AvalonBay Communities Q1 2022 Earnings Call Transcript

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Provided by Quartr
April 28, 2022

Key Takeaways

  • Core FFO per share of $2.26 in Q1 represents a 15.9% year-over-year increase and beat guidance by $0.06.
  • GAAP residential revenue rose 8.5% year-over-year (nearly 10% on a cash basis) driven by ~6% effective rent growth, improved occupancy and lower bad debt.
  • The development platform generated a 6.9% unlevered yield on $270 million of completions this quarter (6.3% projected for the full year) and AvalonBay controls a $4 billion development rights pipeline.
  • Leasing momentum stayed robust with occupancy near 96.5%, availability below 5%, and like-period rent growth accelerating to 13.7% in Q1 and April.
  • Full-year core FFO guidance was raised to ~16% growth, while acquisition assumptions were scaled back in favor of balancing $270 million of dispositions (at a 3% cap rate) with redeployment into expansion markets.
AI Generated. May Contain Errors.
Earnings Conference Call
AvalonBay Communities Q1 2022
00:00 / 00:00

There are 13 speakers on the call.

Operator

Ladies and gentlemen, please standby. 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.

Operator

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

Speaker 1

Thank you, Jake, and welcome to AvalonBay Before we begin, please note that forward looking statements may be made during this There are a variety of risks and uncertainties associated with forward looking statements and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10 ks and Form 10 Q filed with the SEC. As usual, this press release does include an attachment of 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.avalotbay.com forward slash 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.

Speaker 2

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 and A. Starting on Slide 4 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.

Speaker 2

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 $700,000,000 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 $270,000,000 of dispositions at a high 3% cap rate, with the intention to then redeploy this capital primarily into acquisitions in our expansion markets.

Speaker 2

And in April, we executed on an equity forward for 4.95 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 5, GAAP residential revenue increased 8.5% on a year over year basis led by about a 6% increase in effective lease rates and 100 basis point improvement in net bad debt. On a cash basis, residential revenue increased almost 10%. As shown on Slide 6, the 8.5% GAAP revenue growth was 150 basis points greater 7% increase we assumed in Q1 guidance, with lease rates and occupancy above our prior guidance and 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 7.

Speaker 2

Starting with Chart 1, 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 2, We also continue to see densification with less roommates and a desire for more space, leading to fewer adults per apartment and is a driver of incremental demand across our portfolio. As rents continue to grow, they are supported by greater household income from new residents, which was up 12% in Q1 relative to the prior year period as shown on Chart 3. And finally, in Chart 4, 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 8, This backdrop is translating into continued momentum and like term effective rent change, which accelerated throughout Q1 and continued into April at 13.7%.

Speaker 2

Looking forward, our portfolio is positioned extremely well heading into the peak leasing season. As shown on Slide 9, 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. And 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.

Speaker 2

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 $40,000,000 to $50,000,000 of NOI with approximately $10,000,000 generated to date. This slide highlights 3 of our many initiatives, including Bulk Internet and managed WiFi, which is projected to ultimately deliver $25,000,000 of incremental annual NOI. Smart home technology, which unlocks both operating efficiencies and revenue opportunities going forward and third, our digital mobile maintenance platform, which will not only enhance our residents' experience with us, but also deliver material value to enhance 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.

Speaker 2

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 in Northern California. And in some other markets, while eviction moratoria have expired, the court processes are moving slowly. As a result, some of the growth we are expecting in the back half of twenty 22 may get pushed in 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 update 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.

Speaker 2

And with that, I'll turn it to Matt to delve further into our development and capital allocation activities.

Speaker 3

Great. Thanks, Ben. Turning to Slide 12, our development activity continues to generate outstanding results. The 5 consolidated communities currently in lease up, which are widely dispersed across 5 different regions, have rents which are currently $2.30 or 9% above pro form a, 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 $1,000,000,000 at a cost basis of $690,000,000 This provides roughly $360,000,000 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.

