AvalonBay Communities, Inc. (NYSE:AVB) Q1 2024 Earnings Call Transcript

AvalonBay Communities, Inc. (NYSE:AVB) Q1 2024 Earnings Call Transcript April 26, 2024

AvalonBay Communities, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to AvalonBay Communities First Quarter 2024 Earnings Conference Call. [Operator Instructions]. Your host for today’s conference call is Mr. Jason Reilley, Vice President of Investor Relations. Mr. Reilly, you may begin your conference call.

Jason Reilley: Thank you, Diego, and welcome to AvalonBay Communities First Quarter 2024 Earnings Conference Call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of 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, the press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today’s discussion. The attachment is also available on our website at www.avalonbay.com/earnings.

And we encourage you to refer to this information during the review of our operating results and financial performance. And with that, I will turn the call over to Ben Schall, CEO and President of AvalonBay Communities, for his remarks. Ben?

Benjamin Schall: Thanks, Jason, and good morning, everyone. I’m joined by Sean Breslin, our Chief Operating Officer; Matt Birenbaum, our Chief Investment Officer; and Kevin O’Shea, our Chief Financial Officer. Sean will speak to our operating outperformance year-to-date and our positive momentum as we enter the prime leasing season. Matt will discuss the continued outperformance of our developments and lease-up and how we are strategically deploying capital to generate value. And Kevin is here for questions and is more than happy to speak to our preeminent balance sheet and liquidity profile. Utilizing our earnings presentation. Slide 4 provides the highlights for the quarter and identify these key themes as we look ahead. First and foremost, we are off to a strong start to 2024 with first quarter results outpacing expectations.

We were able to build occupancy earlier than expected, and we also experienced meaningful improvements in bad debt in February and March. Second, we feel well positioned as we enter the peak leasing season, given low turnover, solid occupancy and positive rental rate momentum. We also expect our suburban coastal footprint to continue to outperform, given steady and improved demand drivers and [indiscernible] delivering in our markets versus the rest of the country. Given our first quarter outperformance, applications for Q2 and improvement in underlying trends, we have increased our full year guidance. We also remain laser-focused on executing on our strategic initiatives, including our operating model transformation. We remain on track here to deliver $80 million incremental annual NOI uplift from our operating [indiscernible], a target we raised from $55 million at our Investor Day in November.

And finally, with one of the strongest balance sheets in the sector, we are focused on growth opportunities in which we can tap our strategic capabilities from our operating prowess to our development strength to drive outsized returns for shareholders. With that summary, let me go a layer deeper on our results, the wider supply and demand backdrop and our increase to guidance. For the quarter, as shown on Slide 5, we produced core FFO growth of 5.1%, which was 350 basis points above our prior outlook. Same-store revenue growth increased 4.2% and 90 basis points better than our prior outlook. And our developments and lease-up are seeing strong absorption and achieving rents and returns above pro forma. Slide 6 shows the components of the Q1 core FFO outperformance with the bulk of the increase coming from higher same-store NOI.

Revenues exceeded our prior outlook by $0.04. Expenses in the first quarter were $0.03 better than expected, while we note that $0.02 of this $0.03 is estimated to be timing related or in other words, expenses we still expect to incur just later in the year than we had originally forecast. Turning to Slide 7. Demand for our portfolio is benefiting from more job growth than originally forecasted. For our job growth estimates, we look to the National Association of Business Economics, or NABE, which has now increased its estimate to 1.6 million new jobs in 2024, up from the prior estimate of 700,000 jobs. This better job outlook provides an incremental list of demand, not necessarily on the same trajectory as it may have in the past, given that a disproportionate share of these additional jobs may be part-time and seem to be more concentrated in lower-paying sectors of the economy.

As shown on the right-hand side of Slide 7, demand for [indiscernible] also continues to benefit from the differential in the cost of owning a home versus renting. This is true across most of the country but particularly pronounced in our markets, given the level of home prices, resulting in it being more than $2,000 per month more expensive to own versus rent a home. And this differential translates into record low numbers of residents leaving us to buy a home. Turning to supply on Slide 8. As we emphasized at our Investor Day, our suburban coastal portfolio, 71% suburban today and headed towards 80% suburban, faces significantly less new supply than many of our peers. In our established regions, deliveries will be 1.5% of stock this year and in line with historical averages.

In the Sunbelt, by contrast, deliveries will be 3.8% of stock in 2024, significantly above historical averages. And with the lease-up of a typical project taking an additional 12 to 18 months, the pressure on rents and occupancy in the Sunbelt will last, at least, through the end of 2025, if not into 2026. This weaker operating performance in the Sunbelt is, in turn, starting to weigh on asset values there, which provides a more attractive opportunity for us to acquire assets below replacement costs as we continue on our journey of growing our expansion market portfolio from 8% today to our 25% target. With the supply demand backdrop and our outperformance year-to-date, we are increasing our full year core FFO guidance estimate to $10.91 per share for a 2.6% increase relative to 2023.

With the detail on Slides 9 and 10, the bulk of the increase is in higher NOI driven mainly by higher revenue with same-store revenue growth now projected to be 3.1%, up from 2.6% in our original outlook. Before turning it to Sean, I’d also like to take a moment to thank the team and the wider AvalonBay associate base, who continue to execute at a high level and above plan. It is energizing to see the organization executing on the priorities that we detailed at our Investor Day, a collective set of initiatives that we are confident will deliver superior growth in the near term and in the years ahead. And with that, I’ll turn it to Sean to go deeper and provide his perspectives.

Sean Breslin: All right. Thanks, Ben. Turning to Slide 11. The primary drivers of our 90 basis points of revenue growth outperformance in Q1 were economic occupancy, which accounted for roughly 1/3 of the total outperformance for the quarter; and underlying bad debt, which represented another roughly 20%. Occupancy was about 30 basis points higher than expected, an increase from the mid-95% range at the end of last year to the high 95s for the quarter. While we expected occupancy to grow during Q1, it increased more quickly than we anticipated, reflecting strength in the underlying demand for our primarily coastal suburban portfolio and very limited new supply. In terms of underlying bad debt from residents. We ended up about 25 basis points favorable to our original expectations for the quarter, with all the improvement being realized in February and March.

January was in line with budget at roughly 2.2% [indiscernible] declined materially to 1.8% in February and again to 1.6% in March, which is roughly 60 basis points below our original budget. We experienced a similar dip in May of last year. The bad debt has been reverted to higher levels in June. Therefore, while we’re encouraged by results in February and March, we need to see a few more months at these lower levels to feel confident that we’ll experience consistently better performance moving forward. From a geographic perspective, the favorable variance to our initial expectations was more material in New England, New York, New Jersey, Seattle and, to a lesser degree, in Northern and Southern California. Moving to Slide 12. Key portfolio indicators are very healthy during Q1, and our portfolio is well positioned for the prime leasing season.

