Citi's 2024 Global Property CEO Conference. I'm Nick Joseph, here with Eric Wolfe with Citi Research, and we are pleased to have with us AvalonBay's CEO Ben Schall. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those in the room or the webcast, you can go to Live Q&A and enter code GPC24 to submit any questions. Ben, we'll turn it over to you to introduce the company and team, provide any opening remarks, tell the audience the top reasons an investor should buy your stock today, and then we can get into Q&A.
Terrific. Thanks, Nick and Eric, for hosting us. I'm joined here today by Sean Breslin, our COO, and Kevin O'Shea, our CFO. We are AvalonBay. We're the largest public apartment company in the country of an enterprise value of roughly $35 billion. We went public 30 years ago and since that time have really delivered outstanding results for shareholders: cumulative total returns north of 25,100%, and an annualized total return of 11.5%. Very successful 2023. On the operating results side, we delivered industry-leading Core FFO results that translated into some very strong TSR results. And as we enter and continue in 2024, feel relatively well-positioned for a number of reasons, and I'll touch on those elements to set the table for today. First and foremost is our portfolio positioning: 70% of our portfolio in suburban submarkets, heavy concentrations in suburban coastal markets.
In the near term, the result of that is we are up against significantly less new supply than many other markets around the country. I think that is top of mind for most investors at this point. Maybe what's less top of mind and very top of mind for us is we think about demographic changes and shifting preferences from the core apartment customer. We feel like our portfolio with that suburban orientation is very well-suited to capture those changing demographics over the next 10 years. We're headed from 70% suburban today to 80% suburban. The other target that we've set for our portfolio allocation activities is to grow our expansion market portfolio from 8% of our portfolio today to 25% over a number of years.
Our general view is that our opportunities to move into those markets in terms of cost basis and growth profile are more attractive today than they have been over the last couple of years. That's point number one. Second point is the time, energy, resources that we placed in transforming our operating model are really delivering bottom-line results. We exceeded our expectations for the NOI uplift to come from those operating model transformations. We exceeded expectations last year pretty meaningfully. And at our investor day in November, we increased our target to $80 million of annual recurring NOI to come from our operating model activities. And the way I would generally describe that to the room is making terrific progress and also believe we have a nice runway ahead of us to continue to drive operating results.
Third, based on our set of strategic capabilities, we see a pretty rich opportunity set for investment in front of us today. We are leaning into investments in our existing portfolio a little bit heavier this year. We've targeted about $100 million there, and we're projecting about 10% returns on apartment-only renovations, especially dwelling units, solar investments. Great in terms of incremental yield and long-term value creation. On the development side, our projects underway continue to outperform. It's been a continued driver of both earnings and value creation for us as a company. And then over the medium-term and longer-term, development starts are definitely more challenging today. But I also emphasize to the group that these are the types of times, times of dislocation, where we traditionally have found some of our most attractive opportunities.
So we are positioning ourselves to be able to take advantage of those as we think about longer-term value creation for shareholders. Then third, in terms of investment opportunities, we have been growing our programs to provide capital to third-party developers, and we have two of those. One's our structured investment business where we provide preferred equity in mezz, and the other one's our Developer Funding Program. And for sure, we are seeing better-quality sponsors, better-quality real estate, and a better return profile through that investment in today's environment. Then I'll end on the balance sheet. We continue to have one of the strongest balance sheets in the industry. We continue to trade at the tightest spreads of anyone in the sector, really some of the tightest spreads of anyone in REIT land. And it provides us with an advantage financially.
It also positions us to be able to take advantage of opportunities when they present themselves over the coming years. Then maybe before I turn it back over to you guys, I assume folks saw our operating update on Friday. We're projecting our same-store revenue figure. It's about 45 basis points above where we previously expected it for the quarter. That is being driven by a combination of better-than-expected occupancy and better-than-expected underlying bad debt. I'll stop there and turn it back to Nick and Eric.
Sure. Thanks. So we'll get into the operating update in a little bit, but I wanted to build off some of the remarks that you made a second ago, which I think mirrored what you said on the call, which is that in environments like this, you typically see some of your most attractive investment opportunities. I'm trying to sort of marry that with the fact that transaction volumes are down a lot. There's a ton of capital that's sitting on the sidelines trying to get involved in any type of marginal distress. Do you think you're actually going to see those type of acquisition or development opportunities this year, and what gives you the confidence that you'll be able to see that?
