Ladies and gentlemen, please stand by. Good day, ladies and gentlemen, and welcome to the AvalonBay Communities' first quarter 2022 earnings conference call. As a reminder, today's conference is being recorded. 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 the call by pressing star one..
If your question has been answered or you wish to remove yourself from the queue, press star two. If you're using a speakerphone, please lift the handset before asking your question. We ask that you refrain from typing and have your cell phones turned off during the question and answer session. Your host for today's conference is Mr. Jason Reilley, Vice President of Investor Relations. Mr. Reilley, you may begin your conference.
Thank you, Jake, and welcome to AvalonBay Communities' first quarter 2022 earnings conference call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release, as well as in the company's Form 10-K and Form 10-Q filed with the SEC.
As usual, this press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during the review of our operating results and financial performance. With that, I'll turn the call over to Ben Schall, CEO and President of AvalonBay Communities, for his remarks. Ben.
Thanks, Jason, and thanks, all, for joining us on today's call. Matt and I will open with some prepared remarks, and we're joined by Kevin and Sean for Q&A. Starting on slide four of our presentation, Q1 was a very strong start to what we continue to expect to be a very strong year of operating results. Core FFO per share came in at $2.26, a 15.9% year-over-year increase and $0.06 Above the midpoint of our guidance. I'll dive deeper into the drivers of that outperformance in a moment.
On the capital allocation front, our industry-leading development platform continues to drive meaningful earnings growth and value creation with a very robust 6.9% yield on developments completed this quarter. For the year, we're projecting about $700 million of completions at an average yield of 6.3%, which represents a substantial spread to current market cap rates. As we grow, we're also optimizing the portfolio through the selective sale of older, slower growth assets from our established regions. This quarter, with $270 million of dispositions at a high 3% cap rate, with the intention to then redeploy this capital primarily into acquisitions in our expansion markets.
In April, we executed on an equity forward for $495 million as an expected source of capital to opportunistically draw down through the end of 2023 and locking in our cost of capital for future development activity at what we expect to be accretive spreads. Turning to slide five, GAAP residential revenue increased 8.5% on a year-over-year basis, led by about a 6% increase in effective lease rates and a 100 basis point improvement in net bad debt. On a cash basis, residential revenue increased almost 10%. As shown on slide six, the 8.5% GAAP revenue growth was 150 basis points greater than the 7% increase we assumed in Q1 guidance, with lease rates and occupancy above our prior guidance.
While still at elevated levels, better than expected bad debt and rent relief collections, driving the bulk of the outperformance relative to our expectations. Portfolio performance has been supported by a number of tailwinds as detailed on slide seven. Starting with chart one, we continue to see elevated move-ins from greater than 150 miles away, which speaks to a continued flow of residents back to our established markets and is a particularly positive indicator for our urban and job-centered suburban communities. In chart two, we also continue to see dedensification with less roommates and a desire for more space, leading to fewer adults per apartment and as a driver of incremental demand across our portfolio.
As rents continue to grow, they're supported by greater household income from new residents, which was up 12% in Q1 relative to the prior year period, as shown on chart three. Finally, in chart rent, rent versus own economics. The monthly cost of renting versus the cost of owning a home materially favors renting in our markets with a difference of almost $1,000 per month, a historically high level and one which provides a meaningful cushion and support to our rent growth. As shown on slide eight, this backdrop is translating into continued momentum in like-term effective rent change, which accelerated throughout Q1 and continued into April at 13.7%. Looking forward, our portfolio is positioned extremely well heading into the peak leasing season. As shown on slide nine, occupancy remains strong and steady at about 96.5%.
Annualized turnover remains very low relative to historic figures, and 30-day availability, effectively the near-term inventory that's available for lease, remains limited at less than 5% of our units. While we continue to capture meaningful loss to lease as existing resident leases expire, our portfolio-wide loss to lease remains high, currently at 14%, which has been supported by a 4% increase in asking rates since the beginning of the year. Turning to slide 10. We're making meaningful progress in the transformation of our operating platform. As we drive toward our goal of improving margins by 200 basis points or an additional $40 million-$50 million of NOI, with approximately $10 million generated to date. This slide highlights three of our many initiatives, including bulk Internet and managed Wi-Fi, which is projected to ultimately deliver $25 million of incremental annual NOI.
Smart home technology, which unlocks both operating efficiencies and revenue opportunities going forward. Third, our digital mobile maintenance platform, which will not only enhance our residents' experience with us, but also deliver material value via enhanced operational efficiency. Before turning it to Matt, slide 11 provides our updated full year guidance with projected 16% core FFO growth, reflecting our strong momentum in Q1 and incorporating our increased outlook for same-store revenue and NOI growth. We've also updated our guidance to take into account a couple of factors. On the operating side, while core operating performance is quite strong, there continues to be some uncertainty about net bad debt in certain markets, particularly in Southern California and Alameda County and Northern California. In some other markets, while eviction moratoria have expired, the court processes are moving slowly.
As a result, some of the growth we were expecting in the back half of 2022 may get pushed into 2023, which we have assumed in our updated guidance. As it relates to our projected Core FFO growth for the year, we've scaled back our assumption for acquisition activity for 2022 based on where we stand through today, as we keep a close eye on cap rates, fund flows, and assess any shifts in the transaction markets. While we remain active, including another acquisition we recently put under contract, we've updated our guidance from being a net buyer in 2022 to an assumption of balancing acquisition volume with disposition volume before taking into account proceeds from Columbus Circle. With that, I'll turn it to Matt to delve further into our development and capital allocation activities.