Speaker 3

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 Q1, our development rights pipeline had grown to $4,000,000,000 up from $3,300,000,000 at the start of the year with new sites added in our expansion regions 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 the hard costs which typically flow through to development yields. This is an increasingly important issue in the current environment.

Speaker 3

Our development rights pipeline is 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. 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 Denver and Southeast Florida.

Speaker 3

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 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 Q1, 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 Plus Denver and Florida with our position in the capital stack between the primary construction loan and the sponsor equity.

Speaker 3

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 $300,000,000 to $500,000,000 total investment level over the next few years. And with that, I'll turn it back to Ben for some closing remarks.

Speaker 2

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 both WiFi, smart access and mobile maintenance. As you heard, we continue to lean into our development platform with b subs outperforming and generating meaningful earnings growth and value creation. We're also building our development rights pipeline now up to $4,000,000,000 providing options on future value creation, including significant investment in our established 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, financial know how to grow earnings and create value.

Speaker 2

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

Operator

We will begin with Nicholas Joseph with Citi.

Speaker 4

Thank you very much. As you look at entering the structured investment program, how quickly do you expect to scale up to that $500,000,000 And how are you thinking about laddering the deals and redemption timing?

Speaker 3

Hey Nick, this is Matt. I guess I can take that one. I think it will take us a couple of years. It really will be dependent The volume of the transaction market starts volume and kind of how our origination goes, but I would expect it's probably going to be 2 to 3 years before we get it up to that level. Then once you get it to that level, These are typically 3 to 5 year investments.

Speaker 3

So each year there's some redemptions and hopefully you're putting out some new money. So it's a ramp to get it there and then Probably that's worth to keep it there.

Speaker 4

Thanks. And then as you look to enter it, what were you thinking in terms of just the competition within this market? And then are you going to have an option to buy or own throughout all of the deals?

Speaker 3

Yes. Thanks for that. To the second question, no, we do not expect to have an option to buy the deals. And 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.

Speaker 3

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. So we really are viewing it as a one time investment. What was the first part of the question?

Speaker 4

Competition. Competition.

Speaker 3

Competition, sorry. Yes. 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 Probably shifting in a way that's going to make this program more attractive going forward, as development capital maybe gets a little more challenging As first loan proceeds start to get constrained, so we're pretty bullish.

Speaker 3

And the other thing is we have key Relationships in all of these markets. And we've been in them for many years. And so we view it as really another way we can work with a lot of folks that we We've worked with another capacities in the past and it's kind of another sleeve of capital if you will.

Speaker 2

And if you think about us in our established markets, 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.

Speaker 3

Thank you.

Operator

Now we'll move to a question from Rich Hill with Morgan Stanley.

Speaker 4

Hey, good afternoon guys. I want to maybe circle back to The acquisitions 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, 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 for cap rates. Is that sort of the right way to think about that? And if so, It doesn't mean you're really taking a medium to long term approach rather than trying to maximize returns over the near term.

Speaker 4

And I say that in a complementary way, not

Speaker 3

a negative way.

Speaker 5

Yes, sure, Rich. This is Kevin. Maybe just to tell you what the first part is, I mean, think you're right. With respect to all that, basically maybe to break it apart into 2 pieces. You're correct.

Speaker 5

Obviously, we did the equity $400,000,000 $500,000,000 spend Mentioned our intention at least at this point is that while we can pull that down in 1 or more settlements from here through the end of 2023, Our expectation is at this point that we're going to use that equity capital to draw down over the course of 2023 to fund development in 2023. So that's our current attention. So 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 acquisitions, You're correct. We increased overall expectations for core FFO for full year by $0.03 to 9.50 $0.08 is a midpoint.

Speaker 5

And 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. And among the more notable changes are obviously an expectation for an $0.11 increase in earnings from higher same store NOI, primarily driven from higher rental rates and to a lesser extent from higher occupancy and relatively famous. And 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 based at least on 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. So Matt can certainly speak to that.