I do. I can give you some more color on the transaction markets. But our general view is that as the world shifts from one in which capital was homogeneous available to all sorts of players, generally at the same capital cost, to the world that we are in today where capital is more differentiated and the cost of capital is differentiated across various players, that we will have an advantage and have the opportunity to use both our balance sheet strength and leverage our strategic capabilities. So one connection I would make for you, Eric, and reinforce to the group is the operating model transformation activities, which is driving internal growth. We are also increasingly tapping those capabilities to be able to drive external growth and effectively look at both acquisitions and development opportunities with the potential to drive above-market types of yield and value creation.
Then you also mentioned that you're able to enter the Sunbelt today at a lower sort of cost basis than you have been in the past couple of years. I was hoping you could just expand on that and also trying to think about, yes, I guess it's lower cost basis, but on a relative basis to your cost of capital or a relative basis to the coastal assets you're selling, do you see those Sunbelt opportunities as being more attractive today than they were, say, a couple of years ago?
Sure. I'll make a couple of comments on the topic. So where you ended there in terms of the relative trade, yes, we see that as more attractive today. A lot of our growth in our expansion regions in the Sunbelt over the last number of years has really been trading capital out of our established regions and into our expansion regions. And what we think about in terms of that relative trade is what's that IRR look like, and what's that IRR more specifically look like on a cash flow generation basis? Because we've been typically selling older assets with a higher CapEx profile and maybe a slightly slower growth profile to redeploy that capital into the expansion markets. And there we're generally buying assets that are a little bit younger and that we think will have a better growth profile on average.
So we've been willing to accept some dilution on that trade, and we feel like that dilution has narrowed in this current environment. I gave you all that with the caveat, and you made the point in the prior question, that the transaction market still remains relatively muted, right? So there's not a lot of data points there. AvalonBay, we have taken out a handful of assets early this year to get a better read directly on what the underlying transaction market looks like, what the bidding pools look like. And then if and when we transact on that set of assets, we'll then influence how do we think about the trade into new capital allocation decisions.
If we think about, I mean, I know it's going to depend on pricing opportunity, but if I look at some of the portfolios on the market today, I think a home builder, for instance, has a portfolio on the market. Maybe it's attractive to you, maybe not. So I guess that's the first question. But then if I look at some of your public peers, they're trading materially sort of material discounts to NAV. Maybe they're more interested in selling some assets just given that they can then use the proceeds to buy stock. We started seeing one of your peers do that recently.
Do you think there could be an opportunity at some point this year to make a bigger acquisition or do something sort of more material to get you closer to that target of 25% that you're thinking about, or do you think this is going to just be sort of a slower process of doing one or two assets, doing some development opportunities, and it's going to take multiple years to get there?
Our mindset is we are prepared, and we want to be prepared to take advantage of those larger opportunities. As we assess the landscape, and you talked about portfolios as an example, I think we've done well, and our operating results in our expansion markets have performed relatively well because we've been conscious about the product that we're acquiring there. And if I had to summarize it, we are pushing ourselves to think about submarkets that are a ring or two out, to think about lower-density product, to think about lower-price point product. And we've done that conscious of the supply that was coming through in the markets. And so we've seen that. So some of the portfolios that have come through have tended to be the large one you referenced as an example tended to be more mid-rise, high-rise, a little bit more urban-oriented.
When we think about portfolio optimization, that's not what we're gravitating towards.
How do you think about, as you make this transformation, the impact to both NOI margins and cash flow margins? Obviously, you're trading some older products, so you get the AFFO benefit, the cash flow benefit there, but at the same time, maybe you don't have the scale, and you're giving up some scale in established markets.
Yeah. I'll make a comment and turn to Sean to make some commentary. So we've been focused on a set of six expansion markets and really remain focused on those. Because as we build our density in those markets, we're able to leverage more and more of our scale, similar to the type of scale that we're able to generate out of our established regions. So we've made good progress. We led with Denver and Southeast Florida, and we have our other expansion markets that are now behind that. So that's kind of an overall orientation. Sean, you want to comment some around kind of NOI margins?
Yeah. I mean, probably where you're heading, Nick, is in some of the expansion markets, generally margins are a little bit lower than our coastal established regions. That's a fair point. The assets that we are looking to acquire, I'd say two things. One is they're probably slightly above-average margins for the market just based on the type of assets, the type of service offering, the price point, etc. Some more suburban walk-up type assets, not a lot of conditioned corridors, things like that that drive cost. And then in terms of operating efficiencies, we do try to structure what we are operating in those environments, and we're thinking about it through the capital allocation lens to try and cluster as much as possible in various submarkets so that we can get some operating efficiencies.