All right, great. Thanks, Ben. Turning to slide 12, our development activity continues to generate outstanding results. The five consolidated communities currently in lease-up, which are widely dispersed across five different regions, have rents which are currently $230 or 9% above pro forma, which in turn is contributing to yields that are 40 basis points ahead of our initial expectations at 6.1%. With an estimated value on completion in excess of $1 billion at a cost basis of $690 million, this provides roughly $360 million in value creation for an exceptional profit margin of 52%. While hard costs are certainly trending up, there's plenty of room for margins to compress from these elevated levels and still provide strong risk-adjusted returns going forward.
As we mentioned on last quarter's call, our teams have also been very active in sourcing new development opportunities, as shown on slide 13. At the end of the first quarter, our development rights pipeline had grown to $4 billion, up from $3.3 billion at the start of the year, with new sites added in our expansion regions of Denver and Austin, as well as established regions in New England and Northern California. All of these new development rights are in suburban locations, and with the total pipeline weighted 75% suburban and 25% urban, our stabilized portfolio will likely trend towards that mix over time as well. The chart in the lower right-hand corner of this slide provides an illustration of how inflationary pressures on both NOIs and hard costs would typically flow through to development yields.
This is an increasingly important issue in the current environment. Our development rights pipeline is underwritten to a current average yield on cost of roughly 5.5%. The chart shows how a change of ±10% to both hard costs and NOIs would impact that yield, holding all else constant. Because hard costs represent 60% of total capital costs on new development, with variances depending on the specific site, you can see that rising NOIs have roughly twice as much of an impact on yield as rising hard costs of a similar magnitude. As a reminder, we underwrite all of our development on a current basis and typically do not trend either NOIs or costs. Even in the current environment, with hard cost inflation running at a high level, this gives us a measure of safety.
This math suggests even if hard costs rise by 10% from current levels, the 5.5% yield can still be preserved with just a 6% increase in NOI. Slide 14 provides a quick update on our progress in our expansion markets of Denver and Southeast Florida. We have been measured in our approach to building diversified portfolios in these regions, investing through a combination of acquisitions, funding local third-party developers, and developing our own communities directly as we do in our established regions. This has allowed us to put together portfolios that we believe will be optimized for future revenue growth as well as initial investment return, with strong locations in both urban and suburban submarkets in both regions.
Critically, we are also focused on getting the product we want that will be well-positioned to take advantage of demographic trends like the aging of the millennials and the increase in work from home, as reflected in the larger than typical average unit size and young average asset age shown on the chart. We expect to follow a similar trajectory as we ramp up our investment activity in our newest expansion regions of North Carolina and Texas and make steady progress towards our goal of a 25% allocation to these expansion regions. Turning to slide 17, we also launched a new investment vehicle in the first quarter, which we are calling our Structured Investment Program, or SIP.
This is a mezzanine lending platform that provides short-term construction financing to local third-party developers in our established regions plus Denver and Florida, with our position in the capital stack between the primary construction loan and the sponsor equity. The SIP provides another way for us to leverage our deep expertise in development, construction, and operations to generate attractive risk-adjusted returns for our shareholders, and we expect to build this program to a $300 million-$500 million total investment level over the next few years. With that, I'll turn it back to Ben for some closing remarks.
Thanks, Matt. To wrap up and summarize key themes, Q1 was a strong start to the year, with several tailwinds continuing to support our operating fundamentals, which are some of the strongest we've experienced and have us well positioned going into the peak leasing season. We continue to invest in our operating platform with the teams executing across a number of transformative initiatives over 2022, including bulk Wi-Fi, smart access, and mobile maintenance. As you heard, we continue to lean into our development platform with lease-ups outperforming and generating meaningful earnings growth and value creation. We're also building our development pipeline now up to $4 billion, providing options on future value creation, including significant investment in our established regions that accretive returns, as well as a continued focus on optimizing the portfolio by growing in our expansion markets.
Finally, we continue to look to tap our company's strengths with our Structured Investment Program being our latest offering by tapping into our development, construction, and financial know-how to grow earnings and create value. With that, I'll turn it to the operator for questions.
Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. Do keep in mind, if you are using a speakerphone, make sure your mute function's released to allow that signal to reach our equipment. Once again, star one for questions. We will begin with Nicholas Joseph with Citi.
Thank you very much. You know, as you look at entering the Structured Investment Program, how quickly do you expect to scale up to that $300 million-$500 million? How are you thinking about laddering the deals and redemption timing?
Hey, Nick, this is Matt. I guess I can take that one. I think it'll take us a couple of years. It really will be dependent on, you know, the volume, the transaction market, starts volume and, kinda, how our origination goes, but I would expect it's probably gonna be two to three years before we get it up to that level. You know, then once you get it to that level, these are typically three to five-year investments. You know, each year there's some redemptions, and hopefully you're putting out some new money. You know, it's a ramp to get it there and then, you know, probably less work to keep it there.
Thanks. As you look to enter it, you know, what were you thinking in terms of just the competition within this market? Are you gonna have an option to buy or own throughout all of the deals?
Yeah, thanks for that. To the second question, no, we do not expect to have an option to buy the deals. We're trying to be very clear with the market and the sponsors that we're working with. For us, this is not a program that's about ultimately owning that real estate. It's a program that's about leveraging our expertise and our local market presence in these markets to generate good risk-adjusted returns during the duration of the investment. We really are viewing it as a one-time investment. What was the first part of the question?
Competition.
