AvalonBay Communities, Inc.

Good morning, ladies and gentlemen, and welcome to Avalon Bay Community's second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. Following remarks by the company, we will conduct a question and answer session. You may enter the question and answer queue at any time during this conference by pressing star 1. If your question has been answered or you wish to remove yourself from the queue, you may press star 2. If you are using a speakerphone, please lift the handset before asking your question, and we ask that you refrain from typing and having your cell phones turned off during the question and answer session. Your host for today's conference is Mr. Jason Riley, Vice President of Investor Relations. Mr. Riley, you may begin your conference call.

Thank you, Paul, and welcome to Avalon Bay Community's second quarter 2024 earnings conference call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risk and uncertainties associated with forward-looking statements, and actual results may differ materially. There's a discussion of these risks and uncertainties in yesterday afternoon's press release, as well as in the company's Form 10-K and Form 10-Q, followed with the SEC. As usual, the press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available on our website at www.avalonbay.com forward slash earnings. and we encourage you to refer to this information during the review of our operating results and financial performance. And with that, I'll turn the call over to Ben Shaw, CEO and President of Avalon Bay Communities, for his remarks. Ben?

Thanks, Jason, and thank you everyone for joining us today. I'm here with Kevin O'Shea, our Chief Financial Officer, Sean Breslin, our Chief Operating Officer, and Matt Bierenbaum, our Chief Investment Officer. I will start by emphasizing a number of key themes that are top of mind and that we believe are important drivers of our continued outperformance, and then turn it to Kevin, Sean, and Matt to go deeper. As usual, we will reference our investor presentation starting on page four as we proceed through our prepared remarks. Our operating momentum continued in the second quarter with us exceeding revenue expectations and also successfully managing operating expenses lower. Based on this momentum, we further raised our guidance for the year and are projecting sector-leading full-year core FFO and same-store revenue growth among our closest peers. Our operating momentum through the first half of the year has been driven by better than expected demand, with our core renter, the knowledge-based worker, in a relatively strong position right now. Sectors of the economy that encompass our core customer are at effectively full employment with stable job and income prospects. We also continue to benefit from customers' strong tilt towards renting versus buying a home, given the lack of for sale inventory and unaffordability. And finally, as expected, we continue to benefit from the low levels of new supply in our suburban coastal markets, a dynamic that should continue to benefit our portfolio versus most of the rest of the sector for another 12 to 18 months at least. Our strong internal growth is also being fueled by our continued progress with our operating model transformation. As we detailed at our Investor Day last November, our collective set of initiatives, from our investments in technology and centralization to our reimagined operating neighborhoods, are driving meaningful operating efficiencies and allowing us to drive healthy increases in ancillary revenue streams. We're on track with these operating initiatives for 2024 with a strong runway of future earnings growth ahead of us. Importantly, we're also increasingly tapping these operating capabilities to drive outsized yields and returns on new developments and acquisitions. Further to that point, our platform is uniquely positioned to continue to drive incremental earnings growth and value creation from our external investment activity. Our developments underway continue to outperform. During the quarter, we completed three new development communities at an impressive initial stabilized yield of 7.7%, as noted on slide five. We are also incrementally more optimistic about new development, adding two additional developments to this year's starts for a total just north of $1 billion. We're underwriting mid-6% yields on this set of new projects, well within our strike zone of having 100 to 150 basis points of spread relative to market cap rates and our cost of borrowing. And as the final differentiator that I'll highlight up front, We continue to actively reposition our portfolio for superior, longer-term growth, heading from 70% suburban to 80% and 8% of our portfolio in our expansion regions to 25%. We believe we are now moving into a more attractive environment to execute on this repositioning, particularly with the froth in rents and cap rates off in our Sunbelt expansion regions. We're also tailing our portfolio in our expansion markets with lower density and lower price point assets at an attractive basis. At the bottom of page five, $500 million of the $900 million of capital raised year to date has been from asset sales at an average cap rate of 5.1%, which we are then reallocating into acquisitions in our expansion markets. The remaining $400 million was our prior unsecured debt deal with an effective rate of 5.05%, including the benefits of swaps we had in place, highlighting our relative cost to capital advantage. Before turning it to Kevin to discuss our updated guidance, let me touch on a couple of the details of our Q2 results. Page 6 provides the detail of our $0.09 core FFO outperformance in Q2, broken down by category. And please take note that $0.02 of this $0.09 outperformance was timing related and costs we expect to incur in the second half of the year. Slide 7 zooms closer in on our Q2 revenue outperformance with better than expected outcomes on lease rates, occupancy, and other rental revenue, partially offset by bad debt staying more elevated than we had hoped. Other than bad debt, our revenue momentum was strong, which is a nice segue to Kevin to discuss our updated and increased guidance for the year. Kevin?