Some of the tools and technology platforms that we're deploying today will allow us to do that more so in the future without having as much portfolio density as maybe what we have needed in the past. It still is quite helpful, but at the margin, it will be slightly better for us in the future than what we've seen.
And I think I missed this in your previous answer, but why is it that you don't want mid-rise or high-rise product in the urban areas? Is it just competition versus supply? And I guess along the same lines, what are you doing to sort of think about the supply risk as you become greater weight within the Sunbelt? Because I think if what was happening today was happening five years ago, I think every coastal REIT would say, "Hey, I told you so.
This is what happens every single time the Sunbelt outperforms. Supply comes. So how are you looking to sort of protect yourself from that risk going forward?
It does really get down into submarket selection and specific asset positioning. And if you looked at our Denver portfolio, but I was going to point you to one direction to make this point, I would look at our Denver portfolio, which has been substantially suburban, a lot of low-rise, lower price point that inherently has just been facing less new competition. And so if you look at Denver performance, those markets have held up relatively well as compared to urban Denver. And we do have a new development asset in urban Denver, and like a lot of those types of market, it is facing more pressure today with elevated supply and what's called level or softening demand.
Maybe switching to operations if there's no questions on the external growth environment. Saw your update. Looks like Same-Store Revenue, 45 basis points better than you were expected. Sounds like it's due to bad debt and occupancy. I guess my question is, based on what you're seeing so far, does that inform sort of how you're going to sort of price things going into peak leasing season? Does that say, "Hey, now we can be a bit more aggressive with new leases"? Does it change your strategy based on what you've seen so far and the fact that you're ahead of where you are in guidance?
Yeah. Just to provide a little more color on that, in terms of the update we provided, it's an expectation for Q1 revenue performance to be about 45 basis points ahead of plan. If you break that down a bit, roughly half of that is expected through better-than-anticipated occupancy, about 25% from net bad debt, and then the balance, kind of a mix of other items. On the occupancy side, I'd say two things. One is demand is slightly better than we anticipated and combined with lower-than-anticipated turnover so far during the quarter, with turnover being down about 5%-6% on a year-over-year basis. So greater retention, slightly better demand, push to slightly better occupancy, 20-22 basis points is kind of the rough estimate at this point.
And then on the bad debt side, about three-quarters of the better bad debt is just through underlying collections from residents being better than anticipated, particularly in the month of February. So one month doesn't make a trend, but based on what we see today in terms of asking rent trends, what we've seen with turnover, what we've seen with bad debt, I'd say we are optimistic but not ready to sort of extrapolate that through the next 10 months of the year given it is relatively early at this point. We had anticipated occupancy to pick up as we move through the year, particularly as we got into late March. So certainly did pick up more quickly than we anticipated, primarily due to that lower turnover than we expected. As it relates to pricing power, I mean, we're always dynamically pricing based on current conditions.
Given where we are from an occupancy standpoint, we are pushing rates, and that is consistent with what we would traditionally do.
So I guess my question is, what do you look at to try to understand sort of from a forward indicator perspective? Because obviously, you don't have visibility to what's going to happen seven months from now, but you are seeing customers sign leases today, 30 days-60 days or even sometimes further out than that. So if you kind of look at that pace, I mean, is that informing at all sort of what you expect to see in the April, May time period? And sort of what does the strength of that look like relative to a normal year?
Yeah. In terms of one of the key variables that we see is two things, really. One is how renewals are pacing. As you mentioned, we make renewal offers 60 days-90 days in advance, but we track it week by week in terms of what's outstanding, what's been accepted, the kind of renewal rent increases people are accepting to try and determine, A, what we might be doing on the new move-in side based on less or more inventory coming to us. And it also informs our negotiation guardrails with the remaining sort of open renewals that have not yet been locked down. It's sort of an iterative process week by week, both on the move-in side and the renewal side, adjusting our parameters based on the expected available inventory to lease. That's sort of the primary factor.
And then that obviously influences the pace of asking rent growth as we move through the year, etc.
So, what does the availability? I'm going to try to steal that. The availability of inventory tell you today? What does that look like?
It's roughly at par for where we were last year.
Usually, the questions I get in terms of markets kind of go around some of these more volatile markets like the Bay Area. I mean, is there anything that you can tell thus far about it? Obviously, it's been one that's been of interest to people not only because of multifamily sort of overweight to that area but also because rental rates are actually down there versus, call it peak, and people are trying to figure out whether there's going to ever be a real recovery there or if it's sort of structurally changed market. Is there anything that you can tell thus far from this year about whether you're starting to finally see a recovery there, or do you think it's just going to be another sort of muted year?
