future, we can generate even more revenue by selling different kinds of parking products and durations, like single, tandem, EV, premium spots, by the hour, daily, instead of just monthly, based on the information and data gleaned from our apps. The last journey that I'm gonna highlight is maintenance. Our mobile maintenance app allows our residents to enter a service request through their phone, really easy. They can contact us and they can stay updated on progress all through their digital device. For associates, they can manage work on the go, they can access the apartments that they need to service, and they can keep our residents updated in real time. As far as the results, we have 80% adoption on the app, which is terrific, and we're expecting a 15% savings in labor costs based on the efficiencies generated from our app. We now have a better idea of what work is being performed, who is performing that work, and what the status of that work is throughout the day, which is going to allow us to further optimize labor scheduling in the future. With that, I'm going to hand it over to Lisa to talk more about our organization model.
spk05: Thanks, Rajiv. Okay, well, our organizational model is evolving to reduce payroll costs, and we are doing that two primary ways. So the first is with centralization. Now, centralization is a bit of a buzzword these days, but for us at Avalon Bay, centralization is about for our centralized associates They are supporting our prospects and our residents in any one of our digital journeys. If the AI can't support them, it goes to our centralized associates to help. The second way we're doing this is by spreading our associates across larger numbers of assets, or what we call neighborhoods. So let's start with centralization first, and we'll talk about our centralized lease renewal team. Now, yes, Rajiv just said we have a new digital tool that handles renewals, but he also said we don't have 100% adoption. So our centralized team is there to help our residents with their renewal. Now, think about it. In the past, our on-site associates handled renewals, but they didn't just handle renewals. They did move-ins, they did prospect tours, they handled customer service issues, noise complaints, move-outs, and oh yes, I have to make sure I close out the renewal too. Well, now that we have this digital platform, earlier this year, we were able to transfer the primary responsibilities of renewals from our on-site associates to this centralized team. And this centralized team is all about closing the renewal sale. They proactively outreach to our residents who have an outstanding renewal, they answer questions, they negotiate, they are focused on getting that renewal sale. The impact of this is we are improving our revenue performance, we're getting increased efficiency, and we're getting more data than we had before. Using the performance management tools of our Customer Care Center, or our CCC, we now have more behavioral data, understanding of what the customer is thinking, than ever before. Think about it. Now, anytime we want to hear the voice of the customer, we can listen to one of any of the recorded phone calls between our centralized team and our residents. So, the results of this? We have been able to reduce three on-site associates for every one renewal specialist on our team. And this is just the start. We think we will continue to improve our efficiency as our AI gets better and as this new centralized team really starts to hone their craft. So let's move on to neighborhoods. So historically, our properties were managed one property at a time. You had a distinct management team and distinct on-site field associates that serviced that property. Sometimes, if we had two properties close to each other, we would run them together. They would be managed by the same manager, and we called those a pod. Well, now, since we've launched our neighborhoods, we have been able to scale our associates and achieve a 15% FTE reduction. So how do we do this? How do we create a neighborhood? Well, here is a map of our LA portfolio. You can see how our portfolio density strategy really sets the foundation. You see these regional clusters forming the base of our neighborhood. So you have to have the portfolio density but then we also need to layer in these additional digital tools. So let's start with the resident self-service. The residents are now serving themselves, they're happy to do so because they can do what they want, when they want, and they're taking tasks out of the hands of our associates and freeing up time. We also have better management tools. Now our managers can have insights across multiple properties, so we can scan or spread the managers across more properties. And this is the same for our frontline associates. The mobile tools they have make them work more efficiently as well. So if we look at a specific example, we go further into LA, let's look at our Ventura neighborhood. This is a neighborhood that is operating now. Historically, this neighborhood was managed with a couple of pods and three standalone communities. By deploying these strategies, this neighborhood achieved a 14% FTE reduction. So now I will turn it over to Rukus, who's going to talk about the technology backbone that's behind all of this.
spk37: Thanks, Lisa.
spk11: The entire multifamily industry is solving for similar challenges, trying to drive efficiencies, leveraging technology, and we're no different. But what is different about us is our approach. And I'll spend the next several minutes walking you through it. Our strategy is made up of three key elements. At the heart of it is harvesting value from data. Second is our modern and flexible technology platform. And third is driving artificial intelligence and automation throughout the organization. Now to execute on this strategy, we made an intentional decision to bring key capabilities in-house. We'll unpack each of these capabilities, starting with the organizational capabilities, and we'll end up with data and AI. When I joined the organization, this amazing organization, in 2019, and we proceeded to define our North Star, it became clear that we needed specific capabilities that really weren't native to Avalon Bay. So we made a decision to bring those capabilities in-house as opposed to outsourcing them. To think holistically about the customer experience and the end-to-end journeys, we brought in product management and user experience design. To build the foundation of our platform, Aligned with our strategy, we needed software architecture and engineering leadership. We also decided to expand our data science capabilities given our emphasis on data. The platform that we're building emphasizes capturing data and minimizing both our technology switching costs and as long-term asset holders, our long-term software maintenance costs. This allows us to own our destiny and gives us flexibility to really build, buy, or rent technology solutions as we see fit. In other words, we're not beholden to industry solutions or prop tech startups that typically price their products by the unit. Let me walk you through the platform with some examples of how we create value from it. It starts with the foundation that we've built on the cloud. This allows us to build and deploy software with speed, manage our server utilization, and spend appropriately. Next is our API and database layers. This layer allows us to easily integrate with third-party solutions and minimizes the disruption on our internal business processes and overall operations. At the top, we have our digital experiences. Now, this first example, which is search, is an example of an experience that we built. As a result, we have direct access to customer behavioral data, which we can leverage to enhance personalization to drive the business results. Imagine a customer who's searching for a two bedroom apartment and receives a recommendation from one of the neighborhoods that we just talked about. The second example is our digital maintenance experience. This is also an example of an experience that we explicitly rented. This solution integrates into our ecosystem using our APIs. And we have access to transactional data which we leverage to optimize tech scheduling, tech routing, and preventative maintenance. Now this platform scales to support the entire portfolio. And every new asset that we bring on comes at no incremental cost. Which brings us to data. We believe that data is the fuel for all our automation and AI efforts. And we believe that, and when we think about creating value from data, there are really four main categories that we consider. First is customer interactions. Here we think about engaging with our customer 24-7, 365, via any channel they choose to engage with us. Think our customers. AI leasing assistant, Sydney. The second category is what we refer to as decision support. Here we think about aggregating our large data sets to drive insights and provide recommendations for improved decision making. Think our machine learning models that optimize renewal pricing. The third category is associate and enterprise support. Here, with the rise of generative AI, we believe there's a significant number of opportunities for us to drive efficiencies using this technology. Think Avalon Bay GPT. And lastly, back office automation. Here we think about automating manual and highly repetitive tasks, leveraging technologies like robotic process automation to drive efficiencies. Now, as I wrap up, I'd like to leave you with a sneak peek into what we're working on with Voice AI in partnership with one of our PropTech partners in the customer interactions category. Take a listen.
spk06: Hi, I'm Sydney, a leasing agent for Avalon Quincy. How may I assist you today? Hi, Sydney, this is Gabby. I'm looking for one-bedroom apartments and I wanted to know if you had any apartments with washers and dryers. Hi, Gabby. We do have one-bedroom apartments available for immediate move-in, all equipped with washers and dryers. The rent ranges from $1,875 to $1,960 per month. Would you like to schedule a tour to see one of these apartments? Yeah. Can I come in tomorrow at 10 a.m.? Great. You are confirmed for your in-person tour tomorrow Sunday, September 17th at 10 a.m. I will send a confirmation to your phone number, 315-219-4660. Is there anything else you would like to know about the apartments or the community? No, thank you. Oh, actually, is there parking available and is there a fee? One moment, please. Yes, we do have parking available in our on-site garage. The cost is $70 per vehicle per month. Is there anything else you would like to know? No, that's great. Thank you. Great. If you have any other questions in the future, don't hesitate to ask. Looking forward to your tour tomorrow. Have a wonderful day.
spk11: Imagine that dialogue in my voice. Now, we believe there's a lot of promise with this technology. And I am... and the entire company. We are excited about our approach, the efficiencies, and effectiveness being delivered as we continue to evolve. And with that, I'll hand it back to Sean.
spk22: Great. Thanks, Rukas, and thanks to everyone up here for walking everybody through several of the things we're working on. One thing that I thought I would try to share is that the team went through very, very select sort of targeted areas in terms of things that we're working on and give you a little bit of a glimpse into the future in terms of what may be underway. But it is a very, very much a subset of things that are underway within a short period of time that we have with you today. There has been a lot that we have done to innovate our business over time, whether it goes back to 2007 in our customer care center. We stood that up and started processing transactions that way. We're the first in the industry to do that. 2018, we were the first to adopt AI for lead management purposes with our leasing assistant, Sydney, who is now going to become our voice AI assistant in many ways, and a lot of other things. So there's a lot going on in the company. Innovation is part of the DNA, and we're always looking forward to what's next to continue to drive value for the business. So with that, most of what you heard today is representative of what we call Horizon One Opportunities. Those are initiatives or activities that are underway that have a business plan, business owner, there's budgets, deliverables, timelines, and various other elements of a real focused effort. And so most of what you heard is representative of that. And of that activity, we expect to deliver incremental NOI on an annual basis of $55 million. We expect to be about halfway there by the end of this year, so realize about $27.5 million. with the balance to come by year end 2025. Now, as you look forward into Horizon 2, Horizon 2 is really representative of things that are in discovery or R&D, if you want to think of it that way. And so some of the topics that were referenced today represent that. Rajiv talked a little bit about parking, what we're doing with parking and our parking experience, which is going into test like this year. Ruka has talked about some of the automation efforts at our customer care center and elsewhere. how we're going to be leveraging AI to drive more efficiency. So those things are all in test and discovery. And based on at least preliminary sizing, we think that I'll deliver an incremental roughly 25 million over the next few years. So if you look at it in total, it's about 80 million of incremental NOI that we'll be delivering to the bottom line. And it really is in two tranches. So again, the first horizon over the next couple of years by year end 2025, and then the balance of it over the next few years. But what's important to understand about what we're doing is regardless of how you think about what we've done in the past, whether it's customer care center or lead management or what we may have done in the last couple years as it relates to digitalization of processes or we're thinking about AI, is really importantly that innovation is really a critical element in the organization. It's reflective of the culture of continuous improvement as Ben referenced earlier. And so what you'd expect from us going forward is here's what we're doing today, here's what's coming, but there will always be things that we're thinking about to drive value from the business, as well as serving our customers as best we can because of the business value that we derive from it. So with that, we're going to pause. We're going to take some questions for maybe 10 or 15 minutes before we go to the break. And Jason Riley over there and Matt Grover, who's on that side, have some mics. They'll walk around and hand mics out. If you don't mind, wait to ask a question until they bring a mic. so that we can hear it as well as webcast audience can hear it. And we'll do that for 10 or 15 minutes. So we've got one started over there.