Sorry, competition.
Oh, competition. Sorry. Yeah. There is competition. There's competition from some of our REIT peers, as we're aware. Although I would say I think that the market conditions are probably shifting in a way that's gonna make this program more attractive going forward, as you know, development capital maybe gets a little more challenging, as first loan proceeds start to get constrained. You know, we're pretty bullish. The other thing is we have deep relationships in all of these markets, and we've been in them for many years. We view it as really another way we can work with a lot of folks that we've worked with in other capacities in the past, and it's kind of another sleeve of capital, if you will.
Nick, if you think about, you know, us in our established market, self-performing and being our own GC, right? We've come with a ton of daily on-the-ground knowledge that we think we can leverage here, and do so in a competitive way as we think about risk-adjusted returns.
Thank you.
Now we'll move to a question from Rich Hill with Morgan Stanley.
Hey, good afternoon, guys. I wanted to maybe circle back to the acquisition taking down guidance by about $0.05 from acquisitions, but also square that to the recent equity raise. I'm just trying to understand. It seems like if I'm thinking about this correctly, you're using the equity raise to potentially fund development in the future, but maybe taking a little bit of a pause on the acquisition market given uncertainty with cap rates. Is that sort of the right way to think about that? If so, does it mean you're really taking a medium to long-term approach rather than, you know, trying to maximize returns over the near term? I say that in a complimentary way, not a negative way.
Yeah, sure, Rich. This is Kevin. Maybe just to kind of deal with the first part of this, I mean, I think you're right with respect to all that. Basically, maybe to break it apart into two pieces. You know, you're correct. Obviously, we did the equity forward, $500 million to spend. Mentioned our intention, at least at this point, is that while we can pull that down in one or more settlements from here through the end of 2023, our expectation is at this point that we're gonna use that equity capital to draw down over the course of 2023 to fund development in 2023. That's our current intention. It's basically capital that we've earmarked at this point to fund future starts into 2023.
As to kind of the first part of what you're referencing in terms of the change in reforecast and in acquisitions, you're correct. We increased overall expectations for Core FFO for full year by $0.03 to 9.58 as a midpoint. As you can see on page 4 of our earnings release, there are a number of pluses and minuses that result in that net $0.03 change. You know, among the more notable changes are obviously
An expectation for a $0.11 increase in earnings from higher same store NOI, primarily driven from higher rental rates and to a lesser extent from higher occupancy in rent relief payments. Then second, as you pointed out, Rich, a $0.05 decrease in earnings from capital markets and transaction activity, which in turn, when you kind of net the pluses and minuses in that category, is driven by a decrease in forecasted acquisition activity, basically. Where we stand today at this early point in the year, of course, what we may do in acquisitions can change pretty quickly. That's a dynamic part of our budget and what we may be doing on the investment front. Matt can certainly speak to that.
At the moment, we've pulled that down a little bit, which creates a little bit of a $0.05 decrease. The other notable item is just a $0.03 decrease in earnings related to the flow through of your compensation items. That is sort of a, you know, kind of reconciliation of the reforecast for 2022. The equity forward, to be clear, is not being pulled down in that model for 2022 because that's not our current expectations.
Okay. That's very helpful.
Yeah. This is Ben.
Go ahead.
This is Ben. Just a couple more tidbits there. On the acquisition side, you know, as Kevin hit on, you know, it's a reflection of where we stand today. We did narrow the box some, right, earlier this year. We wanted to assess the market and obviously some, you know, macro dynamics happening there. You know, the assumption we pulled it down to is similar to what we had last year, which is sort of a balance between acquisitions and dispositions. We continue to think about it really as sort of trade capital, right? Capital that we can be looking to monetize out of our established regions, and then redeploying that capital into our expansion markets.
Yeah. Ben, thank you for that, and that's a good segue into my next question. Why, at the risk of overstepping here, why wouldn't you accelerate dispositions? You've done a really good job of taking, you know, maybe older properties with higher CapEx spend, selling those at tight cap rates and rolling it into expansion markets. Why wouldn't you accelerate dispositions at right now and maybe take that money and use it as, you know, call it dry powder?
Yeah, I'll start and then, Matt can chime in. I mean, we were very active last year, had a lot of activity, and at the end of last year, and are continuing to push there for, you know, some of the reasons that you hit on. Yeah, the bulk of our portfolio, we've got a lot of conviction around is performing well, right? So our movement as we think about optimizing the portfolio is a longer-term approach, right? So we're thinking about assets at a point in time. How do we think about value today, versus value six months from today? You know, while there could be some, you know, movement in cap rates, let's say, there's also, you know, very strong operating fundamentals, right, that are gonna help support asset values as we look forward.
Yeah, I guess one thing I would just add to that, Rich, is it's also about the relative value between what we're buying and what we're selling. I will say, you know, that changes. You know, we may be starting to see a little bit of a change in where values might be in the regions which we're looking to buy in. Some of the regions we're looking to sell in maybe haven't been quite as in favor, and that shift may be changing. I actually think looking forward that relative value proposition on the trade may look a little better than in, say, in the first quarter of this year when we were being a little more cautious.
Thanks, guys. That's it for me.
We'll now move to Steve Sakwa with Evercore ISI.
Thanks. Good afternoon. I was wondering first if we could just start on kind of the renewals that you're sending out for, you know, I guess either May, June, July, and how those stacked up the first quarter and in April?