Speaker 5

But at the moment we pulled that down a little bit, which A little bit of a $0.05 decrease. And the other notable item is just a $0.03 decrease in earnings related to the flow through of your So that is sort of a kind of reconciliation of the reforecast for 2022 Any equity forward to be clear is not being pulled down in that model for 2022 because that's not our current expectations.

Speaker 3

Okay.

Speaker 2

Yes, Rich, it's Ben. Just a couple more tidbits there. So on the acquisition side, as Kevin hit on, That's a reflection of where we stand today. We did narrow the box some, right, earlier this year. We want Assess the market and obviously some macro dynamics happening there.

Speaker 2

And the assumption we pulled it down to is similar to what we had last year, Sort of a balance between acquisitions and dispositions and we continue to think about it really sort of trade capital, right? And so capital that we can be looking to monetize Out of our established regions, and then redeploying that capital into our expansion

Speaker 3

markets. So

Speaker 4

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 maybe older properties with higher CapEx spend, selling those at tight cap rates and rolling it into expansion markets. Why wouldn't you

Speaker 2

Yes, I'll start and then Matt can chime in. We were very active last year, had a lot of activity At the end of last year and are continuing to push there for some of the reasons that you hit on. Yes, the bulk of our portfolio, we've got a lot of conviction around 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 6 months from today and While there could be some movement in cap rates, let's say, there's also very strong operating fundamentals, right, that are going to help support asset values as we look forward.

Speaker 3

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. And I will say that changes. And we may be starting to see a little bit of a change and where values might be in the regions we're looking to buy in and some of the regions we're looking to sell and maybe haven't been quite as In favor and that shift may be changing. So I actually think looking forward that relative value On the trade, it may look a little better than it would say in the Q1 of this year when we were being a little more cautious. Thanks guys.

Speaker 3

That's it for me.

Operator

We'll now move to Steve Sakwa with Evercore ISI.

Speaker 6

Thanks. Good afternoon. I was wondering first if we could just Start on kind of the renewals that you're sending out for, I guess, either May, June, July and how those stacked up the Q1 and April?

Speaker 7

Yes, 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, maybe 150 bps or so higher than What we originally expected, so that's what's out now.

Speaker 6

Okay. And Sean, are the take rates, is there any change in kind of the attitude or acceptance From kind of 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?

Speaker 7

Yes. 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, Call it 20% year over year, but it's down 15% to 16% compared to kind of pre COVID norms, when you look at Q4 and then Again, Q1 of this year, so 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 at compelling value. And then there's transition costs.

Speaker 7

So, if I'm going to go, Alan, I bet it's going to pay roughly the same, and then I've got moving costs or switching costs, people are inclined just to say where they are.

Speaker 6

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 and just try to compare that to 2021.

Speaker 5

So, Steve, I'll jump in here and Sean may want to ask here a little bit. So, 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, but just to kind of give you a sense that for the full year in our budget, We assume that uncollectible revenue overall would be about 2 70 basis points of the headwind, And it's 70 basis points of revenue. And at this point, it's 2 64 basis points. So on a net basis, marginally better.

Speaker 5

But As you probably saw reflected, there's some fair there's a bit of movement as we've seen in the 1st part of the year so far in some of those underlying pieces. And so underlying bad debt trends, delinquencies if you will, in a couple of our jurisdictions have trended worse such that overall for 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. And so kind of When you miss that out over the full year, overall, our forecast for overall bad debt taking account rent relief and underlying bad debt trends It's 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 of the year. Sean, how are you?

Speaker 5

Yes.

Speaker 7

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, it's 2.64% for 2022.

Speaker 6

Got it. Okay. So it's a little bit of a headwind year over year. But you're saying within the 9% revenue growth, you've got about a 2 70 basis point And in fact bad debt, sort of headwind in the growth this year?

Speaker 7

Correct. And the way I'd probably think about it, Steve is relative to our original budget, some markets are getting a little bit better. But given the delay in the eviction moratorium expiration, particularly throughout Los Angeles and Alameda County in 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 and that's really what 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. But as Kevin noted, a little more than offset by greater rent release.