spk29: Hey, it's John Kim from BMO. On your margin comparison versus your peers, the one item that you were underperforming was on OpEx by 180 basis points. And I'm wondering if it's because of anything that's one time in there or repairs and maintenance that you expense versus your peers that might capitalize that or any other items that you've noticed in that number.
spk22: Yeah, good question. Some of it is simply just P&L geography. And that's one of the reasons we look at it on a fully loaded basis is historically there are costs that we allocate to the communities that others do not allocate to the communities. And so those are representative of, for example, technology licensing costs, which can be substantial. lead management costs, our customer care center, as I mentioned, we allocate that back to the communities. And a number of peers do not do that. So I think you really have to look at all of those components together to get to a fully loaded margin, as opposed to just looking at the pieces. So what we try to do is account for all of that. And you could try to reconcile it within each category, which is a little more challenging to do. So that's why we take the entire sort of ecosystem of costs and put it all together.
spk37: Good question.
spk34: So I'm just curious on the tenant application process. Is that outsourced or done in-house? And also, how do you localize the algorithm for markets that are known for having kind of hype at like LA, Atlanta?
spk22: I got the first part, which is the application. What was the second part again?
spk34: How do you localize the algorithm or customize the algorithm when it comes to markets where bad data has always been a problem?
spk22: Yeah, good question. So why don't I start, and then others can chime in. But as it relates to the application leasing product, we did build that ourselves. We've had great feedback on that, a process that used to take 45 minutes, Lisa, by our on-site team to process an application. now is done in less than five minutes. And a good percentage of the applications, more than half now, are done without any associate interaction. And then in terms of the sort of localized effort, it really depends on the market. And our data science team has what we call a screening cut point as it relates to every single asset in the portfolio. And I can tell you the screening criteria of what we do for an asset in LA is different as compared to an asset in Boston. And that relates to different tools that we use to screen out for fraud and various other things. So that is not done at the local level. We don't want judgment being applied to that at the local level. We want the data that we've aggregated from the assets and tons and tons of application volume over the years to drive those cut points and those decisions as opposed to the human judgment on the ground.
spk33: Hi, Steve Sackweber for ISI. I know Down the road, you'll probably get to sort of the guidance or outlook for 24. But I guess I'm just curious, when you sort of think about some of the savings, but going into next year, a more difficult operating environment with kind of revenue slowing, and I think there was a slide talking about elevated expenses growth next year. Like, how does that all sort of tie into the $27 million of savings, and how much of that savings is revenue, and how much is expenses?
spk22: So you win the prize. I knew there would be somebody in the first five minutes who would ask about 24 guides before we got too far. But there is some discussion coming up later on that, Steve. So we'll hit on that, and then we can go into more detail for you on the key components of it. So Ben's going to touch on it, and then we'll have Q&A on it later.
spk37: Right up here in the front. Rich Anderson, Wedbush.
spk21: So I wanted to talk... about the, let's call it the growing pains of AI. That audio that we heard was very nice, but I think a lot of us might say representative, representative. And so do you monitor not the annoyance factor, but are you monitoring these interactions so you sort of get a sense of, okay, we have to do that. We know this is something that has to be done for the future. But are the growing pains, are you kind of annoying people in the process because they really just want to talk to somebody?
spk22: I'll give you two answers to that. Maybe Lisa can talk about how we manage the interactions with Sydney, who's our current leasing assistant, and what the teams look for and what they get. And then Rukus can talk about the future.
spk05: Yeah, I would say there's always growing pains with AI, and we definitely experienced that when we launched Sydney, our leasing agent, and we monitored every exchange to understand what does she need to know that's the basic information we didn't know, and we were feeding that, and to understand the customer experience, because it was really important to us, and I think that it was a positive experience for the customer. Like I was thinking about the application, It's also more efficient, but also the customer is much happier because they've got their application submitted in five or seven minutes if they choose to move through it right away. So the customer aspect is really important, and we monitor it continually until we see, okay, she can go out on her own unmonitored.
spk11: Yeah, and as far as the technology is concerned, I would start with the technology is significantly advanced over the last six to nine months. So we do believe there's a lot of promise with it. It doesn't mean that the technology is going to run in isolation. I think fundamentally we will continue to monitor and make improvements to it, keeping the customer in mind to ensure that the experience is not devalued.
spk37: Thank you.
spk10: Jamie Feldman with Wells Fargo. So I know you were dismissed from the RealPage lawsuit in July. So as we think about your data analytics, I know you had mentioned a couple different data providers, but how should we think about your reliance on third-party data, or is this all just completely clean, internal, where if there are any lawsuits like this again, Avalon Bay will absolutely not be included?
spk22: Yeah, in terms of how we think about data, a lot of the things that we talked about today is based on models we developed in-house, which I think Rajiv mentioned, that are trained on our proprietary data. So everything you heard about in terms of renewal optimization models, screening cut points, and various things like that, it's all internal data, so not an issue there. The only thing we use are third-party benchmark data, which is historical-looking in terms of how things have trended across markets and sub-markets across time. And that third-party data, as I mentioned, is CoStar, Exometrics, and others. We continue to use that benchmark performance historically looking. It obviously does not impact in any way, shape, or form sort of current pricing decisions and things of that sort.
spk37: Thanks. This is John with Green Street.
spk26: I have one housekeeping clarification question and then a question on the roll process. Page 53, when you talk about Horizon 2, do you mean it's during the next few years beyond 2025, so 26, 27, or it's included in the 24, 25 kind of opportunity set?
spk22: Yeah, good question. So it'll be the next few years starting with essentially 2024. What we haven't done yet, John, as I mentioned, each one doesn't yet have a fully committed business plan, owner, budget, timeline. But we do expect those activities, including some of the AI activities, some of the things that Rajiv talked about as it relates to renewals, to start to kick in in 2024 as we formalize those business plans. And then probably by mid to late next year, we'd be able to give you sort of the more precise timeline. But all of that incremental $25 million should come through over the next few years is the way I would describe it.
spk26: Okay. And then the second question will be on just page 36, the lease renewal process. So can you give us a sense how rolled out this is across the portfolio today and what the old process looked like in terms of the pricing of renewals and just so we understand what's kind of in the numbers today and what's to come?
spk22: Yeah, sure.
spk36: So as far as our digital app, that's fully rolled out. And we've been, you know, that 75% adoption rate, that continues to grow. I believe it will continue to get better as we introduce new features into our app. And as far as the optimization process, we've been doing that for years. Going off memory here, but we developed the model back in 18-19, so it's been in place for quite a while.
spk22: The one thing I would add on what's amazing about the adoption on the Renewals app, it was only developed and deployed earlier this year. So to get to that level of adoption, and he's being modest, it was a hell of an outcome, to be honest, in a short period of time to be able to get that kind of adoption through that tool. And the good thing about the renewal optimization efforts is the more data we're aggregating, those models continue to be refined, version 1.0, 2.0, 3.0, et cetera, through time. And so the more data we're generating now will continue to help refine those models that our data science team maintains. We've got time for one more. I'm getting the flag back there.
spk35: Eric Wolff at Citi. What are the main factors driving the NPS score for your tenants and the lease renewal probability? And then if over 65% of your residents are accepting renewal offers, should we eventually expect your retention to move to that level?
spk22: Yeah, so why don't I take the first one, Rajiv, and take the second one in terms of what's missing there. On NPS, there's a number of factors. Certainly, We track what happens with promoters and detractors. Price is certainly a factor that does come into play. We measure our primary metric is mid-lease NPS. So certainly people who experience a more significant renewal, say in 21 or 22, that does come into play. But if you think of it in a more normal market environment, it comes down to the basics for the most part. Neat, clean working environment for associates that are, excuse me, for residents who are working in our communities, they're working out in the gym, using the clubhouse, they want responsive service, they want friendly people, you know, the maintenance service person that comes to their apartment and performs service work, leaves a little note, if they have questions, let me know, or sends them a message via the new digital app. So most of it is just responsiveness and the basics of keeping the community clean and just a fine living environment. I'd say the last couple of years, something that has come up more often that you do hear about across the markets is safety and security, particularly in urban environments that have become more challenged over the last couple of years. Data showed up more. But in normal times, it's usually the basic stuff and responsiveness that matters.
spk36: As far as the second question, so the 65% acceptance on the offers that we make, so the way to distinguish between the acceptance on offers and what net retention ends up being is really the residents who may have accepted an offer but then go on to break their lease early. So that happens a decent bit in our portfolio. Around a third of our move-outs tend to be early terminations. So that's generally what accounts for that difference.
spk08: Alex Goldfarb, sorry, well, Mike. Alex Goldfarb, Piper Sandler.
spk09: Going back to the revenue and the expense savings, I think you said that the $50 million incremental revenue and the $80 million of incremental expense, that's in the future. But you mentioned $15 million of whether it's savings or value creation, what have you, since 2008. from the opening of the Virginia Beach Service Center, and $15 million over that amount of time doesn't sound like a lot of money. So I'm assuming that's above and beyond the cost of operations, or how do we think about that $15 million relative to basically 15 years?
spk22: Yeah, so let me distinguish between all the different things. So in terms of the $15 million that's a recurring annual benefit associated with executing the transactions at the customer care center, as compared to where they would have been executed previously. So that is a recurring annual benefit that is not embedded in the $55 million or the $80 million. $80 million is a recurring annual NOI uplift that we expect at full stabilization from the various activities that are underway today. And so think of that as NOI, not revenue or expense, but that's what the annual recurring benefit will be from all those activities by the time they're fully stabilized is the way you want to think about that. Time for one more, I guess.
spk23: Hi, Anthony Pell from Barclays. Just going back to the margins and the recurring CapEx difference, 270 basis points, what drives that and how sustainable is that?
spk22: In terms of the recurring CapEx? Yeah, it's relatively stable. We don't account for major redevelopments, as I mentioned, that are unusual and occur very infrequently. We're talking about the recurring CapEx that you see from the types of things that I mentioned earlier. It's the flooring, it's the appliances, it's the condensing unit that occurs every single year. It's just part of the ongoing management and maintenance of a multifamily portfolio. And we use a trailing five-year average to make sure that we're smoothing out for any unusual years. So we think it's a pretty good representation of what it costs to maintain that portfolio regardless of whether you're expensing those costs or you're capitalizing those costs. Again, regardless of where they are on the P&L, you're picking those up, and you account for them to have a good apples-to-apples comparison. Is it perfect? It's not perfect. Nothing's perfect, but it's pretty darn close, I would say, when you're trying to capture for all those costs. Okay, so we're getting a high sign. We had to cut off the Q&A. Just so you know, we're going to take a quick break here for maybe 10 to 15 minutes. and then we'll come back and get started with Matt and the rest of the investment team for the second session. Thanks. We'll be right back. © transcript Emily Beynon We'll be right back. Thank you. We'll be right back. We'll be right back.