In Chart 1, turnover remains well below historical norms, in part due to a very low level of move-outs to purchase a home. During Q1, only 7% of our residents moved out of one of our communities to purchase a home. It wasn’t that long ago that we highlighted 12% to 13% of move-outs, purchasing a home as being low. 7% is extremely low relative to the long-term average of 16% to 17% and certainly reflects the favorable rent versus own economics in our established regions as Ben referenced earlier. Given the low level of turnover, availability has been relatively stable and supportive of above-average asking rent growth recently, which is reflected in Chart 3 and accelerating rent change, which is reflected in Chart 4. As expected, our East Coast regions delivered the strongest rent change in Q1 at 2.7% with the East Coast established regions trending at 3% range, while Florida was sub-1%.

We experienced positive momentum in rent change throughout the quarter across the East Coast markets, which was particularly notable in Mid-Atlantic, while performance in the District of Columbia has been soft and volatile due to a number of issues, including the impact of new supply. The Northern Virginia and Maryland suburbs have demonstrated continued positive momentum. Rent change for the West Coast regions was 1.3% during the quarter, with the Seattle market leading at 2.8%, which further increased into the mid-4% range for April. While urban Seattle is still soft due to a significant amount of new supply and weaker demand, performance across our primary suburban portfolio improved meaningfully during the quarter. In Northern California, while the underpinnings of better performance are starting to appear, it’s not yet having a meaningful impact on current performance.

Rent change was flat for the quarter with a positive rent change in San Jose being offset by negative rent change in San Francisco and the East Bay. Transitioning to Slide 13 to address our updated revenue outlook for the year. We now expect same-store revenue growth of 3.1% for 2024, an increase of 50 basis points from our original guidance. The increased outlook is primarily driven by stronger lease rates as higher occupancy at the start of the year has allowed us to begin to achieve higher rental rates than we originally anticipated as we move into the prime leasing season. We now expect like-term effective rent change in the mid-2% range, about a 50 basis point increase from our original outlook. The second quarter should trend up into the low 3% range before decelerating in the back half of the year, consistent with seasonal norms.

We expect renewals in the low to mid-4% range for the balance of the year, while new move-ins average roughly 50 basis points, which reflects the low 2% range for Q2 move-ins before experiencing the normal seasonal decline in Q3 and Q4. In addition, we’re projecting a greater contribution from the improvement in underlying bad debt with a full year rate of 1.7%, down from 2.4% last year and slightly more rent relief. And finally, moving to Slide 14, you can see where we’re projecting stronger revenue performance relative to our original outlook. We’re expecting the most significant improvement in Seattle and New England, which outperformed our expectations in Q1 and accelerated further into April, with both regions delivering greater than 4% rent change followed by Metro New York.

The Mid-Atlantic is expected to modestly outperform our original expectations, supported by stronger performance in Northern Virginia and suburban Maryland. Southern California is also expected to perform modestly better than our original outlook, and we haven’t changed our forecast for Northern California. So I’ll turn it over to Matt to address recent lease-up performance and our capital allocation plan for 2024. Matt?

Matthew Birenbaum: All right. Thank you, Sean. Turning to our development communities. Slide 15 details the continued impressive results being generated by our lease-ups. The 6 development communities that had active leasing in Q1 are delivering rents $295 per month or 10% above our initial underwriting, which is translating into a 40 basis point increase in yield. And this performance is being supported by strong traffic and leasing velocity with these assets averaging 30 net leases per month in the seasonally slow first quarter, which grew throughout the quarter to nearly 40 per month in March. This outperformance is driven by 2 primary factors. First, since we conservatively don’t trend rents and report our development economics based on projected NOI at the time of construction start until the communities enter lease-up, there’s usually rent growth during the construction period, which provides some incremental lift to our development yields by the time of their completion.

And second, while we are pretty good at predicting how the market will respond to our latest state-of-the-art product offerings and new development, we do still frequently see some additional premium as the market responds to the unit and community features we incorporate into our designs. Turning to Slide 16. While it was a quiet quarter for investment activity with no closed transactions or development starts, our investment plans for the year are still very much on track. We brought 4 assets in our established regions to the market in Q1, looking to take advantage of a potential lull in the investment sales market as many owners were waiting for interest rate cuts before getting going with their disposition plans. All 4 are now under agreement at pricing, consistent with our initial expectations with a weighted average cap rate of 5.1%.

We expect to redeploy some of the proceeds from these pending sales into acquisitions in our expansion regions in the coming months as we continue to make progress on our portfolio optimization objectives to increase our expansion market allocation to 25% over time. Planning for development starts is also proceeding as expected with our start activity this year concentrated in Q2 and Q3. We are seeing some helpful construction buyout savings in certain regions, which will allow us to preserve our targeted spread of 100 to 150 basis points between development yields and prevailing cap rates. And in our SIP book, we continue to be conservative but do expect to grow that business line modestly through the course of the year. Fortunately, the $200 million in commitments in the program today were all originated in the last 2 years, are geographically dispersed across our markets, concentrated in submarkets with less new supply pressure and have initial maturity dates that are still 2-plus years out.

So we do not have any legacy overhang burdening our loan book. It’s also been interesting to see some larger portfolio transactions start to gain traction just in the past few weeks. This illustrates the continued attractiveness of our sector to private the capital and perhaps marks a shift in sentiment that might bring increased deal flow as the year progresses. We continue to preserve dry powder on our balance sheet so that we will be in a position to take advantage of future opportunities that may emerge, if they are aligned with our strategic priorities and our unique capabilities. And with that, I’ll turn it over to Ben to wrap things up.

Benjamin Schall: Thanks, Matt. Our results to date have exceeded our expectations, and we’re excited for the momentum we have heading into the peak leasing season. Demand is stronger than originally expected, and our suburban coastal portfolio faces meaningfully less supply than elsewhere in the country. And we’re confident that we will find opportunities to put our balance sheet and strategic capabilities to work to generate shareholder value. I’ll end our prepared remarks there and turn it to the operator to open the line for questions.

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Q&A Session

Operator: [Operator Instructions]. And our first question comes from Eric Wolfe with Citi.

Nicholas Joseph: It’s Nick here with Eric. Maybe just on the capital allocation and then rotation into the Sunbelt. You made a comment in the prepared remarks about seeing opportunities below replacement costs. And so I was just curious if you can quantify kind of that. Obviously, it’s probably range, but kind of how far below replacement costs you’re seeing on average then also the size of the opportunity you’re seeing in terms of product, I mean, on the market in those expansion markets.