Speaker 6

Great. And just one last question for Matt. Just on kind of the construction supply chain, just How was that sort of unfolding as you're looking to start new projects? Is that a lot more challenging today? Is it getting better?

Speaker 6

Just where are the bottlenecks and what does that maybe due to the risk of starts or how do you sort of manage that and what should we expect?

Speaker 3

Yes, Steve, I guess I would say construction inflation is definitely running hot. So costs are on the rise. This is where us being our general contractor really does help because we're able to go back to build on the relationship We've had over many years with a lot of our subcontractors and negotiate early agreements and signed build agreements. So we're doing what we can to stay in front of it. I suppose the supply chain issues and the actual availability issues, those have probably gotten a little bit better over the last 4 or 5 months.

Speaker 3

So 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 It's occupancy, final inspections from jurisdictions, getting a power company out there to set the meters. Those things probably haven't Got it. Better yet. So I think that's kind of slowing down supplies extending out durations on construction jobs by a quarter or 2 in many cases. I'm not talking about us so much as the industry as a whole.

Speaker 3

So, but for us so a couple of starts that we thought we were going to start in the first half of the year. We'll probably get delayed a couple of 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.

Speaker 6

Great. Thanks. That's it for me.

Operator

We'll now take a question from Austin Wurschmidt with KeyBanc Capital Markets.

Speaker 8

Great. Thanks and good afternoon everybody. I was curious how the 4% increase in asking

Speaker 7

Yes, it's Sean. Good question. What I'd say is that it's tracking a little bit ahead of what we anticipated. And part of the reason why we looked at updating our reforecast and outlook for the year was based The trend that we were seeing not only in asking rents, but what people are actually taking on renewals As well as what we're seeing on the move in side as well as renewal offers that we have at the queue. I think typically what would happen If you look at our business historically, as you would see rents continue to rise as we move through sort of the July, maybe early August period And then decelerated in the back half of the year.

Speaker 7

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 macroeconomic Forces etcetera, just the overall supply and demand dynamics in the housing market Well, really dictate kind of where things come out is because the second half of the year and I think we'll have a better sense for that as we get to our Q2 call.

Speaker 8

That makes sense. What does that imply based on your current expectation, for how things will play out in a 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 based on the current guide?

Speaker 7

Yes. That's a good question. I'd say that one probably it's a little more challenging to answer sitting here and Late April when we're talking about what it might be in January of 2023. So, I would say based on what we know today, it should be Yes, well above average. But trying to give you a range would be just too speculative at this point.

Speaker 8

Okay, that's fair. And then 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 $880,000,000 that you initially outlined back in February, I believe. And 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 into this point?

Speaker 5

Yes. Thanks, Lawson. It's Kevin. So yes, I mean the short answer is our capital plans changed a little but not a lot. So you're correct, when we began the year, our initial outlook was for $880,000,000 External Capital, most of which at that time was planned to be sources for the issuance of our secured debt.

Speaker 5

At this point, our current capital plan calls for Just under $700,000,000 of external capital, so we're down call it $200,000,000 overall relative to our initial outlook. And of that nearly $700,000,000 of external capital that we currently expect for the year, about half It's expected to come through net disposition proceeds from sales of from Columbus Circle as well as a little bit of disposition Only on dispositions, which is much more of a closer to a push, it's been alluded to a moment ago. And then the other half from newly issued unsecured debt, against which we have $150,000,000 in hedges in place at a forward starting swap rate of 1.37 percent, so about 150 basis points below where treasuries are today. And then just to kind of put that in What needs to still be sourced is of the $700,000,000 of external capital, as you can see from our earnings materials, we sourced $270,000,000 in Q1 less $95,000,000 acquisition in Q1 for about 1 fourth of the anticipated external capital needs in Q1 with 3 floors left to go here. And then just as a reminder, at the moment, as I mentioned ago, we do not plan At this point in any way, on drawing down capital on the record in 2022, but it's rather currently expected to do so in 2023 to start development in that year.

Speaker 2

Great. Very helpful. Thank you.