spk13: Operator, are you there?
spk16: The operator's not there.
spk29: But it's like music, though. Okay, so that's good.
spk34: All right. Thank you. © transcript Emily Beynon Thank you.
spk12: Ladies and gentlemen, thank you for standing by. The meeting will resume at 2.55 p.m. Eastern Time. Again, we will resume at 2.55 p.m. Eastern Time. Thank you. Thank you. Thank you. Thank you. Thank you. © transcript Emily Beynon
spk31: Ladies and gentlemen, we will begin in about two minutes.
spk01: Again, we will begin in about two minutes. Thank you.
spk13: All right. If I could have everybody's attention, please. Button up. No button? All right. Well, thank you very much, and we will kick things back off with Matt Bierenbaum and his team.
spk27: All right. Great. Thanks, Jason. Wow. I'm not used to, like, talking and having everybody get quiet. This is awesome. All right, so my name is Matt Birnbaum. I'm the Chief Investment Officer here at Avalon Bay. And in this session, we're going to go into kind of the middle two focus areas that Ben had laid out at the beginning of the day, portfolio optimization and our development growth engine. And joining me for this, I've got Emily Carmody, who's Vice President of Capital Projects, who's been with the company for 15 years. Dave Gillespie, Senior Vice President of Development, who's been with the company for 16 years out of our Boston region, and Stu Royer, Vice President of Investments, who's been with us for six years. So I'm going to start by going through our portfolio, take you through a little bit of an overview of our current portfolio, why we think it's positioned for outperformance, and then walk through how we think about portfolio allocation and our vision for our future portfolio. And portfolio allocation, of course, it starts With market allocation, we've got to be in the best markets, but it really goes well beyond that into sub-market and ultimately beyond sub-market into the product, the actual physical product you have within each of those sub-markets. And we think a lot about this, obviously, spend a lot of time on this. I love this stuff. I'm a real estate guy, so this is what gets us going. And we're going to share that with you now. So here's our current portfolio. We are spread across what we believe are the 10 best markets in the country. We're 92% in our established regions, including 49% in the Northeast, basically from here north to Boston, 43% on the West Coast, that's Northern Cal, Southern Cal, and Seattle, and 8% in our new expansion regions. That's roughly a third of the way towards our long-term goal that we established to be 25% in those expansion regions, And I'll get a little bit more into how we came up with that number and how we think about that. And as Ben had mentioned earlier, we are 70% suburban, and that share is growing as well. Now, why are we in these markets? We're thought of traditionally as a coastal REIT, and it's because these established regions really do feature the strongest fundamentals of all markets in the U.S. And among the variables that we think are the most important to driving long-term apartment market performance are income and education levels and the cost of home ownership, which increases rentership rates. And you can see that our established regions score the best in the country on these key metrics and much better than the U.S. as a whole. In the long run, these metrics have been shown to be the drivers of long-term rent growth performance along with constraints on new supply. And historically, our established regions have had low levels of new construction. And that's due to the challenging regulatory environment, which sometimes can make it challenging for us as operators, but they do provide protection for our existing investment. And you can see, looking back over the last decade, that the spread in supplier deliveries between our established regions and the Sun Belt wasn't as wide as maybe it had been in the decades before. But in the last couple of years, that's gapped out, and it's now honestly wider than it's really ever been. And, you know, certainly that's been a topic of a lot of conversation here recently. So while we do continue to believe in our established regions, I did mention that we're looking to grow in some new expansion regions, including Denver, Southeast Florida, Texas, and North Carolina. Why? Why are we doing this? You know, honestly, it's a continuation of what we've always done through our history as a public company, which is to follow the customer. We're seeing higher income customers. income, higher income jobs, the knowledge-based economy, STEM jobs, migrating inland, in particular to some of the regions that we've selected as expansion regions, and we're following suit. Now, historically, a lot of these Sunbelt metros have typically had better population growth than our coastal established regions, but, as the prior slide showed, they've also typically seen more supply, and in past cycles, a lot of times that supply more than met more than met that incremental demand. But in these expansion regions in particular, we see the demographics and we see the supply-demand fundamentals starting to look a lot more like our established regions. Now, importantly, this is not true of all markets in the Sun Belt. And we selected the markets that we did specifically because they rate higher on these variables that I mentioned before, income, education levels, home ownership. And you can see here how they're starting to approach our established regions and are well above other Sunbelt regions. And that's part of our market selection process. So it really is pretty fine-grained. And then the other factor that's worth mentioning is regulatory risk. We do also view that as a factor and a driving force behind trying to rotate some of our portfolio into these new regions, which helps us diversify this risk on a portfolio-wide basis. Why 25%? And why the specific allocations within that to the different regions and, frankly, to our established regions as well? Well, we start with the relative size of each market, which is shown in the far column here on the left. That's what would be an index weight. That basically is the total size of each region's apartment market as a percentage of the entire footprint. If we had a neutral market exposure, if we were just index weighted in these regions, that would be our target allocation. But then we start to put our thumb on the scale and say to ourselves, where do we want to have more or less in that index weight? Where do we want to be overweight? Where do we want to be index weight? Underweight, sorry. And we base that on a number of different factors, including our current portfolio, market potential, demand and supply, kind of secular shifts, regulatory resiliency risk. And then in some regions, we do have unique competitive advantages more so than others. Sean showed how, in general, we've been able to outperform our market by 70 basis points long-term due to our operating platform and our operating prowess. But that 70 basis points of alpha is not consistent from region to region. And so we're looking to over-index to the regions where we can drive more alpha over time. So as one example, New York. New York is the largest market in our footprint. It's the largest department market in the country. It's 24% of our new expanded geography. And we're underweight there today at 21%. And our goal is to take that down further to 15%. At that point, it would be a 0.6x underweight, under index. And then we have, even underneath that, different sub-market and product goals as well. Boston would be the converse. It's a pretty small market. It's only 5% of our total market footprint. And even though we are very overweight there today at 13% of our portfolio, Our long-term goal is to take that down a little bit to 10%. That would still be a two times overweight. And one of the reasons we like to lean so heavily into Boston is because it does really play to a lot of our competitive advantages, both with our longstanding, outstanding development platform and track record, which Dave's going to take us through, and also because this is one of the regions where we have typically, with our operating platform, been able to generate above-average alpha as well. So putting it all together, here's our vision for our future portfolio. We're looking to reduce our Northeast exposure to roughly a third, take California down to a little bit less than a third, and grow substantially to 25% in those expansion regions. And as we're making these portfolio shifts, we'll also be looking to grow our suburban allocation further, as Ben had mentioned, from 70% to 80%. Now, we're executing on this plan by steadily selling assets out of our established regions and redeploying a portion of that capital into acquisitions in our expansion markets. Just in the past six years, we've sold $5.7 billion worth of assets. I think that's maybe a little underappreciated by the market, kind of how active we've been. And we've traded $2.4 billion of that into acquisitions, which on average are 15 years younger. The assets we've acquired are more suburban and more concentrated in garden product, where we see future demand headed. And while there was a pretty modest 20 basis points of dilution upfront in terms of the cap rate of what we bought versus what we sold. The stronger growth profile and the lower CapEx profile of the acquired assets more than makes up for this within a few years. In fact, we've already seen it, and I'll show you that in a minute as we go into Denver as an example. So you can expect that we're going to continue to make progress on these portfolio trading goals, steady progress over the next few years. But our pace is going to be dependent on the transaction market. Right now, the transaction market is pretty sedate. But as it starts to hopefully loosen up, we actually think the dynamics of the trade may look more favorable over the next couple of years than even they have in the last couple of years if you think about where there's more supply, where fundamentals are more under stress. It is in the Sun Belt, including some of our expansion regions, And so we are on the lookout for potential distress opportunities that could help us accelerate the pace. So that's the portfolio at the market level. Let me take it down another level of detail to sub-market and product. Within each region, we are located in the best sub-market. And again, if you go back to those same key variables I mentioned before, incomes, premium to own, And education levels, not only do our established regions score best on those variables, but our sub-markets score even better than the regions in which they're in on average. So it's an incredibly high quality portfolio, which is one of the foundational strengths that Bennett mentioned at the top. In addition to those key variables, we're also very focused on demographics. And this is the one thing in our business that is predictable. We know where demographics are headed. And demand is going to look very different in the next cycle than it did in the last one. And this informs our approach to sub-market and product positioning. The key difference is that future growth is going to be concentrated in middle-aged renters. Now, I don't want to offend anybody who might be in their 30s out here, but, you know, we call middle-aged renters folks in their 30s. So if you don't think you're middle-aged, sorry, we do. And we know that folks, when they're 38, are looking for very different things out of their housing than they did when they were 25. They're much more likely to want a suburban location, larger unit types, and more space for work from home. Fortunately, our portfolio is already pretty well positioned for this shift, arguably better positioned than it was in the last cycle, given our suburban over index. And not only is there more demand coming to the suburbs with the demographic shift, but there's also typically less new supply in the suburbs, particularly in our established regions, and this is due to longstanding entitlement challenges A lot of these suburbs are small, local jurisdictions that have a strong bias against any kind of growth, and a particularly strong bias against rental housing. And frankly, that's one of the keys to our success as developers all these years, is unlocking those entitlement challenges, but they do suppress supply and protect our investment once we've made it. And then when you take it down a level further, from the sub-market to the asset level, our specific assets are even better positioned to capture this growing demand from aging millennials, as well as growing demand from empty nester renters as well. I know we have a few of those in the room. We developed most of our portfolio ourselves, and that gave us the ability, and still gives us the ability, to tailor the product and unit mix offering to future demand, to skate to where the puck is headed. Now, this is a big contrast to the rest of the industry. Most of the apartment product out there is built by what we call merchant builders, and who are building the community to sell it on completion to a long-term institutional investor owner. And they're much more focused on constraining their total cost per door to make that sale on the back end easier. And it's much easier for them to get lenders and investors and appraisers on board if they can show the demonstrated past demand as opposed to the future demand. Our portfolio is more heavily indexed to two and three bedrooms. Our average unit size of 930 square feet is greater than the markets we're in. And we have 14,000 large format units with a dedicated work-from-home space that could be either a loft, a den, or an extra bedroom, or have townhome or direct entry layouts with private garages that compete pretty well with the growing build-to-rent single-family rental sector. In fact, we've had to learn different ways to market those apartments because somebody looking for that kind of unit isn't just Googling an Avalon apartment in such-and-such town. So that's kind of an underappreciated little mini-stat of our portfolio. You can see how this all comes together in our expansion regions, where we have a unique opportunity to assemble our portfolios there from the ground up, mixing both acquisitions and new development to create diversified offerings optimized for long-term performance. Denver is a great example. We've completed five acquisitions there and three developments, one of which is complete, two are under construction. And that portfolio, it's small, but it's delivered same-store NOI growth of over 40% in the last three years. The five acquisitions were all garden assets in second-ring suburbs with constraints on new supply. And by selecting the right assets and bringing them onto our operating platform and all the great stuff you heard about before the break, we've been able to grow the initial yield by 130 basis points in just a few short years. And we're balancing that with profitable development in close-room locations that generate strong initial value creation on the initial build and appeals to a different customer. So wrapping it all up, Our portfolio continues to be one of our foundational strengths. We're concentrated in the best markets and submarkets, 70% suburban and growing, purpose-built by us for long-term outperformance. We're roughly a third of the way along our journey to getting to 25% in our expansion regions to optimize growth and help manage risk. And we also have exciting opportunities to invest capital in our existing assets for incremental growth. And for details on that, Emily is going to walk us through.