Yeah. Good question. I'd say both Northern California and Seattle come up frequently in terms of the tech exposure, what's happening there. As it relates to Northern California, there are three markets there, really, that you have to kind of dissect to understand better. So San Francisco, the East Bay, and then San Jose. San Francisco, I would say the conditions on the ground are still such that it is a difficult environment for people from a quality of life perspective. But there are things happening in the market with the city, business leaders, etc., that are starting to move it in a positive direction. But when you make that kind of shift, it's not just a quarter or two to get there. It's usually six, eight, 10, 12 quarters to actually move the needle from the time you change policy to start to see conditions on the ground change.
So in San Francisco, it's really mainly on the demand side. Supply is coming to a screeching halt. Given that market, the type of product that you're building, it's typically a 34 months- 38 months delivery schedule. Supply will not be the issue. The question is just when does demand come back, which I think is primarily a function of quality of life in that environment. We're seeing some green shoots in terms of what's happening with AI, obviously, but we just need more of that to continue to see better performance there. As it relates to the East Bay and San Jose, I would say the sentiment from consumers is getting better based on what we have seen from an AI standpoint, but there has been a rotation if you pay close attention to the types of jobs that are being let go versus those being sourced.
There's a bit of a transition occurring. That transition needs to be completed to then get back to better sort of income growth that people will experience there, which really drives rent growth. But overall, for the Bay Area, what I would say is development economics there anywhere do not make sense. So supply will be a non-factor going forward for the next two years-three years, very likely. So it's just a function of when we see that better demand. I expect it will play out better sooner in San Jose and maybe the East Bay as compared to San Francisco. Just quickly on Seattle, it's really a story of urban versus suburban in Seattle. The core urban submarkets in Seattle are still challenged both from a demand standpoint and heavy supply, north of 3% of inventory being delivered there.
If you're on the north end or the east side, Bellevue, Redmond, etc., performance is much healthier.
You gave your supply outlook for the next two years, I believe, in your deck. Obviously, it doesn't look anything concerning. I think it's like 1.6% or something for this year, 1.4% for next year. I guess in that type of environment, right, I mean, if you're seeing just a normal economic growth, you obviously have this tailwind from housing in terms of there's just not much competition because it's very difficult to purchase a home. It's very expensive. Wouldn't you expect to see sort of north of kind of 3% rental rate growth in that type of environment? What would hold that back if you have supply that is in check, you have the tailwind from housing, and you have a decent economy? What would make it that you don't see 3% type rent growth?
Yeah. Good question. So as it relates to maybe kind of dialing back to what our outlook was for the year, the anticipated sort of economic environment at that time was for a fairly material slowdown in job growth and wage growth as we move throughout the year. So if you looked at 2023, we're talking about, call it, roughly 2.5 million jobs. The sort of consensus outlook coming into 2024 was closer to maybe 800,000 jobs, somewhere in that ballpark. So our outlook reflected a slowdown in both job and wage growth and, as you said, kind of more normal, slightly above average, but more normal supply growth. I think the other thing that people are being mindful of is we've kind of described it as sort of crosswinds for the consumer and the renter overall in terms of what they've seen.
In terms of wage growth has been strong. That's decelerating. But what's happened with inflation across various categories certainly has put pressure on the consumer. So I think in terms of the outlook for well above average rent increases given where the consumer is today, I think industry participants overall are a bit cautious about how much further you can push too hard with sort of current consumer position, I guess, if you want to call it that. Consumer balance sheets are still good, but in terms of affordability, in some markets, you start to see it a little bit stretched as we were getting into late last year.
What do you mean by that? In terms of stress, you're seeing bad debt pick up. What do you mean in terms of consumer stress near the end of last year?
If you just think through what's happening not only with the housing costs but consumer loans, auto loans, student loans, generally food inflation, etc., there's pressure on the consumer to some degree. So most of our metrics are generally within normal ranges, but certainly based on the data that you see out there, more generally, the consumer is a bit pinched in certain areas.
Gotcha. And then you mentioned that you were ahead on bad debt. I think you said 20 basis points. Is that right, or?
Closer to 10 or 15. Occupancy was around 20, 22 basis points.