Operator

And now we'll take a question from Chandni with Lutra with

Speaker 9

So you took down your high end of your guidance by a couple Could you perhaps give us a little bit color as to what would get you to that high end versus the low end right now?

Speaker 5

So, hi, and Shania, we had our time here. This is Kevin. I'm sorry,

Speaker 9

my thoughts really messed up. I can repeat.

Speaker 6

No, no, I think I've got it.

Speaker 5

I think you want to know what could drive us to the high end of our range $9.78 versus the midpoint $9.58 I think the answer primarily is an increase in expected 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 These smaller impacts, I mean, up and down the P and 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 we're currently seeing in other known acquisitions as well.

Speaker 9

Got it. And then towards the low end, what would it take to get you there? Like what would have to kind of go wrong in that equation?

Speaker 5

Yes, it's probably the inverse of just kind of what I suggested. So 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, I guess, analogous to sort of what we saw in 2020 with the pandemic. So of course, not within our expectation, but Certainly, I guess, potentially within the realm of possibility.

Speaker 9

Understood. And then as a follow-up, so you're sending renewals right now in the low teens rate You mentioned earlier, at this point last year, perhaps, there was obviously a lot of deal seekers that kind of got into Apartments that just given where the market was, are you seeing any reversal from that standpoint wherein people no longer are able to afford, especially those who previously Did not live in St. Ablond Bay Apartments. I mean, what are you seeing from that deal seeking activity standpoint? Is it reversing?

Speaker 7

Yes, 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. And probably importantly, the reason we're not experiencing that is wage growth has been quite robust.

Speaker 7

And if you look at wage growth, particularly across the occupations that are represented primarily by our residents, It's not uncommon to find high single digit, low double digit numbers out there for people in those sectors. And I think that's consistent even with some of the movements that we're Ben referenced his prepared remarks where people that are moving in this quarter as opposed to the same quarter last year with incomes up 12%, 13% range. That's pretty good, especially in an environment where people are generally spending less from a discretionary income standpoint on various items. So, so far there's not much stress in the system If that's kind of the main purpose of the question.

Speaker 9

Yes. Thank you. Thank you so much.

Speaker 7

Yes.

Operator

And the next question will come from John Pawlowski with Green Street.

Speaker 10

Thanks for taking the question. Matt, I want to go back to your comments on just the development deliveries for the industry overall, not just Avalon 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 we're going to be talking about just kind of a lot of deliveries dropped onto a market once Did 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 When there's going to be a shoe

Speaker 3

to drop? Yes. It's interesting, John. I don't know that it will suddenly Correct. And there'll be I think what's more likely to happen is you're going to see supply bleed in over a longer So it's going to extend out that delivery pipeline.

Speaker 3

It will get there eventually. So maybe it gives those markets a little more time to absorb it, but people are starting just as much. So I don't A, I don't think it's going to change anytime soon to some of these issues, Particularly when it's jurisdictions or it's utilities, those are structural issues, those types of Entities don't suddenly go and hire a bunch of new people. So 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 2 years from start to finish is taking 2.5 to 3, but there's tons of starts there.

Speaker 3

So I don't think I think it's just going to extend out The delivery times in general, and among our markets, including our expansion markets, the 2 that I'd say are probably most stretched that way Probably Denver and Austin. I don't know that there's a lot of supply in some other markets we're not in That I read about, but those are the 2 off the top that I would say where we're seeing it the most in terms of those kind of pressures on the system Not being able to keep up with the amount of supply. Not in terms of demand, in terms of deliveries and kind of final inspections and punch out and all that.

Speaker 10

Okay. Makes sense. And then final question, 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 under managed?

Speaker 7

Yes, John, it's Sean. I'd say it's a little bit of a blend of both. Certainly, the market fundamentals and 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 twenty twenty one, it's currently being captured in early 2022. But there are I'd say there's a couple of different assets out of that big and small pools you referenced that we felt had a compelling When we bought the asset in terms of how it's managed, whether it was how the parking garage is managed in one case, how the pricing was managed terms of revenue management in another case that are probably giving us a little bit of a lift. But I'd say market fundamentals have been very robust and You'd still see pretty robust numbers come out of Southeast Florida, maybe in the high teens range or something like that, Low 20s, independent of sort of the management value add, if you want to call it that.