Ben, turning to slide 7, you will see our updated 2024 full-year financial and operating outlook. Based on our performance to date and our expectations for the remainder of the year, we are raising our projection for full-year core FFO per share by 11 cents to $11.02 per share. This represents a year-over-year growth rate of 3.7%, which is a healthy 100 basis point increase relative to our outlook in April and a 220 basis point increase relative to our January outlook. We are also favorably adjusting our expectations for full-year same-store revenue, operating expense, and NOI growth. We now expect revenue growth of 3.5% and same-store NOI growth of 2.9% in 2024, which are favorable increases of 40 basis points and 80 basis points, respectively, relative to our prior outlook in April. Lastly, our mid-year re-forecast includes a strong increase in new development starts of nearly $200 million to just over $1 billion of new starts in 2024. Matt will provide additional details on this activity in a few moments. Slide 8 highlights the drivers of the 11-cent increase to our full-year projected core FFO per share midpoint relative to our April outlook. Encouragingly and importantly, strong performance within the same store portfolio is driving most of the increase. In addition, we are benefiting from outperformance at our lease-up communities. These amounts are partially offset by other items, including minor adjustments in capital market activity and overhead. Slide nine provides a roadmap from our second quarter core FFO per share to our third quarter projected core FFO per share midpoint. Looking at the components of this sequential quarterly change, we expect revenue growth from the same store portfolio and NOI contributions from lease activity and other stabilized communities to drive $0.08 of sequential core FFO per share growth. These contributions will be affected by a combination of higher same-store operating expense growth in the third quarter, which we expect will increase about 6% on a year-over-year basis, adjustments in capital markets and transaction market activities, which are primarily driven by recent net disposition activity in the last month, consistent with our sell-first and buy-later transaction strategy, and by adjustments in overhead expenses. In the fourth quarter, we expect reduced same-store operating expense growth. And for full year 2024, we now expect same-store operating expense growth of 4.8%, which is a 60 basis point decrease from our April outlook and an 80 basis point decrease from our January outlook. Based on our performance to date and our projected core FFO per share midpoint for the third quarter, The implied projected core FFO per share midpoint for the fourth quarter is $2.84 per share. Notably, this strong sequential growth in Q4 is primarily driven by our growth from our same-store portfolio and our lease-up communities during the fourth quarter. I will now turn the call over to Sean. All right. Thanks, Kevin. Turning to slide 10, key portfolio indicators were strong during Q2 and were off to a good start in Q3. In chart one, turnover remains well below historical norms, in part supported by a lower level of move-outs to purchase a home. In Q2 specifically, turnover was down 600 basis points a year over year, or roughly 12%, and was lower than last year in every region. Lower turnover supported relatively stable occupancy and drove higher rent change as we moved through the quarter. Black-term effective rent change increased from 3.2% in April to 4% in June before moderating into the high 3% range during July. As expected, our east coast regions delivered the strongest rent change in Q2 at 4.2%, with our mid-Atlantic portfolio leading the way at roughly 5.5%. Our northern Virginia and suburban Maryland assets continue to demonstrate strong momentum, but the District of Columbia is still lagging due to weaker demand, which is in part due to the federal government's return to the office policies. and ongoing supply, which is projected to be roughly 4% of existing inventory this year, before declining to approximately 2.5% in 2025. Our Boston portfolio, which represents high-quality assets in predominantly supply-protected suburban submarkets, produced rent change in the high fours during the quarter. New supply in Boston has declined from the low 2% range a year ago to roughly 1.5% this year, and is expected to decline to just above 1% next year, with urban supply projected to be substantially higher than suburban supply. Assuming a relatively static demand environment, the outlook for our suburban Boston portfolio remains quite positive. The metro New York, New Jersey portfolio, two-thirds of which is diversified across various suburban submarkets in Westchester, Long Island, and central and northern New Jersey, delivered 4% rent change during the quarter. Recently, the strongest growth has occurred across the various submarkets in New York City, northern New Jersey, and Long Island. Some of the more distant locations in central New Jersey have lagged as employers increased their in-office workday requirements in the city. The West Coast established regions produced rent change in the 3% range. Our Seattle portfolio, which is primarily located in east side and north end submarkets, led the way with 6% rent change during the quarter. While there are some pockets of new supply in select suburban submarkets, most notably Redmond, most of the new inventory is concentrated in urban submarkets and is not competitive with our portfolio. On the demand front, major employers like Microsoft and Amazon requiring more in-person work have supported the increased demand we've experienced throughout the first half of the year. Northern and Southern California lagged Seattle with rent change in the mid 2% range. In Northern California, we had better momentum in San Francisco and San Jose, with 3.2% and 4% rent change respectively during Q2. However, the East Bay remains soft with rent change of 50 basis points during the quarter. Given new supplies projected to be below 1% of stock across the major markets in Northern California for this year and next year, trends could continue to improve in the near future to the extent we realize a modestly stronger level of demand. Moving down to Southern California, Orange County produced the strongest rent change at 4.2%, followed by San Diego at roughly 3%, and L.A. in the 2% range. Orange County and San Diego have been healthy markets year to date, but performance across the various submarkets in L.A. has been choppy and highly