Matthew Birenbaum: Yes. Sure. Nick, it’s Matt. I would say the discount replacement cost is obviously going to vary to some extent based on the age of the asset. I mean, in theory, assets that are 10, 20 years old should be trading below replacement cost because there is some depreciation there. But we are — I’d say we are seeing assets that are 10 years old. It might be trading 15% to 20% below current replacement cost. We haven’t seen kind of brand-new assets coming out of lease-up come to market yet at compelling prices. I think people are getting extensions on their construction loans, and there’s a pretty active bridge lending space. So we would look at those as well. So younger assets, I would expect the discount to be a little bit less than that, but we haven’t seen as much of that yet.

The volume has been . And that’s one reason that supported cap rates honestly being lower than I would have thought they would have been, but there is a little bit of a scarcity premium. And on the one hand, we’re taking advantage of that as a seller, and that’s one reason we brought some assets to market early because we anticipated that might happen. But as a buyer, that’s a little bit frustrating.

Nicholas Joseph: Would you expect some of that product to start to come to market? Or do you think it’s more — owners right now will be more of a wait and hold? I’m just trying to understand how kind of the current supply and the rate uncertainty may impact kind of your acquisition strategy and maybe urgency into moving into these, if we fast forward a year or 2, and the supply picture has started to improve.

Matthew Birenbaum: Yes. I mean, who knows? I would say that there is more volume coming. And if you talk to the brokers, they’ll say they’re pretty busy with . This is the seasonal time of the year when you start to see an uptick in transaction volume. Q1 volumes were down over — below Q1 ’23, which was down a lot from Q1 ’22. And transaction volumes are now below where they were kind of in ’17, ’18, ’19. So I think you will start to see some pickup in what might be available. And certainly, from our point of view, we’re staying disciplined about it. But we are hopeful that we might move into an environment where we’ll be able to start to accelerate our asset trading activity a little bit. We haven’t done that much in the last, say, 4 or 5 quarters.

Benjamin Schall: Nick, I’ll add a couple of comments, guess it’s well put by Matt. I generally see as our window of opportunity being open for a decent period of time and 2 primary reasons: one, the supply dynamics that exist in the Sunbelt. Per my prepared remarks, we expect to be with us for a period of time. So that softness on rate and occupancy and a weight on asset values is we think, we’ll be here. And then the second part is on kind of the capital world, which we’re really just at the front part of the wave of maturities of deals done 2, 3, 4 years ago. So I agree with Matt, not seeing a ton today would — also not seeing a ton of dislocation, but it is still early. And we think we’re well prepared to take advantage of it for the right types of opportunities.

Operator: And our next question comes from Jamie Feldman with Wells Fargo.

James Feldman: Great. So I want to go back to a comment you made on — I think you said rents and occupancy in the Sunbelt could last, at least, through ’25. The pressure on rents and occupancy in the Sunbelt could last, at least, through ’25 and possibly into ’26. So first, I want to make sure I heard that correctly. And secondly, can you just talk more about what gives you the confidence in saying that? And if you think about we’ve got spring leasing this year, then it slows down at the end of the year, then you’ve got spring leasing next year. I think a lot of people think things will get cleaned up by then. But your comments kind of indicate they probably won’t. So just want to hear based on data you’re seeing or what you’re seeing on the ground of how you think that trajectory plays out.

Benjamin Schall: Yes, Jamie, I’ll start with a couple of comments. So one is just the sort of the facts and the known dynamics that exist. Supply in the Sunbelt, yes, it is going to be peaking later this year, but it is going to remain elevated into 2025. Second known dynamic is we know when projects are — we know which projects are under construction, you know when those projects are completing, and you know the period of time associated with lease-up. So that inherently takes you out another 12 to 15 months depending on the size of the project and the velocity of that lease-up. And then the third dynamic, and this gets into the impact on NOI is the rolling through of rent rolls over that period of time. And so when you then think about sort of the last dynamic and the last effective NOI impact, that gets you into that early 2026 type of time frame.

It’s the area where, in our minds, it’s sort of — it’s one of those known industry dynamics. And to the extent the economic scenario has gotten better, but in a, call it, a slower growth economic environment, overlaid on high supply in certain submarkets, we expect there to continue to be pressure.

James Feldman: Okay. And then are there specific markets? I mean I know we’ve heard Austin, and we were [indiscernible] as kind of the poster child of the weakness. But when you think about all the Sunbelt markets, I mean, you’re painting a pretty broad brush. Is there some that really stand out that will be in pain for longer?

Benjamin Schall: Yes. Austin would also be at the top of that list. Just look at percentage of stock coming online. That would be high up on the list. Generally, in the Sunbelt markets, the more urban-oriented submarkets are generally seeing the highest levels of supply coming online. And that’s one of the reasons we’ve been conscious as we’ve been growing our expansion market portfolio to really push ourselves out further into those marketplaces out of a submarket or 2 with lower density product, lower price point. That is competing less directly with new supply.

James Feldman: Okay. So it sounds like your Sunbelt expansion would still be mostly suburban, if you could find that.

Benjamin Schall: It is. Yes, that’s been a very conscious choice of ours. And we also think about it as complementing what we’re buying with what we’re going to be building. And so even to make the point further, what we’ve been buying tends to be slightly older product, lower price point, lower density products. Recognizing that our development, while it still will be suburban, will tend to be mid-rise and a little bit higher price point, once it comes to market. So we think about that as just our overall — we talk about at a portfolio level optimization, but we also very much focus on it in terms of a market and a submarket perspective.

Operator: And our next question comes from Austin Wurschmidt with KeyBanc Capital Markets.

Austin Wurschmidt: Great. Matt, I just want to go back to the dispositions. You kind of highlighted the scarcity premium, but I’m curious if there was any specific factors related to the assets you sold sort of idiosyncratic factors that maybe benefited valuations you achieved? Or if you think that is reflective of valuations today? And then can you just share how deep the buyer pool was and whether or not there is financing contingencies?

Matthew Birenbaum: Sure. Well, the first thing I’d say is none of them have closed yet. So be able to provide more detail at the end — on the second quarter call. But it’s a pretty good mix. Three of the 4 assets are AVAs, so a little bit more urban than what we’ve been selling in the past, one in Jersey, one in Seattle, one in Boston, one in Southern California. So a good mix of geographies. And it continues to be a little bit of a bifurcated market. So the ones — the smaller deals, kind of less than $100 million, tend to be either private buyers, buyers, syndicators, little bit less institutional. And then when you get into bigger assets, that’s where probably those buyers are using less leverage. And the cap rates are little bit lower if you can find — if that’s more of an institutional bid.

