So, taking our pipeline up a bit from where it is today, not something we would hesitate to do given both the approach that we’re taking and just the capacity we have on the balance sheet and in terms of overall enterprise value. So, we feel pretty good about pushing on this agenda as much as the numbers will support in terms of what Brad was discussing.
Operator: Your next question will come from the line of John Kim with BMO Capital Markets. Please go ahead.
John Kim : Good morning. I believe Adrian mentioned in his prepared remarks that acquisition cap rates have compressed to 5.1% despite the rise in interest rates. So, I guess my question is, is it your view that the appetite for negative leverage has come back? Or were these transactions one-off with below market that?
Brad Hill : John, this is Brad. I don’t think that these cap rates are representative of below-market debt. I mean I don’t think there’s many loan assumptions that are in these numbers that I’m quoting. And some of these are reflective of very recent transactions as of a few days ago, where we’ve gotten the cap rate information. So, these are very current numbers in terms of yields. I mean, Honestly, the spread of cap rates is wider than what it has been in the past. I mean the spread that we’re seeing right now is from 4.5% to, call it, 5.5% and really, again, averaging in that low 5% range. So, in terms of where debt is today, it’s in the debt rates are in the high 5% range, high almost 6%. So, my assumption would be that these underwritings either are assuming a run-up in fundamentals or refinance in a couple of years where they’re able to take the interest rate back down.
John Kim: And are you willing to transact at these levels because this is the market now?
Brad Hill : Well, we’re not. If you look at the Raleigh acquisition, for example, that’s representative and the two acquisitions that we had in the fourth quarter of last year. That’s representative of where we’re willing to transact, which from a yield perspective, has been in the high 5s and then the Raleigh transaction was a 6% yield. That’s where we are comfortable transacting. And we believe, again, based on our ability our balance sheet strength, ability to close all cash and things of that nature, focusing on properties that are in lease-up that are hard to finance that selectively, we’ll be able to find some opportunities to help us hit our $400 million forecast. But at a broad market level of a 5 or so cap rate, at this point, we’re not active in that in that price range.
John Kim: Okay. My second question, if I could squeeze one in, is on your turnover at a record low level, which is surprising given market dynamics I realize a lot of resins are not moving out to buy a home. But is there anything else about the residents today that are different than maybe a few years ago, whether it’s the less mobile now or the cost of moving has gone up just more reluctant to move or maybe they’re more aware of the concession gaming land was used.
Tim Argo : This is Tim, John. I don’t think there’s anything especially different in the residence. We look at all the sort of the revenue demographics are pretty consistent with what they’ve been the last couple of years. But certainly, it’s much more difficult to buy a house. And if you look at our markets in particular, given where interest rates are now, it’s about 70% more expensive house note than it is our average rent. So that’s a very significant difference and then you consider cost moving and all that. And so that plays into it. And the other reason that’s down is certainly move out to a rent increase or down pretty significantly than what we’ve seen in the last couple of years as well. So, I think those two things are driving it. and primarily just the cost of buying, which is — that’s always historically along with job transfer by houses that are our highest reason for move out. So, I think that’s driving it down, combined with the move-out increase.
Operator: Your next question comes from the line of Jamie Feldman with Wells Fargo. Please go ahead.
Jamie Feldman : Great. Thanks for taking my question. I guess just shifting gear to the expense side. Can you talk more about the kind of outsized expenses in the first quarter? And just as you’re thinking about your guidance for the rest of the year, has anything changed? Are there any areas where you’re more [indiscernible] on being able to hit the decline item in your numbers or just things you may want to point out that we should be paying attention to?
Clay Holder: Sure, Jamie. This is Clay. Just speaking to the first quarter and what we saw there. The biggest — the slide unfavorable we had there that we called out in the comments, was really around some onetime property costs around some storm damages that we had at a number of properties, nothing significant, but it was a bit of a bit outside of what we were dialing in for the quarter. As we think about going forward through the rest of the year, I mean, we’re still early on. And when you look to what our larger expense line items are specifically real estate expenses, we still need some more information there before we can really peg that number, but we still feel very confident about our guidance that we set forth on real estate tax expenses at about 4.75% growth year-over-year.
Also, insurance expenses will, although a much smaller component of our operating expense stack, still some more information to come on it as well. When you think about personnel costs, repair and maintenance costs and the other line items that are touching there, we feel confident about those, and those trended in line with what we were expecting for first quarter, and we expect those to continue in that same manner over the remainder of the year
Jamie Feldman: Okay. I mean, so it sounds like you kind of baked in some risk there on all of those, if you’re not quite sure what the outcome looks like, but you’re pretty comfortable.