correlated with the volume of inventory returning to the submarket from nonpaying residents. As it relates to bad debt, which is depicted in chart 4 on slide 10, While we're encouraged with the year-to-date trend and underlying bad debt across our same store portfolio, results were choppy during the second quarter. We're still expecting bad debt to average roughly 1.7% for the full year 2024 at approximately 60 basis point improvement from 2023. As we've stated previously, pre-pandemic bad debt for our portfolio was 50 to 70 basis points. So to the extent we reach that level, we realize an incremental 25 million in revenue or more over the next several quarters. Transitioning to slide 11 to address our updated revenue outlook for the year, we now expect same-store revenue growth of 3.5% for 2024, an increase of 40 basis points from our most recent outlook. The increased outlook is primarily driven by stronger lease rates, as lower turnover and stronger occupancy in the first half of the year allowed us to achieve higher rental rates than originally anticipated a trend we expect to continue. We now expect like-term effective rent change in the 3% range for the full year 2024, up roughly 100 basis points from the 2% level we expected at the beginning of the year. We realize 3% rent change in the first half of the year and expect to produce similar performance in the second half. We've seen rent change begin to moderate to start the third quarter and consistent with seasonal norms, expected to decelerate through the back half of the year. We expect renewals in the mid-4% range for the balance of the year, while new move-ins average roughly 1.5%. The near-term outlook for lease renewals remains healthy, with offers in the low 6% range for August and September. Moving to slide 12, you can see where we're projecting stronger revenue performance relative to our prior outlook. In our established regions, we're expecting substantially stronger growth in New England the mid-Atlantic, and Pacific Northwest. We're expecting modestly better growth in New York, New Jersey, and almost no change in northern and southern California. In our expansion regions, Denver and southeast Florida are expected to perform slightly better than we originally anticipated, but our other expansion regions of Dallas and Charlotte are expected to be weaker, primarily as a result of the continued challenging levels of new supply in those markets. And then finishing on slide 13, we're on track to realize roughly 10 million of incremental NOI from our operating initiatives in 2024. You can see those results in our same store portfolio in two areas. First, the expected contribution from other rental revenue, which is projected to increase by 14% year over year. And second, highly constrained payroll costs, which have declined year to date and are expected to grow at roughly 1% for 2024. which is well below the average merit increase of approximately 4%, and is related to a reduction in the number of onsite positions. These reductions relate to the enhanced efficiency of our teams, which is supported by our digital efforts and enabled by our new labor strategy. From a broader perspective, we're on track with the Horizon 1 and 2 financial objectives we communicated during our investor day last year, which reflect generating an incremental 80 million in OI from our portfolio. At year-end 2024, we expect to have achieved roughly $37 million of that $80 million and look forward to producing the balance of it over the next few years. We'll continue to keep you informed about our efforts and achievements as we innovate further in the future. Now, I'll turn it over to Matt to address recent lease-up performance, development starts, and capital recycling activities. Matt? All right. Great. Thanks, Sean. Turning to our development communities, you can see slide 14 details the continued impressive results being generated by our lease-ups. The six development communities that had active leasing in the second quarter are delivering rents $320 per month, or 11% above our initial underwriting, which is translating into a 40 basis points increase in yield. And this performance is being supported by strong leasing velocity, with these assets averaging 37 net leases per month which was an all-time company record, driving our increased guidance for lease-up NOI for the year by roughly $4 million. On the strength of these results and with the transaction market providing more insight into current asset values, we're also increasing our projected development start volume for the year, as shown on slide 15. We now expect to break ground on nine new communities this year for a total projected capital cost of $1.05 billion, with the vast majority of these starts in either expansion regions or the Northeast, and almost exclusively in suburban submarkets. Three of these starts occurred in the second quarter, with most of the others expected in Q3. Based on today's rents, operating expenses, and construction costs, these developments are underwriting to a projected yield of 6.4%, generating our target spread of 100 to 150 basis points over current cap rates. And we control a total development rights pipeline of roughly $4.5 billion, providing plenty of opportunities for future profitable growth in years to come. Turning to slide 16, after several quarters which were quiet, we have also been active in the transaction market recently, closing on five dispositions since our last call for aggregate sales proceeds of $515 million. All of these dispositions were in our established coastal regions, and they priced at a weighted average cap rate of 5.1%, reflecting an average price per home of $475,000. Three of the five sales were also in urban submarkets, where we are seeing better investor interest after several years where these locations were heavily out of favor with institutional capital. We've reinvested a bit less than half of this capital so far into three acquisitions in our expansion regions at an average price per home of $260,000, as we are starting to find attractive opportunities to buy the low replacement costs in some markets and assets that we like. Our asset trading activity continues to move us closer to our long-term portfolio allocation goals of having 25% of our portfolio in expansion regions and 80% in suburban submarkets. We'll look to redeploy more of those proceeds before the end of the year, as well as bring several additional assets to market as we continue to focus on optimizing our portfolio as we grow. And with that, I'll turn it back to Ben.