But there’s plenty of assets that are not getting that institutional bid. So it does really vary based on kind of where you are. And — but one of the things that was a pleasant surprise is that even — we have one larger urban asset, urban Boston, which is a relatively market. And the bid was probably deeper there than any of the others actually.

Austin Wurschmidt: That’s helpful detail. Just switching over to operations. Just wanted to hit on sort of the Bay Area commentary. You mentioned, I think, that the underpinnings of positive momentum were there. What’s it going to take for that to translate into outperformance and sort of a little bit better and maybe less volatile fundamental backdrop? The Bay Area and then any other West Coast submarkets as well?

Sean Breslin: Yes, so it’s Sean. Good question and the question, I think, on a lot of people’s minds. I think the way I describe it is, first, supply should not be an issue for an extended period of time. There are 1 or 2 assets in San Francisco as an example that are finishing lease-up. But given the nature of the product, economics, timelines, that won’t be an issue for a long period of time. It’s really more on the demand side and making sure that I think for the most part, what we’re hearing on the ground is that we really just do need business leaders to be more confident in bringing people back to their respective offices and opening offices in San Francisco. What’s underneath that is making sure that the associate population for all those various employers is comfortable being in that market, kind of living [indiscernible] life issues.

Certainly, the political dynamic has started to shift in a meaningful way. There seems to be some positive momentum there, but that takes time. So that’s why I’d say that, that is probably the most important thing. Obviously, job growth matters, and it’s been a little bit choppy. But we are seeing some good signs of life, particularly given the generative AI boom, so to speak. But it has not manifested itself into thousands of jobs showing up yet in these markets. And so I think the broad view around technology and that being the epicenter of sort of technology innovation is still present, more the confidence about bringing people back to work, particularly in San Francisco, I would say. We’re starting to see signs of life of that in San Jose.

There’s more short-term demand than there has been for the last couple of years. That’s an initial indicator that’s positive. But it’s sort of a mixed bag as it relates to San Francisco and certain parts of the East Bay.

Austin Wurschmidt: And so just one quick follow-up there. I mean is that sort of sequential improvement, Seattle and Bay Area, are those — given we weren’t hearing you talk about this 3 to 6 months ago, I guess, is that year-to-date improvement in asking rents being driven by those West Coast markets specifically? Or is it just more broad and related to the lower turnover, et cetera, that you’re seeing?

Sean Breslin: Yes. I mean as it relates to this trend at asking rents, that’s primarily driven by the East Coast markets. And if you look at it on a year-over-year basis, the East Coast markets are up 2% to 3% versus the West Coast markets are up about 1% roughly. That’s being supported by markets like San Diego, Orange County, parts of L.A. Certainly, Seattle has had a nice recovery. We’ve been surprised, as I mentioned in my prepared remarks, about Seattle. The trends and the firming in Seattle certainly seems to have sort of a greater foundation to it than what we’ve seen in the Bay Area just yet. And part of what’s driving the effective rent change in Seattle in Q1 and into April is a pretty significant reduction in concessions.

Concession volume for us, as an example, from Q4 to Q1, it was down about 70%. We incurred almost 900,000 in concessions in Q4 versus in Q1 of ’24 versus in the Bay Area, it was down about 20%. So you’re seeing good trends, but I would say it’s not being broadly supported yet by Northern California, more so the Southern California markets in Seattle as it relates to the West Coast.

Operator: Our next question comes from Steve Sakwa with Evercore ISI.

Stephen Sakwa: Sorry. Sorry about that. Sorry. I guess on the Slide 13, the economic occupancy for 2024 is basically showing kind of no improvement. So I’m not sure what was in the initial outlook. But clearly, you had a 30 basis point pickup in the first quarter. And I think the actually get easier as time goes on. So I’m just curious, and given the top of funnel demand that you talked about being reasonably strong, I guess I’m just curious why you’re not assuming maybe improved occupancy? Or is there something you’re doing on the rate side that might keep occupancy growth at bay?

Sean Breslin: Yes, Steve, it’s Sean. It’s really 2 factors. One is what you described. We’ve seen sort of a faster improvement in occupancy. We experienced that in Q1. That is quickly translating to rate acceleration, which actually puts a little bit of pressure on occupancy. And the other thing, if you think about it from a revenue standpoint with higher rates, the dollar value of each vacant unit is actually higher. So it doesn’t contribute as much to revenue as you might think when you look at it from that perspective. Anything that is vacant is worth more, and so it does sort of weigh on the revenue side of it. But those are the 2 primary reasons. In terms of physical occupancy, we expect it to be roughly about a push by the time we get to year-end relative to our original guidance. And that’s why it shows up that way on the slide.

Stephen Sakwa: Okay. And maybe as a follow-up, I think I heard — I think you said that you were expecting about 4% on renewal growth, if I wasn’t mistaken, maybe for the balance of the year. I don’t know if I heard you say where you were sending out renewal notices for kind of the May, June, July period. But are those going out at substantially better than 4%, and you’re assuming some discounting? Or could there maybe be some upside to that 4% number?

Sean Breslin: Yes. You’re correct. I did not state renewal offers. But renewal offers for May and June are around the high 5% range. So expecting them to settle sort of in the low to mid 4s is reasonable based on historical norms.

Stephen Sakwa: Got it. And then just lastly on development, Matt. You guys are starting a couple of new projects here, I think, in the second quarter. Can just remind us, what are you targeting on new projects today? I know that there’s been some upside on the things you’re delivering, but what’s kind of the new hurdle in light of today’s new interest rate environment?

Matthew Birenbaum: Yes, Steve, I guess, we — there’s actually — it’s not one number. There are different target yields for different markets and even down to different submarkets and also based on the risk profile of the deal. But we’re generally looking for that 100 to 150 basis point spread to cap rates. What that’s translating into kind of on average is probably a mid- to high 6s target yield. And then it’s going to be lower in markets where deals that are less risky or markets where we expect stronger growth because ultimately, it’s about the full investment return, the IRR. And it’s going to be higher in markets that have the inverse of that. And so where you see where deals actually clearing those today, we expect to start a deal in suburban Boston in kind of the mid 6s, which maps well to where cap rates are in those markets.

We expect to start a deal in suburban Jersey, which is around a 7 because cap rates are higher in that market. And then Mid-Atlantic, it would also be around the 7, and then some of our expansion regions that might be a little lower than that, closer to 6.

Operator: And our next question comes from Adam Kramer with Morgan Stanley.

Adam Kramer: Just wanted to ask about your expectations for West Coast markets. I think these are markets that lagged a little bit if I just look at your kind of market-by-market effective [indiscernible] growth in the supplemental. But they also have pretty high expectations for same-store revenue if I’m looking at your presentation correctly. So I just wanted to ask you about kind of what’s the delta there? Are there kind of outsized growth expected there in — for the rest of the year that’s going to bring same-store revenue to be one of the best-performing markets there, if I’m looking at your slide deck?