Yeah, Steve, it's Sean. In terms of committed renewal offers that have gone out, we're basically in the low teens, which is a little bit better than we originally expected when we contemplated the budget, probably, you know, maybe 150 basis or so higher than what we originally expected. So that's what's out now.
Okay. Sean, are the take rates, you know, is there any change in kind of the attitude or acceptance from kind of the consumer? Or it's once they shop the market, realize it's kind of no better anywhere else, they kind of come back and sign?
Yeah, I mean, I think as what was reflected on the slide that Ben presented as it relates to turnover, the acceptance rates on renewals as well as lease breaks, which typically account for about a third of move outs, both of those are down pretty materially. I mean, turnover is down, you know, call it 20% year-over-year, but it's down, you know, 15%-16% compared to kind of pre-COVID norms, when you look at Q4 and then again at Q1 of this year. So, you know, pricing power is strong for us. I think when people get a renewal offer and they go shop it, to use your phrase, I think, they see that we're a compelling value. You know, and then there's, you know, there's transition costs.
You know, if I'm gonna go out and I'm basically gonna pay roughly the same, and then I've got moving costs or switching costs, people are inclined just to stay where they are.
Right. That makes sense. Kevin, maybe one for you, and if I missed it in here, I apologize. What is the assumption for bad debt or uncollectibles for the full year, today and kind of what was it? Just try to compare that to 2021.
Steve, I mean, I'll jump in here and Sean may want to add here a little bit. In terms of overall bad debt on a percent of revenue basis, there's not a whole lot of change. Of course, there's two categories that feed into that number. Just to kind of give you a sense of it, for the full year in our budget, we assume that uncollectible revenue overall would be, you know, about 270 basis points as a headwind, 270 basis points of revenue. At this point it's 264 basis points. On a net basis, marginally better, but as you probably saw reflected, there's a bit of movement as we've seen in the first part of the year so far in some of those underlying pieces.
Underlying bad debt trends, delinquencies if you will, in a couple of our jurisdictions have trended worse such that overall for the full year, we expect that category to be a little bit worse over the course of the year. At the same time, we saw more rent relief payments in Q1, and we now expect to receive more rent payments overall for the full year. Net that out over the full year, overall, our forecast for overall bad debt, taking into account rent relief and underlying bad debt trends, is roughly net neutral relative to our initial outlook, with higher expected rent relief payments expected primarily in the front half of the year, to be nearly offset by higher underlying bad debt projected primarily in the back half of the year. Sean, do you want to add anything?
Yes, Steve, the only thing I'd add, just on your question for 2021, is the uncollectible revenue that we reported for 2021 was 2.15%, as compared to the current forecast, as Kevin alluded to, is 2.64% for 2022.
Got it. Okay. It's a little bit of a headwind year-over-year. You're saying within the 9% revenue growth, you've got about a 270 basis points, in effect, bad debt, sort of headwind in the growth this year.
Correct. The way I'd probably think about it, Steve is relative to our original budget, some markets are getting a little bit better. Given the delay in the eviction moratorium expiration, particularly throughout Los Angeles and Alameda County and Northern California, we adjusted our outlook to reflect continuation of bad debt trends in those markets through 2022, and not seeing significant improvement until we get into 2023. That's really when you kind of double-click through it from a geography standpoint, that's where we expect a little more of a headwind than we maybe originally anticipated. As Kevin noted, a little more than offset by greater rent relief.
Great. Just one last question for Matt, just on kind of the construction, supply chain. Just, you know, how is that sort of unfolding as you're looking to start new projects? You know, is that a lot more challenging today? Is it getting better? Just, you know, where are the bottlenecks and, you know, what does that maybe do to the risk of starts? Or, you know, how do you sort of manage that, and what should we expect?
Yeah, Steve, I guess I would say, construction inflation is definitely running hot, so costs are on the rise. This is where us being our own general contractor really does help because we're able to go back to, you know, build on the relationships we've had over many years with a lot of our subcontractors and negotiate early agreements and sign build agreements. We're doing what we can to stay in front of it. The supply chain issues and the actual availability issues, those have probably gotten a little bit better over the last four or five months. I haven't heard as much about that. I'd say the bigger challenges have been just getting final permits through jurisdictions.
In some cases, getting certificates of occupancy, final inspections from jurisdictions, getting the power company out there to set the meters. Those things, you know, probably haven't gotten any better yet. I think that's kind of slowing down supplies, extending out durations on construction jobs by a quarter or two in many cases. I'm not talking about us so much as the industry as a whole. For us, a couple of starts that we thought we were gonna start in the first half of the year will probably get delayed a couple months to the second half of the year, but that's really more about just kind of the delays in getting through the jurisdiction to get the final permits.
Great. Thanks. That's it for me.
We'll now take a question from Austin Wurschmidt with KeyBanc Capital Markets.
Great. Thanks, and good afternoon, everybody. I was curious how the 4% increase in asking rates year to date is tracking relative to your expectation at the outset of the year and where you think that could finish the year.
Yeah. This is Sean. Good question. What I'd say is that it's tracking a little bit ahead of what we anticipated. You know, part of the reason why we looked at updating our forecast and outlook for the year was based on the trend that we were seeing, not only in asking rents, but you know, what people were actually taking on renewals as well as what we're seeing on the move-in side, as well as the renewal offers that we have in the queue. You know, I think typically what would happen if you look at our business historically is you would see rents continue to rise as we move through sort of the July, maybe early August period, and then decelerate in the back half of the year.