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

Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment please while we poll for questions. Thank you. Our first question is from Eric Wolf with Citi.

Please proceed with your question.

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

Yeah, Eric, this is Kevin.

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

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

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

Got it. Thank you.

Thank you. Our next question is from Austin Werschman with KeyBank Capital Markets. Please proceed with your question.

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

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

That's fair. And then, so just based on maybe the projected acceleration in same-store revenue growth from 3Q to 4Q, you mentioned that picks up a bit. I think you highlighted in the presentation. I know you don't want to provide too much on 25, but is that directionally what you'd expect then see heading into next year, just given kind of, you know, the growth you're getting in the back half of the year on lease rate growth, you know, what you're seeing from a supply perspective? Or is there something specific in the fourth quarter that's causing that to reaccelerate?

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

Thanks for the time. Thank you.

Our next question is from John Kim with BMO Capital Markets. Please proceed with your question.

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

Sure. Sean may want to jump in here a little bit. Essentially, what you've got going on in the second quarter, third quarter, is a seasonal uptick in the number of the OpEx categories, particularly redecorating utilities and marketing expenses, as well as a timing-related increase in our routine expenses. So what you're seeing, you're going through the second quarter, third quarter, essentially a nine-cent sequential increase in OpEx in the same-store portfolio. And then the fourth quarter, you see that reversal seasonally in the fourth quarter, where roughly there's going to be sort of a 7% sequential decline from the third quarter to the fourth quarter in OpEx.

So that's a little bit of the background on that one.

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

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

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

Yeah, hey, John, it's Matt. Yes, very similar. I mean, again, these are communities where it's 150 homes in one location, you know, with a small amenity package, including a cub house and a pool, and the operating margins are very comparable to multifamily communities that we would have in that region.

Great. Thank you. Thank you.

Our next question is from Jamie Feldman with Wells Fargo. Please proceed with your question.

Great. Thank you. So I appreciate the color or the thoughts on the back half of the year in terms of your expected rent change, renewals mid-four, new one and a half. Can you talk more about by region, whether it's, you know, your major regions in the northeast and the west or just kind of coastal versus Sunbelt, how you think that plays out? And then, you know, how do you feel about visibility at this time this year versus this time last year? you know, clearly we're heading into the slower season, but what feels different to you?