Speaker 3

Okay. All right, great. Thank you. Yes. Now

Operator

we'll move to Brad Heffern with RBC Capital Markets.

Speaker 2

Yes. Hi, everyone. I just wanted to go back to the acquisition guidance and make sure

Speaker 7

I understand the thought process there.

Speaker 2

Is it that you think prices will come down as higher rates And you don't want to inquire 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, this is Ben.

Speaker 2

I'll start and Ben can provide more color. It's primarily Just an updated snapshot of where we stand today, right? And as part of that, as I mentioned before, we did get more selective. And that was to assess and sort of feel out whether there were going to be changes, right? There's obviously 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.

Speaker 2

So, yes, we're you've been looking forward, we're hoping that there's opportunity, Right. Of a group, right, who's going to be most impacted by higher rates, it's going to be those levered buyers, right. We're not that. And we're also able to take a long term approach, right, with our investment thesis. So we're paying close attention.

Speaker 2

As I mentioned in my prepared remarks, we're active Market and are continuing to actively underwrite and pursue acquisition opportunities. Yes. Okay. Thanks for that. And then I guess you have this chart on de densification in the deck.

Speaker 2

I'm curious is that something that you expect to be somewhat permanent or is it

Speaker 7

Yes, 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 phenomena Maybe more secular, I suppose it's just a cyclical issue. And certainly, people working from home and wanting to have more space or quiet space as roommate that might be doing something else. People spending a little bit more on housing in general, whether it Single family, multifamily, as a thought of home has kind of been, I mean, how you want to describe it, but Place where they're spending more significant time, not only from a work standpoint, but for other reasons. And I would just say just given the nature of the population and how we see things evolving demographically, a lot of the growth we've seen has been in single person households and 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, had 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.

Speaker 7

So People coming back maybe more just single in nature, and seeing the future that way for a longer period of time. So there's a number of different issues out there. You can point to probably several Well, that would tend to lead you to a conclusion that this may be durable. But the short answer is, we'll know probably over the next few quarters that we To see that trend remain in place.

Speaker 2

Yes, Brad, another theme supporting it, to want to emphasize is just the Financial health, right, of our resident, right, our customer, right, think about job and wage growth, think about savings, add on the factors that Sean referenced sort of the increasing importance of the home, definitely feeling that it's going to create an additional stickiness as they look for quality home environments and more space. Okay. Thank you.

Operator

Now moving to Rich Anderson with SMBC.

Speaker 3

Thanks. So I recognize your

Speaker 2

Hey, Rich, Robin, you're very soft on the phone.

Speaker 3

Hey, my headset stopped working.

Speaker 11

So can you hear me now? There

Speaker 2

you go.

Speaker 11

Okay. It's been a series of calls today. So I recognize what you're doing on the acquisition Sorry, it's sort of waiting to see how that market plays out. But if I were to extrapolate that conversation into development, obviously, there's no funding issues from your But at what point do you have your pulse on things? We got a GDP print in negative territory for the first Quarter just today, obviously inflation and the war escalating, a lot of things going on around us That could play a role in property values here at home.

Speaker 11

So I'm just curious, how is your perspective about Expanding development, obviously, you're doing that, but how could it change in the future? And what factors are you looking at to say, well, maybe we should Not perhaps to take a pause in development, but introduce a little bit more caution. What factors are you looking for to come to that conclusion even though it's

Speaker 3

Rich, it's Matt. I'll take a shot at that one and Ben or others may want to chime in We're always very focused on risk management and it's kind of built into our DNA. As I mentioned at In my remarks, we never trend, so we're always looking at things on a current spot basis. And 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. So we're very mindful of that.