As we talked about on the last quarter call, for 2021, things didn't really decelerate in terms of asking rents. It kind of just leveled off. We do believe that this year, and what's reflected in our outlook, is that we start to see somewhat more normal seasonal patterns and see some deceleration in the back half of the year. But you know, macroeconomic forces, et cetera, just the overall supply and demand dynamics in the housing market will really dictate kind of where things come out as we get to the second half of the year. I think we'll have a better sense for that as we get to our second quarter call.
Yeah, that makes sense. What does that imply based on your current expectation for how things will play out in a, you know, more seasonal pattern? What does that imply for that 14% loss to lease? How much of that do you draw down, and what are you left with entering 2023 at this you know, based on, you know, the current guide?
Yeah, no, that's a good question. I'd say that one probably is a little more challenging to answer sitting here in late April when we're talking about what it might be in January of 2023. I would say based on what we know today, it should be, you know, well above average, but trying to give you a range would be just too speculative at this point.
Okay, that's fair. Just last one for me. I'm curious, Kevin, has there been any change in terms of the amount of capital that you plan to source versus the $880 million that you initially outlined back in February, I believe? Do you still expect the balance or the bulk of that to be through debt capital based on what we've seen where we've seen rates move up to this point?
Yeah. Thanks, Austin. This is Kevin. Yeah, I mean, the short answer is our capital plan has changed a little, but not a lot. You're correct. When we began the year, our initial outlook was for $880 million of external capital, most of which at that time was planned to be sourced through the issuance of unsecured debt. At this point, our current capital plan calls for just under $700 million of external capital. We're down call it $200 million overall relative to our initial outlook.
Of that, nearly $700 million in external capital that we currently expect for the year, about half is expected to come through net disposition proceeds from Columbus Circle, as well as a little bit of dispositions only on dispositions, which is much closer to a push, as Ben alluded to a moment ago. The other half from new issues of unsecured debt, against which we have $150 million in hedges in place at a forward starting swap rate of 1.37%, so about 150 basis points below where Treasuries are today.
You know, just to kind of put that in perspective what needs to still be sourced of the $700 million of external capital, as you can see from our earnings materials, we sourced $270 million in Q1, less a $95 million acquisition in Q1 for about one-fourth of the anticipated external capital needs in Q1, with three-fourths left to go here. Just as a reminder, at the moment, as I mentioned ago, we do not plan at this point in any way, anyways, on drawing down capital on the equity forward in 2022, but rather currently expect to do so in 2023 as it starts to become relevant to that year.
Great. Very helpful. Thank you.
Yep.
Now we'll take a question from Chandni Luthra with Goldman Sachs.
Hi. Thank you for taking my question. You took down, you know, your high end of your guidance by a couple pennies. Could you perhaps give us a little bit color as to what would get you to that high end in versus the low end right now?
To the high end. Chandni, just we had a hard time hearing. This is Kevin. I think what I-
I'm here. Sorry, my throat's really messed up. I can repeat.
No, I think I've got it. I think you want to know what could drive us to the high end of our range of $9.78 versus the midpoint $9.58. I think the answer primarily is an increase in, you know, expected rent, rental revenue received over the course of the year. There could be other items, including acquisition activity and so forth, but they probably would be of a smaller impact. I mean, up and down the P&L, there could be changes, but anything that would drive us toward the high end of the range would be primarily driven by an expectation for much higher rental rate growth than than we're currently seeing for both and I don't know, in acquisitions as well.
Got it. Towards the low end, what would it take to get you there? Like, what would have to kind of go wrong in that equation?
Yeah, it's probably the inverse of just kind of what I suggested. Something unexpected today that involves sort of a macroeconomic event that would cause a sharp, but unexpected decline in revenues over the course of the year. You know, I guess analogous to sort of what we saw in 2020 with the pandemic. Of course not within our expectation, but certainly I guess potentially within the realm of possibility.
Understood. As a follow-up, you're sending renewals right now in the low teens rate, you mentioned earlier. At this point last year, perhaps, you know, there was obviously a lot of deal seekers that kind of got into apartments that, you know, just given where the market was. Are you seeing any reversal from that standpoint wherein people no longer are able to afford, especially, you know, those who previously did not live in, say, an AvalonBay apartments? I mean, what are you seeing from that deal-seeking activity standpoint? Is it reversing?
Yeah. This is Sean. Good question. I would say it is not changing materially in terms of behavior. If you look at people that are moving out for a rent increase or some other financial reason, it's up very modestly on a year-over-year basis. Probably importantly, the reason we're, you know, not experiencing that is wage growth has been quite robust. If you look at, you know, wage growth, particularly across the occupations that are represented primarily by our residents, it is not uncommon to find, you know, high single digit, low double-digit numbers out there for people in those sectors.
I think that's consistent even with some of the movements that we're seeing that Ben referenced in his prepared remarks, where people that are moving in this quarter as opposed to the same quarter last year with incomes up, you know, 12%-13% range. You know, that's pretty good, especially in an environment where people are generally spending less from a discretionary income standpoint on various items. So far there's not much stress in the system, if that's kind of the main purpose of the question.
Yeah. Thank you. Thank you so much.
Yep.
The next question will come from John Pawlowski with Green Street.
Thanks for taking the question. Matt, I wanna go back to your comments on just the development deliveries for the industry overall, not just AvalonBay. Are there any markets where these delays are particularly high right now, where the operating results are just benefiting from a dearth of deliveries, and you just see in a few quarters what are you talking about, just kind of a lot of deliveries dropped onto a market once some of these jurisdictional delays cure? Just trying to get an understanding of whether some of these operating results in certain markets are artificially high right now, and there's gonna be a shoe to drop.