spk03: Great. Thanks, Matt. So Matt just gave you an overview of how we're thinking about portfolio allocation at Avalon Bay. I'm now going to highlight a few ways that we're investing in that portfolio to drive strong accretive investment returns and cash flow growth. So while we don't talk about it very often, we actually have a very active apartment renovation program. For many years, we executed these renovations through large, comprehensive redevelopments, typically one to two per region, renovating every home at the community, and frequently on an occupied basis. Since then, we've revised our strategy in favor of a more targeted investment approach, executing vacant turns to a select portion of homes across a wider portfolio of communities. This change in approach provides flexibility to test a variety of finished schemes and react more quickly to customer demand, ensuring that we're right-sizing and adjusting our investment based on program performance. Additionally, we're able to leverage our size and scale as a national developer and our in-house construction capabilities to get the most competitive pricing on construction materials and minimize our vacancy through industry-leading turn times of less than four days. All of this comes together to ensure that we're getting the highest return on our capital invested. This continues to be one of the most accretive investments we can make in our portfolio. With minimum return targets of 10%, we're generating around 20 basis points of incremental annual NOI growth. And that's revenue that we can count on year in and year out. Another way we're investing in our portfolio is through accessory dwelling units, or ADUs. We're leaders in adopting this new program in California, which again, due to our ability to leverage our development and construction capabilities, we're able to create new apartment homes, realizing substantial untapped value that didn't exist prior. How the program works? We identify underutilized interior and exterior spaces throughout our communities, and we convert those into new apartment homes, adding density on a buy-right basis. These homes offer attractive entry-level pricing and generally at a more affordable rate for our customers, with absolute rents around $300 below the average of studios and one-beds in California due to the smaller size, while yet at a premium per square foot rent for us. We've completed 26 of these homes thus far and realized average returns around 12%, But honestly, we're just getting started. We've already identified 200-plus additional opportunities in California, representing a potential for $20 million of additional value creation. And lastly, solar. Now, rooftop solar installations are truly a win-win for us, as they're generating strong investment returns at 14%, while also reducing our utilities expense and our greenhouse gas emissions profile contributing significantly towards our science-based targets of reducing Scope 2 and 3 emissions. We've committed capital on 80 common area installs thus far and are piloting resident solar across another 10 assets. With resident solar, we have the ability to provide solar power for resident consumption, not just our common areas, at a lower rate for our residents and a nice profit margin for us. With the possibilities in resident solar, we have the potential to double our investment, firmly establishing ourselves as a leader in this area where we're already the largest multifamily solar provider. Thanks, and with that, I'll turn it over to Dave to talk about our development platform.
spk15: Thank you, Emily. Avalon Bay is known as a developer. I'm going to use our time today to get you under the hood to show you how we sustain this foundational strength. This chart shows our track record through the last cycle. The dark blue bars represent our completions by year, and the light blue bars represent the value created through those completions. As you can see, development has been a consistent, long-term value generator for Avalon Bay. Our profit margin on this business over the period was over 40%. Here are the numbers in a little more detail. The $10 billion we invested in development through the last cycle is more than all of our REAP peers combined. The $4.4 billion in value we created represents a 200 basis point spread over stabilized cap rates, which beat our internal target of 100 to 150 basis points. And as investors, you get the benefit of this purpose-built community in our same store portfolio going forward. The NOI on these communities has grown by an additional $60 million since completion and continues to contribute to cash flow growth. Well, how are we able to deliver such consistent results as an organization? We have a strong, disciplined approach to risk management. We first start with conservative underwriting. All of our deals are underwritten on a spot basis using today's construction costs, today's rents, today's operating expenses. If it doesn't pencil under those conditions, we don't move forward. We then compare that to a target return, which is unique for each community and is based on a series of market and project-related factors. We then carefully manage these investments by limiting our pursuit cost spend and being thoughtful about controlling our land inventory. Now that we've decided to move forward, how does the organization maximize the value of that opportunity? We have a unique organizational structure and culture that supports long-term success. Centralized experts at headquarters partnered with local teams that execute the business on the ground. This combined team works on each development opportunity from conception to stabilization and has aligned incentives. We all have the same goal, to deliver a great asset. The on the ground teams have local relationships and informational advantages over our peers and our national experts further tap into our scale and provide leverage in their area of expertise. This integrated process allows for a feedback loop through lessons learned to improve the next development opportunity. Beyond these lessons learned that we learned through ourselves, how else do we know what's working and what's not? We ask our customers. We survey our residents at the end of each development and find out how we can improve. This process is unique to Avalon Bay because most developers aren't long-term owners that are focusing on resident satisfaction. A good example of this is our prototype floor plan. These floor plans have been adjusted year after year, literally by inches, in response to customer feedback. It's the little things that matter to customers over time. A properly designed outdoor space, a home office that has the plugs in the right place, a full-size washer-dryer in your unit with room to store your household items, and a kitchen that's designed large enough for proper seating and a place to put your trash can. Next, I'm gonna highlight a local office in action. That's my home office of Boston. We've had continued success over 30 years, of which I've proudly been a part of about half of it. Through the entire three-decade span as an office, we've continually had a community under construction. We've built through multiple cycles, and we've tailored our offerings from townhomes to high-rise buildings, depending on market conditions. Over the history as an office, we've built 51 communities, invested $3 billion in development, and realized an unlevered IRR of 11.5%. This is a track record we're very proud of, and it's created a portfolio that's second to none in our market. Going one level below that, I'm going to highlight a recent development right that we secured earlier this year. Avalon Quincy Adams is a 300-unit development right south of Boston in a transit-oriented location. Development economics are challenging to make work right now. We all know that. but we were able to get this deal to pencil when others couldn't because of our competitive advantages. The first thing to know about Avalon Quincy Adams is we needed to move fast. We went from a handshake on terms to a land closing in 90 days. Well, as an organization, how do you get comfortable that quickly to make that kind of financial commitment? You start with development, having relationships. We knew the land seller well, and we've done business in the city of Quincy before. Next, our construction team had recent cost data from another start, which gave us an insight that construction costs for certain trades were starting to trend down. Our operations team, because we manage our own portfolio, had real rent and operating expense data from two other sister communities in the sub-market. And our balance sheet, which you're going to hear about later, really allowed us to make a commitment when others couldn't in uncertain times, especially for opportunities like this that are great and opportunistic. And critically, we modified our design of the project to enhance the projected returns. There were several unique initiatives that we undertook at Avalon Quincy Adams which made this deal pencil. First, we bought the land at a 40% discount to the previous market pricing. Second, we used our experience to redesign the building with an eye to efficiency and overall cost reduction. And we applied our operating, and third, we applied our operating economies of scale, including technology and neighborhoods, which you heard about from Lisa and Rukas, to reduce our projected payroll expense by 60%. The result is we increased the projected stabilized yield over the base case by 110 basis points, and we reduced the projected cost per unit by over $60,000 per door. This is a great, recent example of our flywheel in action. Next, I'm going to turn it over to Stu, who's going to talk you through some exciting new investment programs.
spk19: Well, by now you know that when it comes to that flywheel of development, construction, and operations, we've built a pretty unique set of self-reinforcing capabilities. And we've spent 30 years continually refining and evolving those capabilities. And now we want to use them to accelerate the portfolio optimization that Matt just talked us through, and to find some new and novel opportunities for earnings growth. I'm going to walk us through how we're doing just that with our developer funding and structured investment programs. We'll start with the developer funding program, or DFP. The objective of the DFP is to accelerate our development activity in our expansion regions while our own development franchises mature. Thus far, it's done exactly that, accounting for a little less than half of our development activity in those regions. And what makes the DFP such a good complement to our in-house development is its relative speed to market. On a typical development, we spend a considerable amount of time, years, designing and entitling a project all before a shovel hits the ground. On a DFP, we don't step in until the project is teed up and construction ready. And that allows us to deliver our product to market on a truncated timetable. And I said our product there for a reason. We make every DFP investment subject to the inclusion of Avalon's proprietary design and product standards. That ensures that when we get product from third-party developers, it's reflective of the long-term operating and CapEx performance you'd expect from an Avalon development. That's important because the act of funding third-party developers is not unique to Avalon Bay. In fact, that's what many other REITs in the multifamily sector and in other sectors are really doing when they talk about development. What makes us unique, in addition to getting our product, is that for us, this program is in addition to and not a proxy for in-house development capabilities. And because those capabilities are foundational to Avalon, we can more easily dial up or down exposure to the program based on market conditions, our cost of capital, and the available opportunity set. Now this line of business comes with a different risk-return profile. We still take market and lease-up risk. but we're not exposed to entitlement or pursuit cost risk, nor are we exposed to cost overrun risk because we receive cost guarantees from our partners. The returns we expect in this business line are commensurate with that risk. They're slightly below a typical Avalon return, but still substantially accretive versus acquisitions. Thus far, we've completed or are under construction with four DFP investments. The two we've completed are both in Florida, and the results there have been outstanding. It's allowed us to scale that region more quickly to 4% of our portfolio, the largest of any of our expansion regions, and they've delivered with a weighted average yield on cost of 6.3%, far in excess of the prevailing acquisition cap rates at the time of the investment. It's really been a terrific capital program for us. We're very fortunate that it's not a loan. Our second investment vehicle, the Structured Investment Program, or SIP, is a mezzanine or preferred equity investment program that targets multifamily developments. Like the DFP, we invest in high-quality projects and borrowers, but unlike the DFP, the ultimate goal of this program is not to own these assets upon completion. Our target for originations within the program is roughly $100 million per year, which should provide a nice earnings tailwind as our funding commitments ramp up towards the total program size between $300 and $500 million. Thus far, we've closed on six SIP investments representing $170 million in committed capital, The book has a low weighted average attachment point of 79%, and an average effective interest rate of 11.3%, which is a figure we see continuing to trend higher as new originations are priced into the current rate environment. The book of business is diversified geographically, but aligned with our operating footprint, which provides us direct oversight on the project, and if need be, allows us to integrate any of the communities into our portfolio in the event a borrower is unable to repay our investment. That alignment also provides significant advantages in sourcing and evaluating opportunities, a perfect example of which is our investment in Old Japan, New Jersey. And what I really want to highlight here with Old Japan is how the broader Avalon platform and the SIP can marry to both mitigate risk and drive value. This is a site we knew well. Our regional development team identified and evaluated the site. And while we liked the real estate, we ultimately were forced to pass because the terms of the land deal didn't reflect the entitlement risk in the municipality. So we had to let a good site go, and without the SIP, that would have been the end of the story. Let's fast forward a few years through some bitter entitlement fights, some redesigns, the project is finally ready to begin construction, and with the SIP, we're now able to invest in a site that we know and understand, but at an appropriate and acceptable risk profile. Now we still need to execute, it's a very competitive space, And to do so, we were able to tap our platform, which is really an advantage that no one on this deal, and really in the space more broadly, can replicate. Our development and construction teams knew the site intimately, and we operate over 5,000 units in the region that provide us with real-time proprietary data on market fundamentals. That level of insight into the market is an absolute differentiator for us. It's how our platform makes us better situated to understand and underwrite these opportunities versus our competition. And the borrowers, brokers, senior lenders in the space know we have this advantage. It creates a positive selection bias to us that funnels the best projects and the best borrowers into the SIP. And really, in thinking about both programs, that's what I want you to leave here with, that we have a real competitive advantage as a capital provider. That ability to leverage data from a best-in-class development, construction, and operations platform is incredibly difficult to replicate. And when we pair that with these new programs, it allows us to be more nimble and opportunistic than we have been in the past. It's one of the reasons we're so excited to be building these programs out. We think you're going to be excited with the results. With that, I'll hand you back to Matt.