Speaker 3

And what I'd say is, We have a lot of optionality. So today we control a $4,000,000,000 development rights pipeline with a total investment of less than $300,000,000 between The land on the balance sheet and the pursuit costs that are capitalized for land that we don't get out. So that's pretty impressive to be able to control that much opportunity with the investment that we have. And so that gives us the ability to respond accordingly. So right now, The economics of development are very favorable.

Speaker 3

And we did provide that sensitivity table because we have been getting some questions about that. Well, what if hard costs keep going up? And The answer is, if hard costs grow faster, modestly faster than rents, still preserve the yield. At some point, obviously, that equation changes and we're watching that every day. But I think we're and when we do start, we will match fund it.

Speaker 3

So if we're match funding it and if we're being careful of the risk mitigation upfront, Basically, the way we think about it is we have options on a lot of good business and we don't really have to make the decision until the quarter of the deal starts. I

Speaker 5

would just add one thing to that and to Matt's comments and that's as we do that, We bring terrifically strong balance sheet to the equation, both from a leverage standpoint and liquidity standpoint and a financial flexibility standpoint. As you know, from our earnings materials, our net debt to EBITDA is 5 times, which is at the low end of our target range of 5 to 6 times. Our unencumbered NOI is 95%, which is probably an all time high in the company's history. So we have plenty of flexibility to see forward financing in certain circumstances should we need to do so. And the likelihood that we needed to do so is very low because we've got $2,500,000,000 Liquidity, when you look at our line of credit, our cash on hand and the equity forward.

Speaker 5

So, 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 and flexibility.

Speaker 11

Okay, great. And then my second quick question is, and I asked this to a couple of your peers already This week, I see what you have to say. This is an environment that likes of which we have not seen the ability to grow rents to the degree that we have. Into 2023 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 how to extend the shelf life of it into 2023 beyond just the earn in that you would normally get, maybe extend lease term or do something to capture this for a longer period of time.

Speaker 11

Is there any type of strategy in your wheelhouse that you're looking to do that type of thing?

Speaker 2

Yes, Rich, this is I'll start with a couple of Items that are top of mind, and as you mentioned, obviously, fundamentals are very strong today. But looking out on the medium term, right, there are other ways that we need to And we are focused on driving value and growing earnings. And so you're hearing from us our other focus area and themes, right, Driving margin and driving NOI through our operating model transformation, right? That's one. Think about how do we optimize our portfolio, right, over time Another right, the selling off of slower growth, higher CapEx assets, right, and then redeploying that capital into our expansion markets with newer assets that we think we have a better Our cash flow profile, and then the development pipeline is another area that we continue just tapping into that general development DNA, right, is Another part as we think about growing earnings, and an aspect of that is finding other avenues to allocate capital, other ways to grow earnings, and you saw that this quarter with our announcement around the structured investment program.

Speaker 7

Yes. The one thing that I would add, Rich is a couple of your specific questions. Maybe just as a reminder is that as you look forward, but we're not 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 2023 absent Yes, significant macroeconomic shock of some kind. It should be a pretty good year and above average year was the phrase I used earlier.

Speaker 7

Some of the things that I would point to are 1, we've mentioned what our forecast is for bad debt for this year, which is about Cut group numbers, 2.5%, 2.6%, that's normally 50 basis points or so. It's implied we're going to unlock All of that question is just when as we move through this year into next year. And then in terms of the increases We're seeing our rents today, they're pretty robust. But as we pointed out at the beginning of the call in Ben's prepared remarks, we're seeing pretty good Asking rent growth today, which is actually boosting loss to lease and it sets us up pretty well as we move into 2023. And then the other piece I'd say is, there's still a couple of markets out there where we're somewhat constrained in terms of the renewal offers that we could send out Due to these sort of COVID overlays and regulatory orders that are in place.

Speaker 7

So there's a few things out there that Absent anything else from occurring, I assume it's a static environment, you have pretty good outcome for 2023 is what I'd say. So just keep those in mind.

Speaker 11

You got it. I'll do that. Thanks.

Speaker 3

Yes.

Operator

We'll now move to Alexander Goldfarb with Piper Sandler.