Okay. So you expected, I think, it was like 210 in the first quarter. I'm just extrapolating that. I think you said 1.8% for the year starting kind of north of 2%, ending on 1.6%. I'm just thinking.
That's right.
You're sort of in the high ones today?
The high ones right around two. I mean, we had a few basis points better in January, picked up a little bit in terms of the positive spread in February. So really, it's kind of a one-month trend at this point, I would say, in terms of the materiality of it. But it certainly is a positive trend that will impact the quarter. Whether that continues or not is very difficult to forecast. Last year, the first half of the year looked quite good. The second half of the year, as the court system sort of stalled out, free legal advice from people in various jurisdictions, things slowed down and kind of flattened out on bad debt in the second half of last year.
Got it. And I think you.
Eric, let me just make a comment for the broader group in and around bad debt. It will be a tailwind for us. It's a question of the slope and the pace of change, about our traditional bad debt being in the 50 basis points-70 basis points. So be talking about rates in the high 1%-2%, there's significant opportunity there, but it is very difficult to forecast partially because it's dependent on court systems and the pace at which they make their way through delinquencies.
Right. Yeah. And then that was going to be my second question to that is I think it was either yourselves or someone else that said that usually, the improvement in bad debt is not a sort of linear line where it's like, "Okay. It's two, 1.9, 1.8." There's this sort of step function, if you will, based on when the courts sort of work their way through the process. And so I guess my question was really, if you're starting to see this improvement maybe a little bit earlier than you expected, is it possible that we see that sort of step function down in bad debt simply because the courts are opening up a bit and working through the process and there's less of a backlog?
I would not expect that. So two things. One, it's one month of data, so you start to extrapolate. But two, there are still court systems, I would point to New York in particular, that are very backed up, very pro-tenant as it relates to extension of court dates. Everyone's entitled to free legal advice. As you might imagine, the attorneys that provide that free legal advice are overwhelmed, so they're asking for delays. So we're not anticipating that to improve substantially as we move through the year. And that's why I think our outlook for bad debt was improvement but not at the rate maybe you're applying in terms of a real step function change.
Is there anything medium or longer term that makes you hesitant, unbelieving that you'll get back to that long-term bad debt level? Is there anything structural that you think has changed?
It's a good question. It comes up frequently. I'd say given what we've seen in terms of shifts in the environment, there is a good case to say that it might be slightly above historical averages. I wouldn't expect it to be meaningfully so also because, as you've heard about, we've seen sort of rampant fraud across the portfolios over the last few years. Industry participants have responded appropriately as it relates to sort of stamping that out as much as possible. So I think some of that that we experienced going through COVID and more recently probably would never have shown up using the current tools that we have in place. Usually, what it's more correlated with is shifts in the economy and things of that sort.
I think you mentioned on the call that your other income initiatives outperformed your expectations by like 60% or I think it was $7 million in 2023. I was just curious, why did that happen, and what would it take for the same thing to happen in 2024?
Yeah. Good question. So last year, really, two things drove it. One is a greater pace at which we were able to extract some labor efficiencies. And the second was greater adoption of our AvalonConnect offering, which is sort of bulk internet managed Wi-Fi. Not necessarily expecting those to recur again in 2024. What happened, really, on the AvalonConnect side in 2023 is you implement the product, and then people are rolled onto it as their lease expires. What happened, really, then is while people were on their lease, we also gave them the option to opt in early, and we had a greater than expected opt-in rate early than anticipated. That pie of opportunity still exists in 2024. It's maybe just not as significant as it was in 2023. So we're certainly hopeful that we'll even outperform, but one or two months in here, we're not expecting that.
I think you said that AvalonConnect was going to be pretty much fully rolled out by the end of this year. How should we think about sort of the expenses of that? I've gotten this question a couple of times where there's a certain amount of expense. You're just certainly paying your whatever provider is giving you access, and that's going to continue into the future. But then there's another expense where maybe it's being capitalized, but it sounds like it's being an expense where you're putting in routers and doing other infrastructure work. Sort of how much of that sort of one-time cost infrastructure work is being expensed this year and will presumably go away in the future?
Yeah. So the way to think about it is there's a couple of components to AvalonConnect. The first is the bulk internet kind of managed Wi-Fi offering. The bulk internet program is for existing stabilized assets. We're not investing in the infrastructure in a significant way in terms of installing equipment to deliver managed Wi-Fi and various other things that we would do. On a new development, we're investing in the infrastructure regardless because it's new. For those communities, the expense is really the service component of it. And so for that piece of it, that peaked in 2023 as it relates to year-over-year growth in operating expense for those service fees. It's still elevated in 2024, but will start to come down materially as we move into 2025, as you noted, it being fully deployed, residents opting in as their leases expire, etc.