spk27: All right, great. Thank you, Stu. Thank you, all three. So I'm going to open it up here for Q&A in just a minute. But first, just to close out, I want to make sure I leave you with the key takeaways here. Number one, we have an outstanding portfolio. Really, we couldn't be more excited about our portfolio. Concentrated in suburban submarkets with large format product that's well positioned to outperform as demand shifts in the coming cycle. It's a foundational strength that we continue to refine and evolve. We're excited about future growth in our expansion regions to optimize our growth profile and to mitigate risk, as I had mentioned. We have plenty of opportunities to drive incremental growth through additional accretive investment in the stabilized portfolio. Our development platform will continue to drive value creation, as it has always done throughout our 30-year history as a public company. And we now have several new ways to leverage those development and construction capabilities for additional growth. And with that, I will turn it to Jason and Matt for some Q&A. Again, if you have a question, raise your hand, and I'll bring you the mic.
spk28: Thank you. Handel St. Just Mizuho. Two-parter, I guess the first piece is just on development today. The economics, as you indicated, are clearly more challenging, so maybe a bit more color on what your hurdle rates today are for new development, given higher cost of capital and higher cap rates.
spk27: Yeah, sure, Handel. I mean, what I'd say is our target yield matrix, which Dave provided a little bit of flavor on, it does provide a unique target return for every deal. But on average, we've seen those target yields, you know, a year and a half, two years ago, before the Fed started raising rates, those target yields were in the high fives. Today, they're in the high sixes. So that does make it more challenging. But again, kind of Dave's example illustrates how we are able to continue to generate above market yields based on all of the capabilities that we bring the knowledge, the insight, the operating platform. So there are, I'd say, fewer deals that are kind of clearing the bar. But there are still deals that are clearing the bar. And they tend to be in different geographies. We're seeing more of that in the Northeast, which is a more stable market, which didn't have kind of the violent swings up and down in rents or in hard costs that some of the other regions did. So you've seen that our development starts this year a little more heavily weighted to kind of, again, from here to Boston and probably as I think to the future, that's probably likely to continue for the next little bit here.
spk28: Appreciate that. Second piece is it's clear that adding to the Sunbelt is a priority. Development has been your preferred method to enter and gain more exposure to new markets. But I'm also curious on how you're thinking about acquiring assets from merchant builders specifically or even platforms out there and why perhaps M&A isn't a better or higher use of your capital today. Thanks.
spk27: Yeah, so, and a lot of people have asked that and asked about distress and are you starting to see it? And, you know, Stu's in the market every day. He can probably speak to that a little bit, but I would say not yet. Where we are buying, and we're buying just a little bit of asset trading this year, we have been buying below replacement costs. So, you know, that's why it's more compelling. You know, for example, in Dallas, we bought a couple assets last quarter. It's more compelling to buy there than to build there at this moment in time because of that. That's not necessarily true. in many of our other markets, and I think about some of the assets we've sold this year, those were probably all sold above replacement costs, and those were in different geographies. So we certainly have a balance sheet, which you'll hear about, that's positioned to take advantage of opportunity, distress if it should come. But, you know, and we're on the hunt for it for sure, but it feels like it might be a little early. I don't know, Stu, is that you seeing anything in particular?
spk19: No, I think that's accurate. I think it's... perhaps an opportunity to be patient and let that cohort of potential distress, you know, might be in the future. What we're seeing right now, to the extent there is distress, it's certainly more idiosyncratic to a specific asset, a specific buyer, a specific capitalization that they use on those assets rather than something system-wide or a broad-based opportunity set.
spk25: Austin Worshman with KeyBank Capital Markets here. So last cycle there was this heightened focus on sort of urbanization and that these regions were high barrier to entry. You guys have kind of made the case for suburbanization given the demographics and sort of the spread between supply and demand. I guess what is the risk that that supply follows demand to the suburbs and kind of what's your growth outlook for the next year versus even three to five years out between urban versus suburban?
spk27: So questions about urban, suburban dynamics fundamentals. I would say, first thing I'd say is I think it's a common misperception that there's greater supply barriers in urban than suburban. Typically in our established regions, with maybe the exception of San Francisco, it's the inverse. That it's usually the urban centers. The barrier to supply in most of our urban centers is economics. It's not zoning and entitlements. We're sitting here in the District of Columbia, which has seen kind of epic amounts of supply over the last cycle. They want the renters. They want the bodies on the street. It's in the suburban environments where they don't want the school kids. They don't want the traffic. So I think that those supply constraints, at least in our established regions, are pretty consistent. And as more demand shifts there, there will be some supply response. I don't doubt that. I think structurally there are impediments there that don't exist in the urban jurisdictions that should constrain that to some extent. It might be a little different in the Sunbelt where that difference, that regulatory constraint is probably not materially different, urban and suburban, but it is different in certain submarkets. I think about Raleigh-Durham where Stu is hunting for acquisitions and we have a team there as well looking at development. It's like Cary is a very highly desirable sub-market in Raleigh-Durham. There are supply constraints. So there might not be in the suburbs writ large, but there might be in certain sub-markets.
spk37: And those would be the sub-markets we'd be looking to get into, both for acquisitions and development. In the back there. Alex, go for it.
spk09: Just going back to Handel's question on development yields. You said that it was sort of mid-upper fives before the Fed hiked, so obviously rates were basically zero. Now you're saying it's sort of upper sixes when the 10-year is four and a half or so. So it would seem like there's been a lot of margin compression there. And as you think about development, even though you guys are good, sometimes projects do go over budget or take longer or fall out of bed, what have you. Do you think that high sixes is really balancing for all the risks? And as you think about the pipeline going forward, especially as construction costs unfortunately seem to only go up, should we think about fewer projects underway just because of the cost per project?
spk27: Yeah, so... Really, our index on a target yield is not necessarily directly to the 10-year treasury, but it's to where cap rates are. And it may be irrational, but cap rates today are still significantly lower relative to the 10-year treasury than maybe where they are in more typical times. So even when treasuries were 1 or 0, cap rates were ridiculously low. They were 3.5, 3 in some places. But that was still a pretty wide spread. So some of that's just the spread. We didn't... When cap rates... interest rates were one and cap rates were three, our targets were not four and a half. They were five and a half. So we didn't, we did preserve a margin of safety there because we didn't think that that environment would persist. It turns out, you know, that's not surprising that we were right about that. So I would say the margin now relative to, again, where cap rates are, so far as we can tell, this moment in time feel appropriate. We're also really good at managing the risk. It is different for different product types. So it's lower for garden. where our results are very consistent. You get the capital back more quickly. You don't have a big lease up where you get 100 units all at once. They're higher for high-rise, and mid-rise would be in between. They're higher if you've got more entitlement risk, and we may start to see, we are starting to see sites that are entitled now, like the example Dave spoke to. And so that deal would have a lower target yield, relatively speaking, because there's no entitlement risk there. So that plays into it. But I think really underneath that question is... Are cap rates in the right place? And, you know, who knows, right? We'll see what happens there. If cap rates move up further, we'll move our targets up further.
spk08: Hey, guys. Josh Darnold.
spk07: I'm from Bank of America. You lay out a very bullish thesis on the suburbs, and I noticed you want to take it up to 80% of the portfolio. Why not go all the way to 100% if you're so bullish on it?
spk27: You know, we'll see. I would say the first thing I'd say is all of those portfolio targets should be thought of as midpoints of ranges. You know, we're never going to get exactly to any of those numbers. And then the other thing is, you know, asset trading is not an inexpensive proposition. And particularly in some of the urban markets we're in now, the taxes on sale... are pretty significant, and that may change the economics a little bit. You may think that this suburban asset's gonna have a little bit better growth profile, but is it gonna be worth it to make that trade if you're gonna pay a 5% transfer tax in Los Angeles? You better have a high degree of conviction about that. And so we are trying to bear that in mind as well. If we were starting a portfolio from scratch today, it might be less than 20, but not all urban markets are the same either. New York City is performing really well right now and is a market that I think we do have conviction about in the intermediate future. City of Boston looks pretty good. And then, frankly, some of the new expansion regions, we like the city of Denver. There's a lot of supply there right now, but we're not anti-Denver per se. Right now, we find better value in the suburbs. It will change over time as well. So, you know, it's a marriage of supply and demand, but on balance, we are certainly looking to take some more chips off the table in those jurisdictions.
spk37: One more, please.
spk20: Yeah, you just had some comments, Rob Stevenson from Janney. You just talked about New York City, but where is New York City today as a percentage of that 21% in the tri-state area, and where is that in the target as a percentage of the 15? Is the sort of 6% disposition, is that largely going to come out of New York City, or is it a mixture between the burbs? How are you guys thinking about that market specifically over the next five years?