Tim Argo : I’d say that’s fair. I mean, again, real estate taxes will get the majority of the valuation around that. In late second quarter, early third quarter, we’ll probably have a little bit more to say about that in the second quarter call. Same for insurance expense as well. And again, the other expenses pretty much in line with what we’ve dialed in.
Jamie Feldman: Okay. Great. Thank you. And then I guess just thinking about where we are in the cycle and the opportunities you’re seeing if you think about where you may be buying, I mean, you’ve got your more supply-challenged markets or some of the larger MSAs and your footprint, you’ve also got access — you’ve also got exposure in markets like Kansas City, Birmingham, Fredericksburg. Do you think the opportunities this cycle are going to show up in those types of markets more? And when we look back in five years and think about the portfolio footprint, maybe that’s where you guys grow more? Or no, you want to stick with the larger population, faster job growth market as you build out the portfolio and put your capital to work?
Brad Hill : Jamie, this is Brad. I think as we look at where we want to deploy capital, broadly speaking, the high-growth regions of where we’re located is what we’re targeting. And that’s going to be both our larger markets as well as some of our mid-tier markets that you mentioned. I mean in Tom’s prepared comments, he noted some of the mid-tier markets that are performing quite well right now. Our larger markets. We are committed to those. I think when we combine both of those components as part of our story, it’s part of the diversification that we’re looking for, for our earnings stream, and I think they perform well together. So, I would say you would see us focus on both components there in terms of growing. I would also just say that as we focus on buying new properties generally that are in lease-up, where the average age over the last 10 years that we purchased has been one year.
So, these are brand-new properties generally, those are going to follow a little bit of where the supply is. That’s where the opportunities are going to be that we’re going to find. But broadly speaking, both segments of our portfolio will be areas that we focus on.
Jamie Feldman: Okay. And maybe just a quick follow-up on that. Like when you’re underwriting acquisitions, what is your rent growth outlook? What are you guys modeling in ’24, ’25, ’26, the [indiscernible] deal?
Brad Hill : Yes, it’s going to be different based on each market. But I would say, in general, ’24 is going to be flattish. But you also have to remember that on our deals that we’re underwriting on an acquisition, the leases are predominantly new leases, which is different than our existing portfolio, but we’re generally bringing all new leases into the portfolio. So, it’s going to be flattish year 1, 2025 is going to have a positive uptick in ’26 and ’27 are going to be higher than long-term averages on average.
Operator: Your next question comes from the line of Alexander Goldvarg with Piper Sandler. Please go ahead.
Alexander Goldfarb : Two questions. The first is jobs have definitely been stronger than everyone collectively as imagined. And my question is, were you guys just overly conservative in job expectations? Or have the jobs truly been like much better than anyone would have expected? Just trying to understand the difference, what’s going on because clearly, it’s allowing you guys and others to handle the supply much better than was originally believed to be the case.
Eric Bolton: Well, we use a number of different sources to compile our view of what the demand on and the job growth is going to be. Obviously, a year or so ago, there was more nervousness surrounding the prospects of a more material slowdown in the economy. We have seen some moderation in ’24 as compared to certainly ’23 and ’22, but broadly speaking, we’ve long believed that these Sunbelt markets had underpinnings associated with them surrounding employer stability and job growth and new jobs coming such that we felt pretty good about the job growth or about the employment markets broadly holding up. What has probably been, frankly, more surprising for us is just what’s happening in terms of our resident behavior with routing move-outs to buying a home.
The real decline in people leaving to go buy a home and resulting impact that has on demand has probably been the more surprising factor in our thinking about demand projections. We weren’t really that surprised by the employment market and the migration trends have continued to hold up very similar to what we’ve experienced for the last few years. So, I would say the home buying scenario has probably been the biggest surprise variable for us.
Alexander Goldfarb: Okay. And then the second question is transaction market really tough. But in fairness, it’s — I mean, the transaction market almost, I guess, you’d have to go back to the RTC days for it to be sort of lucrative. And over the past decade or so since the credit crisis, we’ve never seen assets dumped onto the market. So, was there a thinking that — what is your sense? Is it the bank regulators are just getting a lot more lenient with the banks? On the banks for them dealing with developers and saying, look, if the guy is sort of doing a good effort, don’t force a foreclosure, don’t force a sale or what do you think has changed? Because it sounds like it’s more on the lending side that the owners or developers aren’t being pushed to transact in assets that maybe 20 years ago, they would have been.