Yeah. It's interesting, John. I don't know that it will suddenly correct, and that there'll be. I think what's more likely to happen is you're gonna see supply, you know, bleed in over a longer period of time, so it's gonna extend out that delivery pipeline. It'll get there eventually. Maybe it gives those markets a little more time to absorb it, but people are starting just as much. I don't think it's gonna change anytime soon because some of these issues, particularly when it's jurisdictions or it's utilities, you know, those are structural issues. Those types of entities don't suddenly go and hire a bunch of new people.
If you spend time in Austin today, for example, which is one of the markets that's got the most new supply coming in on the way, you'll hear all the developers and contractors talk about how a job that should take two years from start to finish is taking two and a half to three. But there's tons of starts there. I think it's just gonna extend out the delivery times in general. Among our markets, including our expansion markets, the two that I'd say are probably most stretched that way are probably Denver and Austin. I don't know that you know, there's a lot of supply in some other markets we're not in that I've read about.
Those are the two off the top that I would say where we're seeing it the most in terms of those kind of pressures on the system, just not being able to keep up with the amount of supply. Not in terms of demand, in terms of deliveries and, you know, kind of.
Right
Final inspections and punch out and all that.
Okay. Makes sense. Final question is just on Southeast Florida, 25% year-over-year revenue growth. Now it's just a few assets. Can you give me a sense for how much of this is really strong market fundamentals versus these acquisitions being previously undermanaged?
Yeah, John, Sean. I'd say it's a little bit of a blend of both. Certainly the market fundamentals and, you know, pick a source that you want to use, have been quite healthy, with significant market rent growth as you move through, particularly the back half of 2021 that's currently being captured in early 2022. There are, you know, I'd say there's a couple of different assets out of that, again, small pool as you referenced, that we felt had a compelling opportunity when we bought the asset in terms of how it was managed, whether it was how the parking garage was managed in one case, how the pricing was managed in terms of revenue management in another case that are probably giving us a little bit of a lift.
I'd say, you know, market fundamentals have been very robust, and you'd still see, you know, pretty robust numbers come out of Southeast Florida, maybe in the high teens range or something like that, low twenties, independent of sort of the management value add, if you wanna call it that.
Okay. All right, great. Thank you.
Yep.
Now we'll move to Brad Heffern with RBC Capital Markets.
Yeah. Hey, everyone. I just wanted to go back to the acquisition guidance and make sure I understand the thought process there. Is it that you think prices will come down as higher rates flow through, and you don't wanna acquire ahead of that? Are you concerned about the economic outlook and therefore, like, the rate growth assumptions? Is it just lower accretion given the higher cost of capital? I guess, what are the key factors that are making you more defensive?
Brad, it's this is Ben. I'll start, and Matt can provide more color. It's primarily just an updated snapshot of where we stand today, right? As part of that, as I mentioned before, we did get more selective. That was to assess and sort of feel out whether there were gonna be changes, right? There's obviously, you know, factors in the macro market, including rising rates, and part of that is how much does that get offset or is there a countervailing balance with fund flows, right? Which continue to be very strong into the multifamily sector. You know, if you're looking forward, we're hoping that there's opportunity, right? You know, of a group, right, who's gonna be most impacted by higher rates, it's gonna be those levered buyers, right? We're not that.
Um-
We're also able to take a long-term approach, right, with our investment thesis. We're paying close attention. As I mentioned, in my prepared remarks, you know, we're active in the market, and are continuing to actively underwrite and pursue acquisition opportunities.
Yeah. Okay. Thanks for that. I guess you have this chart on dedensification in the deck. I'm curious, is that something that you expect to be somewhat permanent, or is it a sort of a COVID anomaly that will reverse as people go back to work and need to double up again financially?
Yeah, Brad, it's Sean. I mean, the short answer is it's probably too early to tell, but I would say there are a number of macro factors that we see out there that could support this being maybe a little bit longer phenomenon, in terms of being maybe more secular as opposed to just cyclical issue. You know, certainly as you keep working from home and wanting to have more space, more quiet space, as opposed to, you know, a roommate that might be, you know, doing something else.
People spending a little bit more on housing in general, whether it's, you know, single-family, multifamily, and the thought of home is kind of being, you know, I mean, how you want to describe it, but you know, a place where they're spending more significant time, not only from a work standpoint, but for other reasons. I would just say, just given the nature of the population and how we see things evolving, demographically, you know, a lot of the growth we've seen has been in single person households. You can see that kind of playing through the people who are on that bubble, maybe going through COVID, where they were just getting married, hadn't yet had kids, took time during COVID to say, okay, this is a good window for us to leave XYZ location and move somewhere else.
People coming back may be more just single in nature, and seeing their future that way for a longer period of time. There's a number of different issues out there. You can go into probably several others as well that would tend to lead you to a conclusion that this may be durable. The short answer is we'll know probably over the next few quarters if we continue to see that trend remain in place.
Yeah. Brad, you know, another theme that, you know, supporting it, to, you know, want to emphasize is just the financial health, right, of our resident, right, our customer, right? Think about job and wage growth. You think about savings. You add on the factors that, you know, Sean referenced, sort of the increasing importance of the home. Definitely a feeling that that's gonna create an additional stickiness, as they look for quality home environments and more space.
Okay. Thank you.
Now moving to Rich Anderson with SMBC.
Thanks. I recognize your, you know, the
Hey, Rich. You're very soft on the phone.
My headset stopped working, so can you hear me now?