The other component of that is the smart access component, which also is a very, very modest, much lower than the bulk internet service fee. That's more of a capitalized cost for hardware and infrastructure at the communities in terms of changing locks and things of that sort that will continue on for the next several years. And just the service component of that is expensed. The hardware and all of that is capitalized.
And then in terms of the property taxes, you said you're seeing a 75 basis points headwind this year. I mean, is that something that you think is going to continue, and we'll be talking about the same in 2025, or it's really just based on the extent which your tax abatements are sort of coming off? So just curious if that's something that's going to be a sort of headwind for the next couple of years or not.
Yeah. It's related to the burn-off of various tax abatements across the portfolio, most notably the 421(a) tax abatements that are burning off in New York City. 2024 is the peak year for that burn-off, so there will be an element of it in the future but not as material as what we're seeing this year as being the peak year.
And then maybe last question before we get into some of the rapid fire. But obviously, you announced the initial rollout of your property management platform. I was curious how that's going so far, whether you're in discussion with other owners, and just if you can sort of help us understand what you think the opportunity set looks like there.
Sure. Eric, as you referenced, last year, we did roll out our platform, what we call our customer service operations platform, down in Virginia Beach, which we primarily use to provide back-office administration to our own portfolio. We roll that out to a third-party institutional owner that has gone well. That portfolio is fully stabilized. And at this point, we're embarking on the process of taking a look at where else we might be able to deploy that product offering to other institutional owners who may benefit from it. But to clarify, it's not a full suite of property management services that we're providing. We're providing back-office account management. Decisions around property leasing and so forth are retained by that institutional third-party client that we've got. So that's something we're continuing to look at.
There may be an opportunity set that we can deploy in the coming year or two, but nothing else really to report at this point.
Got it. Yeah. I mean, I guess the question is, is there a team that's focused on building that out? How much effort and resources are you putting towards it? Are you sort of in a, "Let's look at how we're doing," phase and then roll it out later? Just trying to understand, there's certain initiatives that you undertake that are of high priority. Is this one to scale that, or is it, "Let's learn what the customer wants and take it from there"?
A little bit more of the latter. We do have a team that has been involved in rolling that out in this first instance that is looking at additional opportunities, but it's not something where we have a large team canvassing a large number of owners. It's really much more of a bespoke process that'll probably take a longer-lived process to roll that and scale.
Got it. And then maybe just quickly on the structured investment program, sort of how you arrived at the goal of sort of capital deployment, where you want to sit in the capital stack, whether you're using this as a vehicle to sort of eventually own the assets, or are you just really the returns in the near term from a risk-reward perspective?
Go ahead.
Sure. So Eric, yeah, that's something we rolled out just for the benefit of everyone else. We started our first commitments in 2022, where we had about $100 million of commitments in the structured investment products program, where we're targeting making essentially loans, higher leverage loans to multifamily developers, usually in the 60%-70% portion of the capital stack. And that has gone well. Vintage matters in this space. We only started two years ago with about $100 million of commitments, $100 million last year. Our goal is to get to a loan book of about $400 million. And there, in terms of broadly sizing it, we recognize it's really an initiative to deploy some of our existing capabilities in both development and construction, where we have significant in-house capabilities.
It's a core means by which we seek to grow earnings at AvalonBay and deploy that there to help generate some incremental returns for our shareholders. And so we've had great success so far with the 7 loans that we've made. They are performing well. We don't anticipate any problems with respect to them at this point. And really, just by virtue of the timing in which we deployed that offering, we think it'll make a lot of good sense with the value reset having largely taken place before we made our first set of commitments, interest rates having largely reset, and we're being judicious in terms of how we move forward. I think in terms of how we sized it, we wanted it to be an appropriate ancillary investment opportunity as we do more broadly penetrate our chosen markets with a broader range of services.
In this regard, it's taking a capability that we have in development, construction, and finding a way to deploy incremental capital at attractive returns where the returns on that lending activity is in the low double digits, around 10, 11, 12%, about 12, 13% currently relative to our own cost of capital, which today is in the low 5% range. We think it's a way to augment returns in a sensible way by prudently deploying our balance sheet in that area.
Rapid fire. Same story on the Y growth for the apartment sector overall next year?
3%.
Will the apartment sector have more or fewer of the same number of public companies a year from now?