spk27: Yeah, so today, roughly a third of our 21% allocation to Metro New York is the city. We've got New York City, we've got Long Island, we've got some Westchester, Connecticut, and New Jersey Central and Northern. So it's a big portfolio, it's a big geography. So today it's about a third. I think we might look to... lighten up there a little bit more over time. And New York City is a jurisdiction we are not developing in anymore. Most of our development is pretty heavily concentrated in New Jersey, where we found a lot of success, and we're getting tremendous yields. Talk about the flywheel. It's amazing in New Jersey. So over time, I think you'll see our New Jersey allocation go up. Underneath that, our New York City come down a little bit more, and where we'll probably lighten up more is Westchester and Connecticut.
spk00: Hi, Linda Tsai, Jefferies. Your target allocations, I guess that's probably informed by your view on market growth, but do you also look at it on a cost basis, so like how that trends out from a margin perspective?
spk27: Margin in terms of investment margin or operating margin?
spk00: Well, just in terms of operating margin, in terms of the costs associated with changing your allocation in those different markets.
spk27: Yeah, we do think about the operating margins, and... One of the things we talked about a little bit, Sean walked through the fully loaded operating margin, and it is important to bear in mind that our geographic mix is changing, and the expansion regions do have lower operating margins, in particular Florida and Texas, because property taxes are so high there because there's no state income tax. And that does inform our view a little bit. So on the margin, we're looking to grow in southeast Florida and Texas, but we're not necessarily looking to get all the way up to an index weight there, as opposed to, say, North Carolina, or Denver, where we might be looking to be a little bit over-indexed because there are better operating margins there. And we are mindful of how that plays into the operating margin across the whole portfolio. All right. I think our time is up, and I'm going to turn it over now to Kevin and the finance team to walk us through the balance sheet.
spk37: It's an ESG. The fun continues.
spk24: Okay. Good afternoon, everyone. My name is Kevin O'Shea. I'm Avalon Bay's Chief Financial Officer, and I've been with the company for 20 years. In this session, we're going to focus on Avalon Bay's financial strategy and our ESG activities. I'm joined by three Avalon Bay officers. Nika DeFore, our Vice President of Capital Markets, who's been with us for 15 years. Mike Simel, also a Vice President of Capital Markets, who's been with us for 13 years. And Katie Rothenberg, our Vice President of ESG, who's been with us for just over a year and has over 17 years of real estate ESG experience. Now, over the years, one question I am sometimes asked is, is that with so many REITs being investment grade rated today, including nearly all of our apartment REIT peers, how is Avalon Bay's financial strategy different? Well, given our unique emphasis on development, our financial strategy is different. And it's a strategy that, in tandem with our development focus, has helped us consistently generate superior earnings growth in our sector while also allowing us to create and sustain one of the preeminent balance sheets in the entire REIT industry. As proof, our financial track record includes being one of the first REITs to receive an investment grade rating, consistently enjoying some of the best credit metrics in the industry, never having suffered a credit ratings downgrade or even had our credit rating put on negative watch, never cutting our dividend, and perhaps most importantly and persuasively, consistently enjoying some of the tightest borrowing spreads in the entire REIT industry. Now, in addition to highlighting our financial track record, in this session, one of the things we'd really like to do is explain what our financial strategy is and how we apply it to our business.
spk37: So what is our financial strategy?
spk24: In the simplest terms, our financial strategy is to ensure continuous access to cost-effective capital. In practice, there are three elements to our financial strategy, which we also call integrated capital management, or ICM. The first two elements, managing or liquidating our borrowing capacity while optimizing our capital sources, are common to all REITs, common to all companies for that matter, and are fairly straightforward. Yet how we execute on those two elements does matter and does make a difference, as Nika and Mike will explain later. The third element of our financial strategy, substantially match-funding our investments and development with long-term capital, is distinctive. And it's one of the reasons why we've been able to be successful as a developer in the public markets. Because match-funding forces a close integration between our development activities and our financing activities, it requires us to work closely together as we analyze our cost of capital, set individual hurdle rates on projects, decide which projects to start, evaluate our long-term capital commitments, and then go about raising the right mix of capital. As a result, we make better decisions We help lock in the long-term profit on development. We keep our unfunded commitments to a manageable level. We generate consistent earnings growth from development. And we strengthen our balance sheet over time. So that's our financial strategy in a nutshell. The history behind it, how it's different, how we use it to harvest growth from development, and how it allows us to strengthen our balance sheet over time. So with that introduction, I will turn things over to Nika, who will provide a deeper look at our financial position.
spk37: Thank you, Kevin.
spk04: Over time, Avalon Bay has been disciplined in our approach to funding our business. With the goal of positioning ourselves for growth, and as a result, we've cultivated one of the preeminent ballot sheets in the industry, A balance sheet that provides us with the financial strength and flexibility to navigate through changing market conditions, that preserves shareholder value via lower cost of debt capital, and allows us to take advantage of opportunities quickly as market conditions change. As you've already heard from Sean and Matt's team, there are always plenty of opportunities to consider. Since 2016, we've maintained an A credit rating, which affords us excellent access to the debt capital markets. And Avalon Bay's balance sheet strategy includes maintaining a largely unencumbered asset base. This creates a higher quality cash flow that provides optionality around repositioning our assets or selling them without the constraints of mortgage financing. In addition, we have the option to place new mortgage financing on our unencumbered assets in environments where the capital market is strained. Further, our credit metrics consistently compare favorably to our peers. Most notably, we have a lower net debt to EBITDA and a lower debt service burden relative to our peers. Now I'm going to refocus us on our future refinancing needs. As you can see, our debt maturities are modest in size and purposely well-rattered. which provides a measure of protection against large liquidity needs in periods where debt may not be attractively priced. Further, we have minimal refinancing needs over the next year, with $350 million maturing in December 2023 and another $300 million maturing a year from now in the fourth quarter of 2024. Expressed differently, our refinancing need through 2024, net of cash on hand, is less than 1% of our total enterprise value. That's about a fifth of the net refinancing needs of our multifamily peers. So how does our approach to balance sheet and debt maturity management create a competitive advantage for us? It's in our sustained cost of capital advantage relative to our peers, which is largely a result of the following efforts. Maintaining low leverage, It's stable debt metrics. It's match funding our investment commitments. It's maintaining an investment-grade credit rating for more than or nearly three decades. And creating a liquid debt complex that's actively traded in the secondary market. As a result, fixed income investors have consistently rewarded us with borrowing spreads near the tightest for all REITs. And over the last 10 years, Avalon Bay's borrowing spread advantage has averaged over 20 basis points, a significant debt service savings over time, which should continue to be a tailwind for us, resulting in enhanced returns and superior growth in the years ahead. With that, I'll turn it over to Mike to discuss integrated capital management.
spk18: Thanks, Mika. We clearly executed on the first objective of the ICM framework. The second and third principles, which are optimizing our capital sourcing and match funding our new commitments, requires a close collaboration across the organization. You just heard from Matt's group about our differentiated investment strategy. Our focus on development requires a differentiated funding strategy as well. primarily because our higher-yielding developments make it possible to grow the platform using recycled asset sales proceeds. And we take a data-driven approach to optimizing our capital sourcing between the asset sales and external growth capital in the form of debt and equity. One tool we've long maintained and considered is our heat map. This is a measure of strength of our available capital sources relative to all points in company history. Our asset sales volume is informed by our portfolio management goals that Matt detailed, and it's constrained by our taxable gains capacity. But we closely track private valuations to make sure that we're leaning into dispositions when the pricing is attractive. Our debt issuance is constrained by our leverage targets, naturally. But we closely consider the initial positive leverage to development yields when contemplating a new issue. And our equity strategy is informed by certain measures like NAB premiums and cash flow multiples, as well as management judgment to determine if we have an appropriate growth signal from the public market. Access to accretive equity financing is episodic, particularly in the current market environment. So drilling in on the last few years is a good case study in how we've utilized all of our available capital sources and been flexible in both our funding and our investment strategy. In 2020, facing steep NAV discounts, we reduced new development start volumes, leaned into dispositions, and used those proceeds to repurchase equity. In 2021, we raised historically cheap debt capital to accelerate development start volume at considerable initial profit stress. And in 2022, we executed a $500 million equity board at ABB stock price all-time highs, allowing us to forego more expensive debt capital thus far this year. Over just this time period, we started $3 billion of development activity while reducing our leverage metrics to all-time company lows. ICM is not a perfect science, but we have a demonstrated track record of responding appropriately to capital market signals and match funding the sector-leading development platform that has and will continue to create significant shareholder value. Today, we have over $1.5 billion of available liquidity in excess of our open investment commitments. If we continue to fund new investments with a creative long-term capital, we can lock in attractive profit spreads and avoid outsized, unfunded commitments. Our current position and financial strength provides us with a tremendous amount of flexibility. And our unique development-oriented business model not only provides fresh assets with embedded value creation to harvest down the road, but importantly, the higher investment returns create a durable stream of earnings growth to raise debt capital against. The roughly one and a quarter billion dollars of annual, leverage neutral, self-funding capacity is a powerful flywheel that allows us to grow the business in excess of what we can generate from our same store portfolio alone. without increasing our leverage or requiring access to the public equity markets. And finally, when Ben talks about our growth-oriented balance sheet, what we're saying is that our current strong financial position allows us, if we so choose, to capitalize on any accretive, smart investment opportunities that could materialize out of the current market turbulence. So with that, I'll turn it over to Katie to walk through our ESG priorities.
spk02: Thanks, Mike. I'm here to share a little bit about Avalon Bay's ESG platform. And I really think this graphic says it all. Avalon Bay's been focused on corporate sustainability and ESG initiatives since way before they became the cool new trends that they are today. We've been incrementally investing and evolving our program for the past decade, and we're incredibly proud of the impact we've made on our portfolio, on the organization, as well as on the communities where we do business. Avalon Bay has consistently been recognized as a leader in sustainability and ESG, both by industry-specific and more mainstream outlets such as Newsweek and Forbes. And we've remained committed to this work because when executed with a focus on driving results, and aligned with business outcomes, ESG activities add value and minimize risk. As Ben and Sean highlighted earlier in the day, Avalon Bay's people and culture are one of our greatest foundational strengths. Robust diversity and inclusion and community giving programs provide opportunities for associate engagement, which help drive our culture. It also helps ensure we're able to attract and retain the best and the brightest, and ensures that our values are aligned with those in the communities where we do business. All of this supports the bottom line, and maybe more importantly, our future growth, which we keep top of mind when executing our strategy. We can all see the climate is changing. Codes, standards, incentives are all changing accordingly. Our sustainability platform has always been focused on lowering consumption in ways that reduce operating costs, and drive measurable reductions against our science-based emission targets and water goals. We're particularly proud of the solar program that Emily spoke of earlier in the day. Notably, Avalon Bay is the multifamily leader based on Black Bear Energy's most recent solar leaderboard with over eight megawatts of solar, eight megawatts of installed capacity and much more in the development pipeline as was discussed earlier. We're assessing the physical climate risks of our acquisitions and development projects, taking long-term resilience of our portfolio into account, because we all know that climate change can impact design, material choice, insurance costs, and other operational elements. We're keeping a close eye on jurisdictional changes that are happening in many of our markets. These are typically focused on building performance standards, looking at building efficiency, embodied carbon reductions in construction, and the electrification of both new and existing assets. There's no doubt that being early innovators in the sustainability space has and will continue to provide Avalon Bay opportunities for continued growth and value creation. With that, I will hand it back to Kevin.