There you go.
Okay.
Yeah.
Been a series of calls today. I recognize what you're doing on the acquisition side. You know, it's sort of waiting to see how that market plays out. You know, if I were to extrapolate that conversation into development, obviously there's no funding issues from your perspective. At what point do you have your pulse on things? You know, we got a GDP print, you know, in negative territory for the first quarter just today, obviously inflation and, you know, the war escalating. A lot of things going on around us that could, you know, play a role in property values here at home. I'm just curious, you know, how is your perspective about expanding development?
Obviously, you're doing that, but how could it change in the future? You know, what factors are you looking at to say, well, maybe we should you know, not perhaps take a pause in development, but introduce a little bit more caution. You know, what factors are you looking for to come to that conclusion, even though it's not happening right now?
Hey, Rich. It's Matt. I'll take a shot at that one, and Ben or others may want to chime in too. You know, we're always very focused on risk management, and it's kind of built into our DNA. As I mentioned at the beginning, you know, or in my remarks, you know, we never trend, so we're always looking at things on a current spot basis. And, you know, we structure our deals where in the vast majority of cases, we're not closing on the land until we're very close to being ready to break ground, if not when we're breaking ground. We're very mindful of that. What I'd say is, you know, we have a lot of optionality.
Today we control a $4 billion development rights pipeline with a total investment of less than $300 million between the land on the balance sheet and the pursuit costs that are capitalized for land that we don't yet own. That's pretty impressive to be able to control that much opportunity with the investment that we have. That gives us the ability to respond accordingly. Right now, the economics of development are very favorable. We did provide that sensitivity table because we have been getting some questions about that. Well, what if hard costs keep going up? The answer is, if hard costs grow faster, modestly faster than rents, you can still preserve the yield.
At some point, obviously, that equation changes, and we're watching that every day. But I think we're, you know, when we do start, we will match fund it. If we're match funding it and if we're being careful on the risk mitigation up front, basically, the way we think about it is we have options on a lot of good business, and, you know, we don't really have to make the decision until the quarter the deal starts.
Yeah. I just, Rich, I would just add one thing to that and to Matt's comments, and that's, you know, as we do that, we bring a terrifically strong balance sheet to the equation. Both from a leverage standpoint, a liquidity standpoint, and a financial flexibility standpoint. As you know from our earnings materials, our net debt to EBITDAre is five times, which is at the low end of our target range of five to six times.
Our unencumbered NOI is 95%, which is probably at an all-time high in the company's history. We have plenty of flexibility to seek mortgage financing in adverse circumstances should we need to do so. The likelihood of needing to do so is very low because we've got $2.5 billion of liquidity when you look at our line of credit, our cash on hand, and the equity forward. Again, to Matt's first point, we do bring the expanded to all parts of our business, but we also bring a strong balance sheet that gives plenty of firepower with financial flexibility.
Okay, great. My second quick question is, I asked this to a couple of your peers already this week, see what you have to say. You know, this is an environment the likes of which we have not seen the ability to grow rents to the degree that we have. I wonder how you are looking to preserve this, you know, to extend the opportunity into 2023 and 2024 as opposed to just sort of taking the money and taking what the market's given you. Is there a way to take this gift of an environment and let it exist and have.
Extend the shelf life of it into 2023 beyond just, you know, the earn-in that you would normally get, maybe extend lease term or do something to capture this for a longer period of time? Is there any type of strategy in your wheelhouse that you're looking to do that type of thing?
Yeah, Rich, this is, I'll start with a couple of items that are top of mind. You know, as you mentioned, obviously, you know, fundamentals are very strong today. Looking out on the medium term, right, there are other ways that we need to be focused, and we are focused on driving value and growing earnings. You're hearing from us, you know, our other focus area and themes, right. Driving margin and driving NOI through our operating model transformation, right. That's one. Think about how we optimize our portfolio, right, over time is another, right. The selling off of slower growth, higher CapEx assets, right. Then redeploying that capital into our expansion markets with newer assets that we think we have a better cash flow profile.
Then the development, right, pipeline is another area that we continue just tapping into that general development D&A, right. It is another part as we think about growing earnings. An aspect of that is finding other avenues to allocate capital, other ways to grow earnings. You saw that this quarter with our announcement around the Structured Investment Program.
The one thing that I would add, Rich, is to a couple of your specific questions, maybe just as a reminder, is that as you look forward, but we're not, you know, providing any kind of guidance for 2023, there are still a number of factors that would, if you kind of start to line them all up, would give you a sense that, you know, 2023, absent, you know, significant macroeconomic shock of some kind, should be a pretty good year and an above average year, was the phrase they used earlier. Some of the things that I would point to are, one, you know, we've mentioned what our forecast is, you know, for bad debt for this year, which is about rough numbers, you know, 2.5%, 2.6%. That's normally 50 basis points or so.
At some point, we're gonna unlock all of that. Question is just when, as we move through this year into next year. In terms of the increases that we're seeing in rents today, they're pretty robust. As we pointed out at the beginning of the call in Ben's prepared remarks, you know, we're seeing pretty good asking rent growth today, which is actually boosting loss to lease.
Right.
You know, it sets us up pretty well as we move into 2023. Then the other piece I'd say is, you know, there still are a couple markets out there where we're somewhat constrained in terms of the renewal offers that we can send out due to these sort of COVID overlays and, you know, regulatory orders that are in place. There's a few things out there that absent, you know, anything else from occurring, assume it's a static environment, see a pretty good outcome for 2023 is what I'd say. Just keep those in mind.