Sean Breslin: Yes, Adam, it’s Sean. Good question. And one of the factors to keep in mind is what’s changing in underlying bad debt across the markets. If you think about it, it was like rent change is one component, but changes in occupancy, bad debt, et cetera. And particularly for the Southern California market, I would say that is a meaningful contributor to total revenue growth in 2024. To give you some sense in the first quarter, I think Southern California, roughly 40% of the revenue growth was related to just better underlying bad debt as we’re — those folks out, seeing the churn and then rerenting those units to people who are paying. So that is a driver. There’s a table in the back. There are lots of attachment that gives you the change that we’re seeing over the last few quarters in bad debt, and that may help you kind of map a little bit better.

Adam Kramer: Great. And just maybe as a follow-up. You guys provided a really helpful kind of expectations for new and renewal growth for the whole year. And apologies if you’ve talked about this already today, but maybe just walk us through kind of what the updated expectations would be. I think renewals prior were 4%. New was roughly flat, leading to 2% blended growth. Maybe just walk us through what the updated expectations are assuming with the new guidance that those may be a little bit higher than they were previously.

Sean Breslin: Yes. What I mentioned in my prepared remarks is that we expect like-term effective rent change kind of in the mid-2% range, which is about 50 basis points above our original outlook. What I indicated is that the second quarter should trend up probably in the low 3% range before decelerating in the back half of the year. As it relates to renewals, kind of low to mid-4% range for the balance of the year, while new move-ins averaged roughly 50 basis points, which sort of reflects maybe the low 2% range for Q2, before experiencing kind of the normal seasonal decline in Q3 and Q4. So that’s kind of how we’re looking at it right now.

Operator: Our next question comes from John Kim with BMO Capital Markets.

John Kim: Part of your beat and guidance raise was due to better-than-expected capital markets activity. And I was wondering what component of capital markets outperformed your expectations. Last quarter, you gave a pretty good breakdown on that $0.29 headwind, which has improved slightly.

Kevin O’Shea: Yes, John, this is Kevin. Really, the $0.02 from better-than-expected capital markets activity was primarily driven by a combination of favorable interest expense and interest income as well as slightly higher budgeted — higher-than-budgeted capital interest expense. So it’s really in those categories where most of the favorability was realized.

John Kim: What about your cap rate expectations either on sales or investments?

Kevin O’Shea: Well, I was referring to Q1. We didn’t have any transactions that closed in Q1. So transaction activity cap rates did not really have an impact. As you look at the full year guidance, we expect basically due to adjustments in a range of things that fall with the capital markets activity such as buying and selling assets and then movement of interest rates on existing debt and additional debt activity that we have anticipated. We anticipate getting $0.01 of the $0.02 back and being net favorable by $0.01 for the full year on capital markets, in terms of our core FFO relative to our initial outlook. So we’re early in the year in terms of what we will do broadly in terms of transaction activity, capital markets activity.

So haven’t made a lot of adjustments, but there’s been some movement that caused that additional $0.01 shortfall in the back half, back 3 quarters of the year that leave us sort of getting $0.01 of the $0.02 back later in the year on that line item.

John Kim: Okay. My second question is on the SIP program, where you mentioned that you had a favorable vintage ’22 and ’23 originations. I was wondering when some of those ’22 originations start to get paid off. And forward and reinvest some of the proceeds. What metrics do you look at or monitor whether it’s exit cap rate or or maybe supply that would make you more cautious on reinvesting in the program?

Matthew Birenbaum: John, it’s Matt. So the only deal that we have that matures next year ’25 is a very small $13 million loan in Northern New Jersey, very stable, strong market. So all the other ones don’t mature until ’26 or later. So it wasn’t necessarily kind of first in, first out, so to speak. So it’s still quite a ways out there. And we’re still building the book. So we haven’t really focused too much on reinvesting, getting that money back. We’re still — we’re at $200 million in the program today. I think our long-term goal is for it to be around 400, 400 or 500. So we’re hoping to grow that total balance maybe $75 million this year and then continue from there in ’26. At some point, yes, we’ll have to — we’ll face that revolving door where we start getting redemptions. But we’re still, at least, a couple of years away from that.

Operator: And our next question comes from Joshua Dennerlein with Bank of America.

Joshua Dennerlein: Ben, I just want to explore a big picture topic you mentioned. You were talking about the differential between owning and renting in your markets is really wide. Rents are benefiting from that. Is there any historical time period where we could kind of look back at where the delta was this wide? And if so, just like how did it play out on the rent growth front?

Benjamin Schall: I mean the rent versus own economics that we’re seeing today are really unique, not something that we’ve seen. We’ve obviously, over time, seen small variations in that. But the combination of home price appreciation, particularly in our markets and the rise in mortgage rates has led to all-time levels, right? I mean you’re approaching where it’s some of our markets 2x more expensive to own versus rent. And if we think about it kind of longer term and looking forward, I would frame it as that’s an incremental cushion that we have that’s supporting our demand on rental economics. So it may not stay as peak as it is today. Obviously, part of that is based on the trajectory of interest rates. But there’s a nice cushion that should serve as a tailwind for us for a number of years.

Joshua Dennerlein: Is there anything in your forecast like as far as rent growth goes? Or does your forecast assume any kind of like narrowing of that gap? Or would that be potential like upside? And maybe it’s not just a 1 year dynamic, maybe it’s multiyear. Just trying to think through upside from this.

Sean Breslin: Yes. I mean the forecast for this year reflected being a relatively stable level. Obviously, interest rates bounce around, prices bounce around. But in terms of the current year outlook sort of reflects generally where we are at this point in time have remained relatively stable.

Operator: Our next question comes from [indiscernible] with Green Street.

Unidentified Analyst: I’m just wondering have you seen any examples of things beginning to get more aggressive with property tax assessments of apartments to help fill the hole in budgets left by suppressed commercial real estate values in other sectors?

Sean Breslin: Anne, this is Sean. I mean it’s early in the calendar year for some of the assessment cycles that really are more heavily weighted towards kind of midyear and the back half of the year. What we have seen thus far is a little bit of an uptick in Washington State and Virginia. We don’t have insight into all the jurisdictions just yet. But in terms of our portfolio, that’s what we’re aware of. There’s a lag as it relates to property tax assessed values. So our expectation would be there’ll probably be more pressure on the Sunbelt based on the run-up that occurred sort of through COVID that’s still working its way through the system before you see it in the next couple of years maybe start to move the other direction. So we haven’t seen clear evidence of that for 2024 just yet, but that’s kind of the high-level view.