Speaker 12

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 $14,000,000 from the federal from Treasury in the quarter. But just curious what the split is on AR balances both that apply to California versus that fall under the federal program? And then 2, within those mixes, how much is owed from existing residents versus owed by former residents.

Speaker 12

And by saying that, our understanding is from yesterday's call is that the former residents in California need to Participate in the process otherwise the landlord doesn't get paid. So just sort of curious the breakout of those?

Speaker 7

Yes. So Alex, we probably need to get back to you with level of detail that you're looking for and all the breakout So we've got some of that in hand, but it might be better to address that offline in terms of the specific Kevin can provide a couple of comments at a high level, but

Speaker 5

Yes, high level is fine. High level is fine. Yes, maybe just in response to your first question about where the money is coming from overall in terms of the emergency revenue system, some programs. From the beginning to where through February, so with respect to receivables from 2020, 2021 and through February 2022, about 2 thirds of the funds that we received, has come from California. And then how about the next biggest chunk is 10% from Massachusetts?

Speaker 7

Yes. So that's a high level of In terms of the question about current versus former residents and stuff like that, let me get back to you Jason to follow-up with you on that one.

Speaker 3

Okay. Then the second question is,

Speaker 12

you guys talked pretty helpfully about the market rents and the demand for the product. And But just sort of curious, your guidance for the Q2 is a little bit 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 Q2 or is it just a matter of Your view of how timing for the year that the back half of the year is going to be materially stronger such that the overall guidance range It basically stays the same when you look at the full year guidance.

Speaker 7

And 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?

Speaker 12

Just your core FFO guidance. The top end of the year range is where The Street is. So I'm just sort of curious if there were some things of caution or maybe some bad debt items or one time

Speaker 5

So, Alex, this is Kevin. I guess, first of all, it's impossible for me to reconcile our numbers against a dozen or so analyst numbers on some composite basis. As a group and individually, 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.

Speaker 5

We beat it by $0.06 The street was at around 226, 227, which ended up being pretty close to accurate, but we certainly didn't guide The Street there. And so Similarly, I guess, The Street maybe around 963, 964 something for the full year. We never guided The Street to that level. We guided them to 955. And frankly, we try not to stand back our numbers.

Speaker 5

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 and as things stand, as things play out based on the kind of business plan that we've As outlined in our updated forecast, we think the balance of risk fifty-fifty are around $9.55 per share And that includes kind of the pain point of pulling back a little bit on acquisitions of $0.05 So have you not done so? We'd probably be at 9.63, right? So maybe that's one way to try to reconcile to the 963, but beyond that, I just don't know how to compare our assumptions versus comp positive The Streets.

Operator

Now we'll hear from Joshua Darlene with Bank of America.

Speaker 5

Yes. Hey, everyone. I had a question on the structured investment program. I guess, how do

Speaker 12

you feel like that will influence your capital Deployment preferences going forward. And then also just curious why now, for launching the program?

Speaker 3

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 something else that will be accretive for the shareholders. So it's not displacing anything else in our capital plans.

Speaker 3

Why now? 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. And as we've been doing that, we've been We've learned some things. And 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 and so we did see it as a again a market opportunity to extend those capabilities.

Speaker 3

And frankly, I think that it will be a better environment for placing these kind of investments going forward It has been the last couple of years when capital was incredibly cheap and easy. So 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 mix becoming just A little bit more, dear.

Speaker 12

Got it. And for the for whether you do a mezz loan and 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?

Speaker 3

I think our first couple of deals that we're looking at now including the one that we closed are fixed, But it's something we're talking about and we're going to meet the market where the market is. And when short rates were so incredibly low, This was I think probably the better way to go for the capital provider. If that shifts, yes, then we'll shift with it.

Operator

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.

Speaker 2

Thank you for joining us today and your questions. Look forward to our continued dialogue and seeing you soon. Thank you.

Operator

And with that, ladies and gentlemen, this will conclude your conference for today. We do thank you for your participation and you may now disconnect.

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