spk24: Great. Thanks, Katie. And thanks, Nika and Mike. Thank you. We're excited and grateful to have been able to share this time with you to focus more deeply on Avalon Bay's capital markets platform and our ESG platform. Although each has a different focus, both share a common goal of building on our foundational strengths in development, operations, and our culture to generate enhanced growth while improving our balance sheet and increasing the resiliency of our business. So with that, I will close this session. and turn things over to Ben. Thank you.
spk16: Great. Well, thank you, Kevin, and great job, Nneka, Mike, and Katie, and really a phenomenal job by all of our groups of presenters today. Well done, team. I hope you appreciated hearing from the set of leaders driving change through our organization and hearing from a deeper set of leaders today that are driving much of that change. It is very representative of the quality, the depth, the experience, the commitment that exists at this amazing organization. It's very powerful and what we lead with here. Bringing it all together today, and I'll go all the way back to our purpose, our culture, our opportunity to build on and benefit from our foundational strengths going forward, recognizing that we need to continue to evolve, and then really focusing, being laser-focused on our strategic focus areas, our operating model transformation, our portfolio optimization initiatives, our development growth engine, and our growth-oriented balance sheet. That collective group of focus areas is what's gonna drive success for us and what's gonna drive superior growth for us over the coming years and over the next cycle. That's what excites us. We did want to spend a minute on 2024. And while we're not providing full earnings guidance, provide some of the building blocks for you as you think about us in 2024 and also how you think about us in the context of the peer set. So let me take you through that. Starting on the same store side, based on our latest data, based on our latest forecast, our expectations for 2024, same store revenue, be about an average year for us. And that's based on where embedded growth is, where loss to lease is, our expectations around improving bad debt, and the benefits associated with the operating model initiatives. And that will stack up relatively well compared to the sector. On the operating expense side, we are expecting operating expenses to be elevated in 2024 but do anticipate our growth rate in 2024 to be inside of or less than the growth rate that we experienced in 2023. We've grouped some of those expenses in categories here. Generally, the elevated expenses are driven by some of the same factors as this year, property tax abatements rolling off being one. And while the operating model initiatives are very profitable, they do have an expense side of them, particularly as we build up those programs over the next couple of years. Shifting over to the external growth factors and capital markets factors, here we have a number of both tailwinds and headwinds that I'll touch on. On the tailwind side, we'll have the NOI uplift from our stabilized portfolio that I just referenced. We'll have the NOI from new developments coming online that we fit on a couple of times. That'll be a significant uplift in 2024. And as Stu talked through, we'll have the increased earnings from commitments that we've made, actually the return and the earnings on those commitments from our SIP program. in 2024. On the headwind side, we were net sellers in 2023 and potentially will be again in 2024. Our baseline plan for 2024 does contemplate some incremental debt issuance. You need to factor in that incremental expense. And then one unique item to call out is in 2023, we were investing large amounts of cash, most of which we drew down from our equity forward, and we were investing it at mid-5% rates. And as much as we'd like that dynamic to continue into 2024, that is not in our baseline plan at this point. So to bring it all together, you think about earnings growth potential for 2024. We think it will be relatively well positioned compared to the sector, but do expect a lower than traditional year of growth for us next year. So I want to shift back now to really what's been our focus of today, which is the strategic growth areas, our strategic focus areas, and how they're going to drive growth over a multi-year period. I want to quantify each of those categories for you as you think about the incremental growth that we can deliver above and beyond our base business. I'm going to start on the development side. So in the near term, there'll be the uplift from development projects. That's a 24 dynamic I just described that continues into 25, stabilizing into 2026. As we've touched on, new starts are more challenging, but we're confident that Over time and over a cycle, we can continue to deliver significant earnings growth and value via our development platform. And we've quantified it here as 150 to 200 basis points of opportunity. Annual core growth above and beyond our base business. Very unique and very powerful driver of growth for us. So that's on the development side. As we move over to the three newer drivers of growth, I'll talk you through those. We have the operating model initiatives. We have the new target of $80 million. Sean talked you through the pace of that. I want to break it down. Roughly about a third of it we've garnered today. So the rest of that is on the come. So we're making great progress and have a nice runway ahead of us on the operating model side. The portfolio optimization initiatives, there's a number of dynamics there. We're moving from 70% suburban to 80%. We're headed towards our target of 25% in the expansion regions. And as Emily talked us through, finding some of our most attractive opportunities right now to make reinvestments in our existing portfolio at accretive returns. And then the third of these new three growth drivers is what Stu talked through, our SIP business. And we're headed towards our target of $400 million at the midpoint of that business. That's another item where making great progress, our capital is very valued, we've got a great competitive landscape. Again, we're only about a third of our way into that growth. If you put these three new growth drivers together, And there it can generate 75 to 125 basis points of incremental growth above and beyond our base business. So we put together the development opportunity, our three new drivers of growth, and it brings us a total of 225 to 325 basis points of incremental growth above our base business. That's why we're focused on these strategic focus areas. That's what gets us excited, and that's what's going to lead to our success in the years ahead. So I'll wrap up. I want to start with, we have an outstanding team, connected and aligned through our culture, deeply dedicated, and focused on Avalon Bay's success in the years ahead. We've got a tremendous amount of foundational strengths that we've built up over the last 30 years that we're going to continue to benefit from. As you've heard a lot today, we're not stuck in place. Continuous improvement runs deep with us. Continuing to evolve, better position the company going forward. And we've got our strategic focus areas that are going to be key parts of driving that growth. I'll end with just to emphasize how much we value the trust that you place in us as fellow shareholders and express our commitment to continued and deep engagement with our shareholders, the investment community, and the wider stakeholders that are important in our business. Really appreciate the engagement today. Great set of questions. We're going to wrap up. I'm going to ask Kevin, Sean, and Matt to join me on stage. We'll have about 15 to 20 minutes for final Q&A, and then we look forward to continuing the conversations at the reception. And keeping in our current practice, raise your hand, and Jason and Matt will find you.
spk29: Hi, it's John Kim at BMO, and thank you so much for this presentation. Kevin, in your presentation, I know you have a very strong balance sheet and are in an enviable position, but I noticed on page 100 all sources of capital are at all-time low attractiveness. So should we take away from that that going forward, looking at 2024, development starts in acquisitions and in other investments will match that and also be at low levels, or are their returns higher and therefore you're making those investments?
spk24: Yeah, terrific question, John. There's probably two questions within there. The first is, how do we look at and evaluate the heat map that Mike Simel walked everyone through? And the second, I think, is what you're getting at is how should we think about the investment and capital plan for 2024? So let me take them each in turn. On the first topic, how to think about the heat map, as many of you know, we've been using this ICM approach for really since the GFC, and in connection with that, developed some very robust proprietary quantitative tools that we have used in tandem with our own qualitative and internal processes to think about capital sourcing. The heat map itself, just you need to kind of understand what it is and how it's created It measures the current spot temperature rating, if you will, for debt, for asset sales, and for common equity, our shares, in each case relative to each capital source's history. And there's different methods that we have for each without getting all the detail, but it is a comparison of how hot the capital price is in that market relative to the past. Certainly, as you look at sort of the last 20 years, if you will, and some of those metrics go back to the Bay merger, some go to 2001, we certainly enjoyed in the last 10 years or so until recently a very low cost of capital environment. So just taking debt, for example, on a percentile basis, our cost of debt today for 10-year debt, which is somewhere in the mid-5% range, is relatively expensive and therefore shows up as cold in that heat map relative to what our average spot 10-year cost of debt was over the prior 20 years, particularly over the previous 10 years. And our average cost of debt in our debt portfolio is about 3.5%. So as we look at that, it's good information to have in tandem with lots of other information that we look at. And what it does tell you is obviously we're in a much higher cost capital environment today than we enjoyed in the prior 10 years. But as we look at sort of pairing today's capital sources relative to today's investment uses, We're looking at different things, obviously. We're looking at sort of what's the investment spread that we can achieve. And as you heard in Matt's session, both Matt and Dave alluded to the fact that we typically look for about 100 to 150 basis points spread between our stabilized development yield and our cap rate, marked acquisition cap rate. And so that's a key ingredient for us. And if we can find a mix of capital, and we'll get to kind of the capital plan for this year, if we can find a mix of capital that brings into that 100, 150 base point spread, then it's probably sufficiently attractive. If it's on the thinner side of that, our appetite is going to be less. And if it's on the wider end, then our appetite will be greater. As you kind of look at that and think about our capital plan for next year, obviously we're not in a position to provide that today. It's something we're still discussing. What will our investment plans be next year? What will be our associated capital uses? But I can give you a few building blocks to think about. The first is that we are obviously in a position of strong financial strength right now. At the end of the third quarter, we had $500 million of unrestricted cash. We are nearly 100% match-funded on our development commitments, and we had virtually nothing outstanding on our $204 billion line of credit. And as Mike Simel alluded to, in a typical year, we have about a billion and a quarter of self-funding capacity on a leverage-neutral basis, and even then some given our current leverage profile. So we are in a position to lean in if it makes sense. But I think the second point is, as you think about our capital plan for next year, it's likely going to be driven by our investment plan. In particular, what we think our anticipated development start volume will be, which Matt can certainly speak to, but I think broadly within our development pipeline, we do feel like there is a very attractive set of opportunities we can pursue and start next year, which will then mean we'll be looking to raise capital. And the third point, as we look today at where that capital is likely to come from, it's likely to come from a combination of the transaction markets, which are likely to stabilize and provide a little more clarity around pricing in the coming months, and the debt markets, which even today are open to us and can provide a cost of debt on a 10-year basis in the mid-5%, which provides some level of appreciation relative to that kind of investment use.
spk37: So my first question is, why did John steal my question?
spk14: But I'm going to redirect the question this way. I'm not asking for 25 or 26 guidance when I ask this. If you had your preference, which would you prefer? In 2025 or 26, capital costs going back to where they were or incremental investment yields going higher?