You got it. I'll do that. Thanks.
Yep.
As a reminder, please press star one for your last chance to enter the queue. We'll now move to Alexander Goldfarb with Piper Sandler.
Hey, good afternoon, and thank you for taking the question. Just two questions. First, on the rents that you guys are owed, I saw that nationally you received about $14 million from the federal, from Treasury, in the quarter. Just curious what the split is on AR balances, both that apply to California versus that fall under the federal program. Then two, within those mixes, how much is owed from existing residents versus owed by former residents? And by saying that, you know, our understanding is from yesterday's calls that, the former residents in California need to, you know, participate in the process, otherwise, you know, the landlord doesn't get paid. Just sort of curious on the breakout of those.
The full breakout.
Yeah. Alex, we probably need to get back to you with the level of detail that you're looking for on all the breakout between the different components. We've got some of that in hand, but it might be better to address that offline in terms of the specific details. Kevin can provide a couple of comments at high level, but
Yeah, just high level. High level is fine. High level is fine.
Yeah, maybe just in response to your first question about where the money's coming from overall in terms of the emergency rent assistance programs. You know, from the beginning to, you know, so to where through February, so with respect to receivables from 2020, 2021 and through February 2022, about two-thirds of the funds that we've received has come from California. Then about the next biggest chunk is 10% from Massachusetts.
Yeah. That's the high-level overview. In terms of the question about current versus former residents and stuff like that, why don't we get back to you, Jason, to follow up with you on that one.
Okay. The second question is, you guys talked pretty helpfully about the market rents and the demand for the product and. Just sort of curious, your guidance for the second quarter is a little bit, you know, short of where the street was expecting. Are there some offsets or some items that are coming up that give a little caution to the second quarter? Or is it just a matter of your view of how timing of the year and that the back half of the year is gonna be materially stronger, such that, you know, the overall guidance range, you know, basically stays the same when you look at the full year guidance?
Alex, specifically about same store or Core FFO, what metrics are you talking about specifically, just so we're clear on what you're asking about?
Just your core FFO guidance. You know, the top end of your range is where the street is. I'm just sort of curious if there were some things of caution or maybe some bad debt items or one-time items that the street wouldn't have factored in that would've had guidance where.
Yeah. Alex, it's Kevin. I guess, first of all, it's impossible for me to reconcile our numbers against, you know, a dozen or so analyst numbers on some composite basis. As a group and individually, you know, you all are free and should be free to sort of make your own forecast. I guess I'd make a couple of points. First of all, with respect to Q1, we guided to a midpoint of $2.20 per share. We beat it by $0.06. The street was at around $2.26, $2.27, which ended up being pretty close to accurate, but we certainly didn't guide the street there. Similarly, you know, I guess the street maybe around $9.63, $9.64 or something for the full year. We never guided the street to that level.
We guided them to $9.55. Frankly, we try not to sandbag our numbers. We're trying to give you an honest expression of where we think the year will shake out based on the assumptions that we have in place in the model today. As things stand, as things play out, based on the kind of business plan that we've just outlined in our updated forecast, we think the balance of risks 50/50 are around $9.55 per share. That includes kind of the pain point of pulling back a little bit on acquisitions of $0.05. Had we not done so, we'd probably be at $9.63, right? Maybe that's one way to try to reconcile up to the $9.63. Beyond that, I just don't know how to compare our assumptions versus composite of the Street's.
Actually, Kevin, that's super awesome. Appreciate that color. Thank you.
Yep.
Now we'll hear from Joshua Dennerlein with Bank of America.
Yeah. Hey, everyone. I had a question on the Structured Investment Program. I guess, how do you feel like that will influence your capital deployment preferences going forward? Also just curious why now for launching the program?
Hey, Josh. It's Matt. I don't think it will influence our capital deployment strategy. I think it's really more additive. It's just adding. It's a way, as Ben was saying, to leverage our capabilities and our relationships and our presence in these markets, to you know, something else that will be accretive for the shareholders. It's not displacing anything else in our capital plans. Why now? You know, we've been in the market for a while now with our different program, our developer funding program, where we've been providing capital to other developers exclusively in our expansion regions. As we've been doing that, we've been, you know, we've learned some things. One of the things we learned is that the expertise that we do bring is valued. It's valued by potential partners.
It's valued by other developers. It's valued by lenders. We did see it as, again, a market opportunity to extend those capabilities. Frankly, I think it would be a better environment for placing these kind of investments going forward than it has been the last couple of years when capital was incredibly cheap and easy. If anything, I think we're probably in a better position to place this money in competitive terms as I look out over the next couple of years with rates starting to rise and capital becoming just a little bit more dear.
Got it. For whether you do a mezz loan or preferred equity, are you targeting fixed or floating? I know you said like 9% to, I think, 11% kind of returns, but just curious if it will be fixed or floating.
I think our first couple deals that we're looking at now, including the one that we closed, are fixed. It's something we're talking about. You know, we're gonna meet the market where the market is. You know, when short rates were so incredibly low, fixed was, frankly, I think probably the better way to go, for the capital provider. If that shifts, you know, we'll shift with it.
Awesome. Thanks, guys.
Ladies and gentlemen, this will conclude your question and answer session for today. I'd like to turn the call back over to Ben for any additional or closing remarks.
Thank you for joining us today and your questions. Look forward to our continued dialogue and seeing you soon. Thank you.
With that, ladies and gentlemen, this will conclude your conference for today. We do thank you for your participation, and you may now disconnect.