Yeah, Jamie and Sean, I want to take your second question first. Just from a macro perspective, I think we feel generally pretty good about the outlook that we've provided. And I would say just, I mean, relative to last year, I mean, different things happening in terms of the general outlook, but I'd say overall, you know, Each time we present our forecast, you know, we're presenting what we think is our realistic case for that forecast and the environment sort of dictates that. So I wouldn't say we're, you know, more or less confident this year than last year. Per se, there's a lot of things that are happening out there that you could point to that create concerns or you could create, you know, optimism. We try not to get caught up in that. As it relates to the outlook for the markets, I try to keep it at a high level as opposed to going through all the regions, but we do expect continued outperformance across our established East Coast regions in the second half of the year relative to the Sun Belt and relative to the West Coast regions, generally speaking, with one exception potentially being Seattle, which has surprised, I think, most of us to the upside in the first half of the year and expected solid growth in Seattle in the back half of the year. So, as I go through every region, I would think of it as East established, West established, followed by the expansion regions in terms of the latter performance.

Okay, thank you.

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

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

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

Okay. All right. Thank you very much. Thank you.

Our next question is from Adam Kramer with Morgan Stanley. Please proceed with your question.

Great. Thanks for the question. I was wondering where you guys are going out with renewals for August, September, and maybe even October, if you have that.

Yeah, Adam and Sean, we'd mentioned that for August and September, renewals went out in the low sixes, which is the visibility that we have today.

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

Yeah, Adam and Sean again.

I mean, I think the way it lays out is pretty consistent with historical seasonal patterns where you think about where you start the year in January, asking rents typically rise up through kind of early July. Depending on the market, I'm kind of just picking the average here, you know, 6%, 7%. Then you see a decelerate in the back half of the year. also consistent with seasonal norms. And so the acceleration that we saw was a combination of two things. One, the seasonal factors. Second, it's just our overall revenue management approach. And what we saw early in the first quarter was better than anticipated occupancy, lower turnover. We hit the gas pretty hard as it related to asking rents. You saw that manifest itself in both renewals and new move-ins as we moved through Q2. But as you see the seasonal peak in rents, and you try to make sure that you're maintaining stable occupancy, you start to see it begin to decelerate July, August timeframe to the balance of the year. And so as you look at what happened, for example, from June to July, some markets were up a little bit, some markets were down a little bit. Overall, we've met down slightly 30 basis points from June to July, but it's not material in the whole scheme of things. But we would expect to see continued seasonal deceleration as we move through August all the way through the balance of the year.

Great. Thanks for the time. Thank you.

Our next question is from John Pawlowski with Green Street. Please proceed with your question.

Thanks. Matt, a question for you on just to get a sense for how the economics of the development rights pipeline compared to the starts this year. So if you went and started as an additional billion dollars of starts, how would you yield compared to the 6.4% you're expecting for 2024 starts?

Yeah, hey, John, it really is depending on the geography. So, you know, the next billion dollars versus Starks, what are those yields going to look like? It does depend on where they are. So, you know, we're finding yields, you know, basically from here in the mid-Atlantic north to Boston, those suburban kind of medium density to lower density products. mid to high sixes you know to even even pushing seven or even a little bit north of seven in some of our jersey starts what we're seeing in the expansion regions is yields kind of around six low sixes but again cap rates are lower there as well so you know that we still have that spread and on the west coast it's hard to find deals that you can get a yield into the sixes which is why very little of the start activity is in those regions so it would really depend on kind of the mix of business And then the other thing I'd say is hard costs are moving and you don't know how much until you actually bring the jobs to bid. So some of the acceleration that we're seeing this year is frankly because hard costs are coming in a little better than we thought. So those deals are starting to pencil a little better than we thought. And we have more visibility into that on the jobs that are closer to start than the ones that aren't. So there's some deals that aren't going to be ready to start for another year or two where based on the hard costs we looked at 12 months ago, They might be in the fives, but based on where hard costs are today, they might be in the sixes.

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

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

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

Yeah, so the three we bought so far, the cap rate's around a five. And again, what we sold, the cap rate's just slightly north of that at a five one. So that spread has actually come in some. I looked at last year, it was probably 40 basis points So now, you know, that's one reason why we're looking to be more active because we feel like the trade is looking a little better. You know, we are hoping to do at least another $300 million or so of acquisitions before the end of the year. We could certainly do more. We have more assets that we're going to bring to sale in the disposition market as well. But, you know, it depends on if we find assets that we like.