Unidentified Analyst: All right. Appreciate that. And I’m just curious, what level of CapEx per unit should we expect in the next few years combined between NOI enhancing and asset preservation?

Matthew Birenbaum: Yes. Anne, it’s Matt. So our asset preservation CapEx has been pretty consistent over the last — well, between ’23 and ’24, around $1,600, $1,700 a unit, which is, I guess, roughly 6% or 7% of NOI, 7%. The NOI-enhancing CapEx, that’s where we really increased our investment or we’re looking to increase our investment volume quite a bit. I think we invested about $75 million, $80 million last year across the whole portfolio, most of which I guess was same store. We’re looking to double that this year. A lot of that is driven by expanded solar production and by expanded the opportunity for the accessory dwelling units in California that we talked about it at Investor Day. And we think that’s an opportunity that’s out there for the next couple of years. So we’re excited about that. And I would think that there will be the opportunity to continue to have those increased opportunities, at least, for the next couple of years.

Operator: Our next question comes from Brad Heffern with RBC Capital Markets.

Bradley Heffern: Yes. On the blended rate assumptions, the low 3% for the second quarter, maybe seems a little conservative given you would normally expect those blends to pick up further from here, and you’re already at 3.3% in April. So is your assumed seasonality more muted than normal for the second quarter and for the rest of the year? Or am I perceiving that wrong?

Sean Breslin: No, not really, Brad. I mean low 3%, 3.2%, 3.3%, somewhere in that ballpark. I mean we’ve seen asking rent growth kind of 5.5% or so through yesterday. That’s played through just renewal offers that have already been made in terms of what our expectation is for rate growth. So it seems like somewhere in that range for the second quarter is reasonable. And then you will have to see how asking rent growth continues as we move through the second quarter.

Bradley Heffern: Okay. And then on concessions, you talked a little bit about the Bay Area and Seattle, but can you go through any of the other regions that have concessions and how they trended? I’m particularly thinking about the expansion regions, but anywhere else as well.

Sean Breslin: Yes. What I would say, first, in terms of the expansion regions is we have relatively small portfolios in our same-store basket in those regions. So as you think of the expansion markets in Texas, for example, we don’t have anything in Austin. There’s only 2 assets in Dallas. We have seen — at least in Q1, we saw a year-over-year increase in concession volume in Dallas. In the previous year, it was about 1/3 of all leases. It was roughly about half in Q1. So Dallas — Dallas is really a market, very large geography, broadly diversified, really depends on where you are. There are some submarkets where it’s well over a month for almost every lease. There are other submarkets where it’s half a month for some level of volume.

So it really depends on where you are. If you move to the Denver market, it’s really a story of urban versus suburban, as I think Ben referred to earlier. If you’re in the urban submarkets where we have one operating asset, concessions are much more [indiscernible] as compared to the suburbs where we have most of our assets. And then in terms of our other expansion regions. In Charlotte, it’s a similar story as Denver. We have some assets in the South end. Concessions are more pronounced there, average closer to 0.5 month for probably 50%, 60% of the leases versus you move to sort of the northern suburbs, it’s quite a bit less. And then in Florida. Florida is a little more of an effective rent kind of market where people tend to price based on absolute rent and as many concessions for existing assets.

Lease-up assets are different but existing assets, it tends to be a little more of a what am I writing a check for. And so they’re most concerned about the lease rent than the concession. So that’s a little bit more volatile, but we haven’t seen a huge amount of concession volume. Again, I think that’s more representative of the sort of market behavior than it is to our pricing dynamics.

Operator: Our next question comes from Haendel St. Juste with Mizuho Securities. We’ll move on to our next question. Our next question comes from Michael Goldsmith with UBS.

Unidentified Analyst: This is on with Michael. Looking back, there have been periodic supply cycles in the South. So clearly, we’re seeing supply starting to slow heading into ’26. But as rents recover, how fast can development start to pick back up in the Sunbelt? And is that concerning to you as you look to increase your exposure there?

Matthew Birenbaum: Yes. Amy, it’s Matt. It is certainly true that there’s less barriers. There’s less regulatory barriers to entry in the Southern markets. And so supply is able to respond to demand much more quickly. And some of the supply kind of excesses you’re seeing now are — were a relatively quick market response to tremendous demand a couple of years ago that really started with COVID in some of those Southern or Sunbelt markets. So it is, I’d say, a shorter cycle, a more attenuated cycle. Demand comes, supply can respond quickly. But having said that, there is a lot of demand there. And the interplay between those 2 factors into our view on kind of our long-term portfolio allocation and trying to get to 25% there. The other thing I would say is submarkets matter a lot.

And there are — even within some of these geographies and particularly the expansion markets that we selected, there are submarkets that do have some meaningful supply barriers. And those are certainly the submarkets that are more attractive to us, both for acquisitions — and we’re pretty good at unlocking those constraints on the development side. So you’ll see that inform our portfolio strategy within each region.

Benjamin Schall: Yes. I’ll add to that. And as we’re thinking about the opportunity set in the Sunbelt, we’ve got in the near term, the ability to buy below replacement cost and be at a good basis and find that attractive from a long-term hold perspective. We are increasingly also focused on bringing our strategic capabilities and particularly our operating model initiatives. It’s been driving a lot on growth for our existing assets, but we’re increasingly bringing that to new assets that we bring into the fold. And as we get more and more density in the Sunbelt and our expansion markets, we expect that flywheel to accelerate. There is the land side and the opportunity with less competition in these markets to be finding attractive land structured appropriately, some of which will make sense to start more immediately and some of which could position us longer term to generate value.

And then kind of a fourth driver of value for us is in a world where capital is less abundant, our ability to provide capital to other developers. And we’ve used that as a tool for growth in our expansion regions. And for sure, in today’s environment are seeing a better quality sponsor, better quality real estate, better return profile there. So it’s that combination of opportunities that we’ll tap into to drive our longer-term expansion of those markets.

Unidentified Analyst: Great. And then just a quick follow-up on that. What are you seeing in terms of land cost currently?

Matthew Birenbaum: Land costs?

Unidentified Analyst: Right. To acquire land, if you were going to buy.

Matthew Birenbaum: Yes. So it varies, obviously, a lot by region. In some regions, we have seen, particularly in some of our [indiscernible] regions, we have seen land prices come down significantly for motivated sellers. There’s plenty of sellers kind of like the assets we’re talking about, who are not particularly — there’s no time sensitivity, and they’re holding out. But one of the deals we actually highlighted at our Investor Day was the deal in suburban Boston in Quincy. That’s the deal we’re looking to start in Q2 in suburban Boston, where that land — we were able to buy that land at probably 40% less than where it had been under contract before, say, in ’21 or ’22. So we are seeing that to some extent. In the expansion regions, land pricing has probably come off a little bit in Florida, where it had gotten incredibly aggressive.