spk24: It's a terrific question. There's a lot of folks here who can probably answer that. I mean, there's a
spk16: Let me answer it this way, which is sort of a version of the question of if we're in a hire for longer environment, how are we going to position ourselves? If we find ourselves in a hire for longer environment, there will be a resetting of asset values. You've seen that happen through the public sector, the public rates already, lesser degree through the private sector. Once that resetting happens, I firmly believe that REITs and Avalon Bay in particular will be better positioned to take advantage of opportunities. Think about our low leverage, think about our liquidity, the ability to tap into our strategic capabilities. I think all of that sets up well. When we're really coming out of an environment, like I refer to as sort of a capital homogeneous environment where everybody had access to capital and it was all priced around the same, that's now changed. I think there could be a period of time over the next couple of years where capital is differentiated, and that really leans into our ability to create incremental value. I don't get a preference. What we're going to do is we're going to react based on the environment, and I think we'll be positioned well, but I think if people are planning for something that is different than what it's been in the past, After capital resetting, a lot of which I think has already been reflected in the public stocks, I think we're going to be well-positioned.
spk37: Yeah. Let's make Goldfarb wait.
spk10: Goldfarb can wait. Okay. Jamie Feldman with Wells Fargo. So, you know, looking at the same-store growth drivers, I mean, market conditions seem to have changed pretty quickly in the last couple months in a lot of markets. So just kind of what gives you confidence on your visibility on some of these numbers that, you know, you won't be changing them come January, February? And same thing on the expense side.
spk22: Yeah, good question. First, on the revenue side, I think some of what we know is for a good portion of revenue growth in 2024, We have a pretty good sense for, and I mean, really the factors are some of the things that Ben referenced earlier. We sort of know where embedded growth is, where it was when we talked about it on the earnings call. We have a sense for where it might trend to by January, late January, early February and provide guidance. Similarly, loss to lease, we know where it was. We know how rents trend seasonally, what that'll look like. We have a sense, as Ben referenced, or was on the chart as it relates to 24 revenue growth, We know we're going to be driving through initiatives and other means, other rental revenue by kind of double-digit growth rates. The two really unknowns for the most part is exactly where a bad debt settles out and then what happens in terms of market rent growth. Those are really the two that I think we're still working through in terms of what that's going to look like. What I would say as it relates to the market environment, though, is – At the time that we provide our guidance, we do take a very strong look, obviously, what the outlook is from a consensus standpoint for the macro environment and how we think that's going to play out. Based on everything that we know today, I would say that certainly we expect a weaker-than-average market environment, given the macro outlook in terms of weaker job and wage growth, higher interest costs, student loan repayments. The latest story is people went out and leased a new car lately or bought a new car lately. Talk about student loan repayments, people trying to buy a car. It's a lot more expensive than it used to be. So those are the headwinds that we see in the consensus data that we think will be a weaker year on average as compared to normal for market rent growth. So really the two unknowns at this point for the most part are kind of where are the rents trend with loss to lease and embedded growth, but we have a good handle on it. and then really what's going to happen as we continue to see the movement in bad debt and market rent growth. So it's not a fully complete puzzle, but I'd say maybe two-thirds of the puzzle is complete on the revenue side for us based on what we know today. And then on the operating expense side, there are some very well-known factors. We know what the pilot burn-offs are going to be for the expiring tax abatement programs. We have a business plan for our Avalon Connect offering, which we think will ultimately generate more than $30 million of profits. But it does ramp up, as Ben mentioned, as we deploy it. So we kind of know what that looks like. We have some expiring contracts on the service side. We kind of know what the new pricing is. So there's some variables there, both on the tailwinds and the headwinds side that Ben alluded to in terms of the slide. So I think we have a pretty good sense for that today. There will be some things that will move around in terms of final tax assessments that come in in December and things of that sort that will sort of help finalize what those numbers look like. So hopefully that's enough color to give you a sense as to how we're thinking about it.
spk08: Alex from Piper Sandler.
spk09: Thinking about things positively, as the current development wave subsides and your competition has shovels down, as your projects deliver, theoretically they should face fewer concessionary pressures, right? even if capital costs go up, construction costs go up, shouldn't your projects get a natural lift by the fact that the need for concessions should go down materially if competitive new supply is going away? Or is that not how it works? And that's overly simplistic to think about.
spk27: Yeah, hey, Alex, Matt. There is something to that. So as Dave mentioned, when we underwrite, we underwrite everything on a spot basis. We're not trending. So if you think about a deal that we're starting now that's not going to be in lease-up for two years, it could well be that the deals that are in lease-up now, we started two years ago, and they've seen a tremendous overperformance because of what happened to rents over the last two years. So that could well happen again. But one note of caution there, which is there are markets where market rents are probably going to decline in the next year. So some of that may be just getting back to par, just depending on how the time and all that plays through on the market dynamics. But certainly it should set up, whether it's in the lease-up year or the year after that, it should come into the same store with a nice tailwind at its back at that time.
spk16: Alex, I'd emphasize as well, this goes back to our history of development. You talked to our developers in the various regions. Some of their most attractive development opportunities they have found are during times like this, during times of dislocation. And part of it's the dynamic you described. I'd say probably more of the dynamic is there's just less competition. We're able to take a longer-term approach to value creation. We've got to make sure we're getting the right spreads. We've got to make sure we're locking in the right cost of capital. But we can find those right opportunities, apply the strategic capabilities that Dave talked through in that one example. That can lead to some very profitable business over a multi-year period.
spk32: Yes, Taioku Sonia from Deutsche Bank. Ben, if I heard you correctly, you talked about 2024 being an earnings growth year that's a little slower than kind of your historical average or recent average. And I just wanted to confirm, is that strictly because of some of the 24 drivers that are in your presentation, or is there a macro backdrop you guys are also thinking about in 24 that could be impacting how you're thinking about pricing and as well as demand?
spk16: Generally, my comment there, being a lower than traditional growth year, is that the tailwinds and the headwinds on the external growth and the capital market side are heading towards most of our uplift or the bulk of our uplift in 24 is going to come out of our stabilized portfolio.
spk37: Thank you.
spk21: On slide 61, where you talk about your allocation targets, you did mention Boston being 2X. I don't know if you mentioned Seattle 2X and also Northern California greater than 1, 1.3. Maybe you could talk about sort of the cadence of technology sectors and how that kind of plays a role into your thinking about West Coast and Northern West Coast areas of the country in terms of their recovery and how that fits into this target allocation model. Or is that more of a supply constraint observation for those two areas of the country in particular. Thanks.
spk17: So there's two components in there. There's maybe a little bit on short-term commentary around market and market potential, and then some of the medium-term growth dynamics. Matt, you want to start, given that's sort of your allocation?
spk27: Yeah, I mean, so those allocations are long-term. So they're not, they don't reflect our view of what's going to happen over the next two or three years in any of those markets. where we actually transact and the timing when we choose to sell or buy or even to some extent start development, that will be influenced by some of those shorter-term dynamics. So in the case of Northern California, we're heavily overweight there today. Obviously, it's the Bay and Avalon Bay. It has been historically... you know, a phenomenally strong apartment market, still the most expensive place to own a home, but it's incredibly volatile, right? It goes up, it goes down more dramatically than any other market in the country in terms of rents in both directions. So we do continue to believe in Northern California. You know, it's the driver of the technology economy for the entire globe, and we still believe that we will benefit in the long term by having an over-index there. But we also, again, as part of the expansion region, we do see a little bit less of an over-concentration in some of that incredibly high value-add economic activity shifting inland to places like Austin and some of the other expansion markets that we've selected. So it's appropriate that we would be less concentrated there, but still overweight. Seattle is a market that's continued to, I feel like the whole last decade we said, gosh, this is amazing, it keeps going. even notwithstanding the supply. Supply has been significantly higher in Seattle than Northern Cal, but it's continued to perform really well. Has our view on Seattle medium to long-term changed? Not particularly. So I think we're kind of maintaining our overall position there at 7% or 8%, not necessarily. We're kind of having it grow with the rest of the portfolio. We don't view there a significant secular shift one way or the other in Seattle, but within Seattle... Most of our portfolio is not in the city. It's mostly on the east side, and we certainly would expect that any future growth is much more likely to be in the suburbs there as well.
spk22: Now, Sean, if you want to comment some around part of the questions around sort of AI growth trends, some of the... Yeah, I mean, in the short run, what I would say, and just sort of repeating what I indicated on the last call, is certainly in the last 60, 90 days, we have seen a weaker environment in both Seattle and the greater Bay Area region. You know, a combination of a number of different factors, I think. You know, certainly on the demand side, you know, job growth has been slowing. Wage growth has been impacted. And then certainly in the city of San Francisco, you know, the quality of the built environment and what people are experiencing has something to do with that as well. So as Matt pointed out, in terms of any trading activity, you know, we're not necessarily going to be, you know, sellers at the bottom. We're going to be thoughtful about dispositions and when we decide to transact in those markets when it's appropriate.
spk16: All right, we're going to do one last formal question and then look forward to continuing the conversation at the reception. John?
spk26: Thanks. Matt, you mentioned you guys have a history or you have an edge, an operating edge in certain markets and you don't have in others. You pointed to like Boston and New York. What type of learning curve challenges are you running into in the new expansion markets? And if you're not right now, are you concerned there's going to be operating issues as you guys just learn how to operate in these markets?
spk22: I'll throw that one to you. Yeah, I can take that one. As it relates to sort of the learning curve, obviously there's no substitute for building communities and operating communities in Boston for 30 years, of course. What we have observed, I'd say, in the expansion markets is a couple of things. There are things that you trip up on and you learn about. For example, in Florida, you were under a bad debt at one level. It's running higher than that. We learned that along the way. Obviously, there's been massive rent growth there. that more than dwarfs any relatively modest increase in bad debt. I think the opportunities are actually great because when we first went into those markets, we used some third-party property managers in a couple of cases thinking we're going to get access to great teams, great data about portfolio trends from all the assets that they underwrote. And I think what we figured out actually is when we took over the assets, we did a much better job. And part of that is the way we think about operating assets, the scale that we bring in terms of not in that market, but just the scale of the information and the capabilities of the platform we bring to those markets do make a difference. So certainly there are local nuances that we're going to trip up on from time to time, but I'd say, you know, those typically have not been meaningful to date, and hopefully they won't be. But, you know, I think the scale of the platform, what we're bringing to the markets is certainly helpful as well.
spk16: All right, well, thank you so much again for making the effort to be here. Great level of engagement. Appreciate the questions. And we'll see you in a moment at the reception and look forward to talking further. Thanks again for your confidence, and we look forward to our continuing dialogue.
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