Okay. Thanks, Matt.

Thank you.

Our next question is from Josh Dennerlein with Bank of America. Please proceed with your question.

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

On the second part, Josh, that's a separate bucket of activity, so that's not in the operating model $80 million target. You know, it's part of a NOI enhancing pool that also has the sustainability benefits associated with it. And so when we talked at the investor day around our increased menu and opportunity set to be investing back into the portfolio in the, you know, 10 to 14% type of range, those solar projects were a component of that.

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

I wouldn't – I'm not sure there's anything to watch out for going forward. I mean, typically – and Kevin went through this earlier, but, you know, in terms of the sequence of OPEX, you do see a spike in the third quarter historically, right? And as Kevin noted, for this year, that spike from Q2 to Q3, about a third of that's in utilities based on seasonal increases in energy and water and sewer and things like that. About a third's in R&M, seasonal increase in turnover, which is historically the case, and some projects from the first half to the second half, and then kind of nits and nats, and then things slow down as you get into the fourth quarter. So I think that's normal. I don't think the pattern's changed materially. What you should see going forward that would be different, and we have explained before, is that as it relates to the absolute level of OPEX growth, we have a number of things happening that will begin to dissipate in terms of the impact on the portfolio in 2025. So our OPEX guidance for the full year is the 4.8 that we identified, but there's about 160 basis points of unusual activity embedded in that. about 80 basis points from the burn-off of various pilots, mainly the 421As, and then the net impact of the operating initiatives, primarily in the utilities category with both telecom, Internet, things of that sort. So kind of the organic run rate is closer to 320 basis points for this year, and some of those elevated activities that I just mentioned will begin to dissipate as you get into 2025. So without providing specific guidance, there's a little bit more of a tailwind as we get into 25 related to those various categories, but the seasonal patterns won't really change if you think about it from quarter to quarter.

Thank you. Yep.

Thank you. Our next question is from Michael Goldsmith with UBS. Please proceed with your question.

Good afternoon. Thanks a lot for taking my question. Are you seeing any changes in resident behavior across markets or any sort of price sensitivity among your tenants? Thanks.

Yeah, Michael and Sean, in terms of sort of movement, if you want to describe it that way, nothing terribly substantial. The only thing that might be worth noting that has continued in Q2, and we saw the same thing in Q1, is that in the tech markets, particularly in Northern California and Seattle, the percentage of new move-ins from a more distant location within that same region is a little bit elevated. So people that may have moved to second, third, ring out, or some rural location during COVID over the last year, they have started to come back in closer. It wasn't like they moved 1,500 miles away, but they moved, you know, 150 miles, you know, that type of thing. So that's the only thing of note as it relates to movement. And then your second question, just in terms of other resident behavior, you know, in terms of reasons for move-outs. The percentage of move-outs related to rent increase is above historical norms. Not surprised, just given the inflationary pressures we've seen across the economy over the last couple of years. But on the sort of flip side, you know, move-outs to buy a home is way, way below historical norms. And so renting is still the more affordable option, particularly in our markets where the spread between Because median price for rent and median price for home is equivalent to more than $2,000 a month is a big number in our established regions. Renting is still the most affordable alternative. So people are potentially making different choices in other parts of their daily life. That's the only thing of note.

Got it. Thanks for that. My final question is, it seems as though there's been a push for more supply chains. in New Jersey suburban markets. Is there a risk that similar supply growth could pop up in some of your other suburban markets? Thanks.

Hi, Michael. It's Matt. It's an interesting question. For sure in Jersey, the last round of Mount Laurel kind of affordable housing allocations was more aggressive than the prior three rounds, and we've been a beneficiary of that with an increase in very high-yielding development opportunities. But there will be more supply in some of those inland suburban markets than we've seen in the past. We haven't seen that. Boston, by contrast, the 4DB framework has been the same. for the last 30 years. There's actually a lot of towns that are kind of at their 40B threshold now. So as Sean mentioned, the suburban supply in Boston is pretty muted, and I would expect it to stay that way. Long Island is another place where they don't really have the ability to force supply on some of these recalcitrant jurisdictions. The governor tried and got her head handed to her. So I would say Jersey is probably the biggest example. The one that people talk about a lot is California. where the state legislature is trying to do things that would push jurisdictions to approve more housing. What we've seen so far is those attempts haven't been as effective as I think the advocates had hoped because it's still really, really difficult to make the economics work in California. So I wouldn't be concerned that there's gonna be a sudden onslaught of supply there anytime soon.