But we haven’t necessarily seen significant moves down in land costs. Partially, I would say that’s because in many of the expansion regions, the land is a much smaller percentage of the total deal cap than it is, say, in California or New York, where land might be 30%, 40% of your total deal cap. It moves a lot. It’s very high beta. If you’re doing a garden deal in Charlotte, land might only be 10% of your total deal cap. So it’s not going to move the needle as much, and it’s not going to be as sensitive really in either direction. So it’s been — land prices tend to be sticky in general. They’ve probably been stickier in those markets where, obviously, they were cheaper to begin with.

Operator: Our next question comes from Alex Goldfarb with Piper Sandler.

Alexander Goldfarb: So two questions here. First, just going to New York with the recent rent law updates. The office to resi conversions actually looks to be quite lucrative, not expecting you guys to take down an office building. But for your development capital program, does this represent a new opportunity for you, given that there’s sort of a 2-year shot clock where the landlords have to apply for permits? So it seems like a lot of existing office landlords who may be contemplating this have a short window to act, and your capital may be attractive to them.

Matthew Birenbaum: Alex, it’s Matt. I would say no. Our developer funding program is really focused on expanding our growth in our expansion regions. So we’re not looking to grow our capital investment in New York.

Alexander Goldfarb: Okay. And then the second question is your overall outlook just was impressive, certainly ahead of expectations that you guys provided a few months ago. There’s a broader debate out there about soft landing, hard landing, what’s going to happen to the economy. But none of the comments that you guys spoke about suggest that there’s any sort of weakness out there. I mean across all the markets, it seems like things are healthy. Is that a fair takeaway? Or are there — is there anything that you feel from the different markets are seeing that would give caution towards later this year or what all the different regions are seeing suggest actually almost an improving environment?

Sean Breslin: Yes, Alex, this is Sean. I think the broad brush is relatively consistent of what you stated. But certainly, real estate is a local business here. And there are submarkets that are challenged for either demand or supply reasons or both. As I mentioned a little bit in my prepared remarks, while the Mid-Atlantic is generally doing pretty well, that is driven by our suburban portfolio. The District of Columbia is quite soft for both demand and supply reasons. The same thing could be said about urban Seattle, downtown L.A. We have one asset there as an example. So I would say, broadly speaking, what you’re indicating is correct. For the portfolio, we have coastal, suburban, primary customer base healthy. But obviously, there are exceptions .

And I would point to really some of these urban submarkets with plentiful supply, some still quality of life conditions that are challenging as a little more choppy. And then there are certain markets, still some of the Bay Area where there are signs of some job growth, but then there are still signs of layoffs here and there that you’re hearing about in the media. So I wouldn’t say everything is rosy, but the broad brush is it looks pretty good right now.

Benjamin Schall: Alex, I’ll just add briefly. We’ve highlighted the improved job picture, right, given the change in expectations from the beginning of the year. But there are crosswinds, Sean touched on a couple. And I would highlight the inflationary impacts on our consumer and their wallet. I mean those are very much there and true when you think about car loans, I’m coming up for renewal, when you think about the beginning of student loan repayment. So the outlook has improved, but I would still describe it generally as sort of our consumer facing a series of crosswinds.

Operator: And our next question comes from Anthony Dowling with Barclays.

Anthony Powell: Anthony Powell here. Just a question on the bad debt improvement you saw in the quarter. What drove that improvement? Was it the core kind of improving their process, getting quicker, resi coming back in current? Maybe more detail would be great there.

Sean Breslin: Sure, Anthony, it’s Sean. Sort of a combination of all those factors that you just laid out. And what I’d point to geographically, which might be a little bit of a surprise for people is most of the improvement was actually not in places like L.A., which have been sort of the poster child for this. But we saw very good improvement in the broader sort of New York metro area. Underlying bad debt in Q4 in that region was 3.1%. In Q1, it declined to 2.4%. Boston was 120 basis points in Q4, a decline of 60 basis points. It was about 20 basis points of improvement in Seattle. So for all the reasons you mentioned, some [indiscernible] up on payments as well as the skip and evict process, sort of a combination of all those factors driving the improvement.

Anthony Powell: Maybe going back to the New York law that was just passed. I guess you don’t want to increase more capital to New York. Was that a comment on the office ready or just a broader comment? I wanted to see if you can maybe just close your views on both the rental provisions and also the development provisions in the ?

Matthew Birenbaum: Yes. I mean — this is Matt. It was really just a broader comment. When you look at our portfolio allocation, our portfolio allocation to the New York Metro area, I think, is roughly 20% today. It has been — and we’ve been on a journey to reduce that over time. That’s one of the regions we’re rotating capital out of as we redeploy capital into our expansion regions. So first and foremost, we’re just overweight that region relative to our long-term goal. And then there are — when you talk about New York specifically, more of our investment in the New York region is going to New Jersey these days. We’re finding very strong development yields, pretty good operating performance. And there is a regulatory overlay there, which it can be challenging, but it is not as challenging as New York State and New York City, and that does factor into our long-term view as well.

Operator: And our next question comes from Linda Tsai with Jefferies.

Linda Tsai: In terms of the 7% moving out to buy a house, along those lines, wondering if you’ve seen any demographic shifts in the composition of your residents over the past year or so?

Sean Breslin: Yes. Linda, it’s Sean. I wouldn’t say anything terribly significant. The only thing that I could point to a little bit is as you might imagine, as winter, COVID, the , the volume of across the portfolio has certainly declined. It has kind of come back up to some more normal levels, roughly, I would say. That would be the only data point that I really could point to for you.

Linda Tsai: And then on the better job growth being concentrated in lower-income residents. Is there any kind of read through for AvalonBay in terms of resident demand?

Sean Breslin: Yes, Sean, again. Not at this point that we’ve seen, other than certainly our lower price point assets in some of the markets, particularly on the West Coast, where we have a greater share of those assets are performing quite well. I think to Ben’s point, there certainly are consumers that are feeling a little bit of pinch from what’s happened with inflation, student loans, car leases expire, et cetera, et cetera. And so certainly, those lower price point assets are performing quite well, in many cases, better than some of the higher price point assets in some of those submarkets. So it’s really a market-by-market question. But overall, we have healthy demand and in some cases, maybe for the reasons you just described, maybe even stronger demand for some of the lower price points.

Operator: [Operator Instructions]. Our next question comes from Jamie Feldman with Wells Fargo.