Thank you very much. Good luck in the back half.

Thank you. Our next question is from Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Hey, good afternoon. Thank you. Two questions. Just first, going back to the bad debt, it was really interesting that you guys presumably would have a higher, more affluent renter base, and yet The bad debt remains elevated. It's certainly above what MidAmerica was commenting on their call. And specifically, two markets that jump out are Metro New York, New Jersey, and MidAtlantic, which rival Southern Cal. So can you just give a sense of overall why your renter base, which assuming has pretty good jobs, one has higher delinquency, and then two, what's going on in Metro New York, New Jersey, and MidAtlantic that's causing delinquency? the delinquencies to be as high as they are.

Yeah, Alex, this is Sean. I'm happy to take that one. In terms of trying to compare bad debt across companies, one, I'd say it's probably a little bit challenging just because you don't know everyone's policies. And what I mean by that is everyone bills different amounts for different things. So, you know, when someone doesn't pay us, for example, we bill them for everything. You know, we bill them for the rent, we bill them for the late fees. Billing for utilities, there's lease break fees, there's legal costs. There are a lot of things that we bill for. And through our customer care center, Virginia Beach, we track it very carefully. So I don't know if everyone's the same or not, but differences in policies can impact what the level of bad debt is. Other than that, it's hard to comment on specifically different customers. As it relates to the markets that you mentioned, yeah, New York and Jersey is an example. It's only 23% of the outstanding accounts that we have, but it punches way above its weight in terms of dollar value. So it's about a third of the outstanding receivables that we have that we're trying to chase down. And the main issue there, as you may know from being there, is just the pace at which the courts are moving. It is the slowest jurisdiction by far in the country. And so we have almost 400 accounts out there in the greater New York metro area, and a lot of them have been sitting out there for more than a year in terms of their current time sort of in the eviction process, which continues. So we just need to see faster movement in primarily New York City, but it does extend to places like Long Island and Westchester. And then in the mid-Atlantic, a lot of that is tied to accounts in the District of Columbia. and Montgomery County, two areas that have also been slow and also have taken steps to try to give renters more time through free legal advice, delays in court cases, and things of that sort. So there's sort of a combination of factors that have led to it where New York, New Jersey, the Mid-Atlantic, and Southern Cal are kind of all in the general same range. And while we've seen some movement, we need to see faster processing, and sort of the relaxation of some of these other supportive benefits to prospective eviction cases kind of dissipate to allow the processes to continue to move. So it's just good to take time.

Yeah, second question is on dispositions. Obviously, Darianne jumped out, given that you established a pretty good renter base there. But, you know, in looking over your Metro New York portfolio, you have a lot New Jersey, a lot Long Island, And Connecticut, you really are only down to two, just New Canaan and Wilton. You used to have Shelton, Stanford, a bunch of other markets. So is Connecticut just not a desirable market, or you saw an opportunity where disposition IRRs were just way too good to pass up, and your intent is to re-bulk up in Connecticut versus the New Jersey and Long Island?

Yeah. Hey, Alex. It's Matt. Now, it is – we are almost complete with exiting the Connecticut market completely. You're right. If you go back, I think we probably sold 15 assets in Connecticut in the last six or seven years. And, you know, once you, once you're on that path, you know, to have a couple becomes very operationally inefficient. So you're right. I mean, those, the ones that Darian was among, you know, kind of the, the absolute most desirable of our Connecticut portfolio, but you know, we've kind of made the decision that we're exiting that market. And so to, you know, when you only have two or three assets left, it's kind of not worth it.

Okay. Thanks. As a final reminder, if you would like to ask a question, please press star one to get into the queue.

Our next question is from Omotayo Okonsanya with Deutsche Bank. Please proceed with your question.

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

Yes, Sean, happy to take that one.

When you say the state front, there's a lot of different things happening across different states. Without being specific, I would just say that the various associations that we're involved with and others are very active in engaging with the local, you know, political folks as it relates to what's happening, what's being proposed, ballot initiatives, various things like that. So there's a lot of engagement there to manage that activity, most importantly to educate people as it relates to the pros and cons of various policies. I think the trend we've seen, generally speaking, is that most political entities and individuals are sensitive to Matt's earlier point about doing things that will impact the future supply of housing in a negative way. And I think that's something that has been good for the industry over the last couple of years. The topic of rent control might sound good, but when you understand the policy and its impacts, it is absolutely the wrong policy. And for that same reason, there is plenty of engagement, not only with the Biden administration, but the potential to candidates, particularly through the National Multihousing Council and others as it relates to any kind of national policy, which likely, you know, putting a lot of teeth to it, first off, for the states, but just the harm as it relates to the supply of housing, which is actually what they're trying to solve for. I think there's likely a roadmap there for other policies to promote some housing in areas where it's needed. That is not record control in nature, but obviously can't predict exactly what people may talk about in an election.

That's helpful. And then if I may ask one more, in your expansion markets, are you seeing anything different just in regards to how the competition is is kind of behaving, you know, in light of kind of, uh, supply deliveries. Um, and I know we have kind of have the classic, uh, use of concessions, but anything unusual in regards to just business practices to kind of shore up their, their financials that you may be seeing?

Not necessarily as Sean, again, I mean, it's a typical concessions, you know, two months, three months, depending on the lease term. in the sort of hyper-supply markets, like part of Austin, as an example, or maybe south into Charlotte, you know, places like that. You know, people waived bonds, you know, stuff like that. And nothing atypical from what you typically see in this kind of environment where there are pockets of supply coming through and backing lease-ups.

Okay. Thank you. Thank you.

Our next question is from Rich Anderson with Wedbush. Please proceed with your question.

Thanks. Good afternoon. Thanks for hanging out a little bit longer here. So in terms of your Sunbelt expansion, obviously you're not getting any bargains there today. And if you're listening to the Mid-America call, things are trending in the right direction, at least eventually. Do you feel a sense of urgency to move more now than ever? And in part two of that same question is, Can you characterize the nature of your sellers, and are you talking to any of the REITs in the cases where you are expanding through acquisitions?

Rich, this is Ben. I'll handle the first part, and Matt can talk to the seller dynamics. On the first part, and we think it is an opportune time to effectuate the trade, and Matt talked to earlier sort of the upfront dilution has gotten pretty narrow as we think about selling older, slower growth assets out of our established regions and then reallocating that capital. The other part that comes to mind is I'm not a believer that that window's closing. I think when you look at the supply dynamics that are going to continue to be a weight on operating fundamentals in a lot of those markets, as well as that we're still to a certain degree at the front wave of refinancing activity, I expect the window of opportunity to be with us for a while.

Rich, in terms of who the sellers are, what we're finding, at least the assets we've been buying and then some of the others that we've been on and maybe haven't been successful, there's a lot of kind of institutional owners that are in funds where the funds are limited life vehicles. They may be reaching the end of their seven or ten year fund life and they're just in a position where and frankly they're sitting on a lot of gains on those assets if they bought them in you know, back in 14, 15, 16, even though, you know, not as much gain as what it would have been if they had sold it two years ago, they're still in a fine position. And so, you know, they're going to meet the market. Again, that's not the majority of the market. And that's why there's still plenty of assets that are not trading and sellers that, you know, are still holding out for yesterday's prices. But, you know, that's the typical buyer profile. It's usually a fund sponsor with institutional capital who's, you know, three funds later now, and they're closing out this one.

But not your REIT brethren down there?

No, we have not. We haven't really anything that another REIT was selling.

Okay. Second question, I think the townhome model is interesting. You consider millennials building families and so on. Does that model work better in the expansion markets in general, or is it sort of across the board sort of thinking in terms of that, building out that product? Thanks.

Yeah, it's an interesting question. It really does depend on the land economics. So you do see more of it in some of our expansion regions because land is cheaper there and the zoning is more flexible. So you're seeing a lot of it in North Carolina. We're seeing a lot of it in Texas. Not so much in southeast Florida because that looks a lot like the northeast in terms of where rents are and land values. And very little in California because, again, kind of land values and the population The other key factor is what's the relative price of a home versus the rent. And when you get into California where the homes are seven figures, you know, it just doesn't pay to build rental townhomes there. It does pay in, you know, in some of these other regions, and those economics are a lot closer.

Okay, great. Thank you.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Ben Shaw for any closing remarks.

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

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