James Feldman: Just quickly, I just wanted to get your thoughts on your debt maturities in ’24 and ’25. Obviously, a much larger maturity pipeline in ’25 with $825 million of unsecured. But what are your thoughts — like maybe can you talk to us about what’s in your guidance in terms of refinancing? And is there any chance you’d pull forward the ’25 maturities? And might that have any impact on your outlook if you did that? Just kind of what are you thinking about the markets in general?

Kevin O’Shea: Yes. Sure, Jamie. This is Kevin. Maybe just to kind of provide some context, I’ll just start with our capital plan for the year. It’s not changed significantly from our initial outlook. And as you recall, what we identified then and it’s still true today is that for 2024, we have $1.4 billion in uses, which consists of $1.1 billion of investment spend and then a $300 million debt maturity later this year in November, which has a 3.7% interest rate. So that’s the usage we’ve got for this year. Our sources are pretty straightforward and have kind of 3 broad parts, $400 million of free cash flow. We anticipate drawing down about $175 million of unrestricted cash that we had at the beginning of the year and ending the year with 2 25 in cash at the end of the year.

And then our contemplated about $850 million or so of external capital, which at the time we contemplated would be sourced through the combination of 2 debt offerings. We’re early in the year, a lot can change, and we’ll see what will happen. In our Q1 reforecast, we assumed that we do only about $700 million of incremental debt this year and probably use about $100 million or so of net disposition proceeds from the acquisition — disposition activity that’s underway. So not a lot of change. So two debt deals, we have $250 million of hedges in place that we intend to apply to our first debt deal. The $250 million are basically effectively struck at a 3.7%, 10-year rate. So if we were to do a small debt deal, we’d probably be looking at the cost of debt today, somewhere in the low 5% range versus an unhedged 10-year debt deal that would be more like .

So we’re in great shape. I mean it kind of goes back to Ben’s initial comments. We have a terrifically strong balance sheet, lots of free cash flow, low leverage at 4.3x, and well-laddered debt maturities that typically range from $500 million a year to $800 million or so a year. Next year is a little bit more elevated, but it’s still just over 2 points of our capitalization. So relative to the broader REIT industry, even that maturity is a modest one. That $825 million breaks down into a June maturity in 2025 at around 3.6%, and then there’s another $300 million in November 2025, also at around 3.6%. So our maturities are spaced out roughly 6 months apart. They’re relatively light and level across the spectrum. And so we’re well positioned to kind of roll those debt maturities as they come due.

We do not currently anticipate prepaying them. And certainly with debt rates where they are today, which is relatively unattractive compared to the expiring rate. It’s unlikely we would pull that forward to retire them early. So we’ll probably address those as they come due. And again, this is a pretty light year for capital markets activity, including debt, and we’ll take things as they come.

James Feldman: Great. That’s very helpful. And then for the next year, would you put a hedge on early? And when would you want to do that?

Kevin O’Shea: Yes. Jamie, it’s sort of — one of the — hedging is something we do. We evaluate continually over the course of the year. We don’t have rigid fixed plans to hedge X percent of debt maturity, in advance of its maturity. It’s really a function of what do we anticipate doing in the current year and the following year? And how do we think about our evolving sense of the capital plan that we’ll have for each of those years and what the opportunity set looks like in the treasury market for hedging.

Operator: Our next question comes from Michael Lewis with Truist Securities.

Michael Lewis: I know we’re already going long, but I have just one question. And it relates to a topic you talked a lot about, which is the Sunbelt versus the established regions and what 2025 and 2026 are going to look like. When I look at your Slide 8, 1.3% growth, unit growth in your established regions in ’25 versus 2.5% in the Sunbelt. It’s not really clear to me where the advantage lies there, right? In other words, what should that spread be? Because once you layer demand onto it, if I’m just looking at households created versus units added, it looks to me like maybe your expansion regions are going to have better fundamentals than your established ones in ’25 and more likely ’26. So I’m just wondering, what do you think is an equilibrium for that difference in supply? It’s just not clear to me that there’s a big advantage there.

Benjamin Schall: Yes, Michael, I’ll make a couple of comments. So starts in the Sunbelt expected to peak at some point kind of mid this year, stay elevated as you get through kind of the middle of next year. And then given the reduction in start volume, starts to come down back towards more historical levels as you get towards the end of 2025. So I think that was sort of part of your comment there. Now the impacts on markets as deals deliver, to my comments earlier, will be more extended. And then if you look further out, you’re exactly right. It is both obviously demand and supply story. And for us, it very much leads into how do we think about our overall portfolio optimization. And broadly, that’s the reason we’re headed towards 25% in the expansion markets.

We think that’s a nice addition. Also continue to feel very strongly about the performance opportunity in our South region. So there’s more into that we went into the Investor Day, but that is as we get into a more normalized environment, leading to how we think about our longer-term optimization goals.

Michael Lewis: Okay. So if 2.5% supply growth in the Sunbelt next year, is that — I mean it sounds like you think things are going to kind of gradually get better. But I mean, is that a concerning number versus the 1.3% established regions? Or are those pretty — you think fundamentals in those 2 parts of your portfolio might start to look pretty similar next year?

Benjamin Schall: I think they start to approach closer to historical norms for a period of time. Matt made the comment earlier about now the barriers to starting deals in the Sunbelt and the shortness of those market cycles. So it does factor into how do we think about our overall portfolio optimization.

Sean Breslin: And Mike, one thing, I think, to keep in mind here is I’d be a little careful about isolating years as being very unique in terms of the delivery cycle and the impact on fundamentals. As Ben was alluding to earlier, what you see on that chart in terms of deliveries for 2024, where it does peak in the back half of this year, people will be leasing up. Putting those units into the market 12 to 13 months beyond sort of the initial delivery dates in terms of how they’re leasing them up. And if you think of the impact on pricing, you’ve got those deliveries coming in plus you have new deliveries that are beginning in 2025. So the units coming in to market takes a long period of time for them to lease up. And the impact on stabilized assets takes time as rents are reset to a new sort of market clearing price.

As those leases expire, it has to roll through the rent roll. So when you sort of take the compounded effect, I think that’s why we’re saying that for 2025, we feel much better about our performance in the established regions relative to the Sunbelt. And that should carry into 2026, given the time it takes to lease up the assets and those new prices to be reflected in stabilized asset rent rolls, if that makes sense.

Michael Lewis: Yes. ’23 was a high supply year, too, right? Understood.

Operator: And there are no further questions at this time. I’ll hand the floor back to Ben Schall for closing remarks.

Benjamin Schall: All right. And thank you all for joining us today. We appreciate your engagement and support, and we’ll talk with you soon.

Operator: Thank you. That concludes our call for today. All parties may disconnect.