The operator introduces the conference call and the host, Jason Reilley, before turning it over to CEO and President Ben Schall. Schall is joined by other executives and begins by thanking the company's employees for their hard work and acknowledging their role in the company's success. He also mentions the risks and uncertainties associated with forward-looking statements and directs listeners to additional information on the company's website.

In 2023, the company achieved 8.6% core FFO growth and saw a 6.3% increase in same-store revenue and a 6.2% increase in NOI. They also completed $575 million worth of developments with a 7.1% outside stabilized yield. The company's operating model transformation exceeded expectations, resulting in $19 million of incremental annual NOI. They were a net seller in 2023, selling four properties for $445 million and redeploying $275 million into acquisitions in expansion regions. They also started $800 million of new development and continued to build their structured investment business. This business is expected to contribute to earnings growth in the future.

The company's balance sheet is strong and they have tight credit spreads, giving them a financial advantage. They have identified strategic focus areas for 2024, including operating model transformation, driving growth through development and construction, and shifting their portfolio to focus on suburbs and expansion regions. They are also making investments in their existing portfolio through renovations and creating new units.

The company is confident in their balance sheet and strategic capabilities, and expects to utilize them to generate value for shareholders. They anticipate a slowing economic environment in the coming year, with modest job growth and tempered housing demand. They plan to remain flexible and adjust accordingly. The company also expects new multifamily supply to decrease in established regions, while the Sunbelt will see a higher level of supply. They anticipate being well positioned in established regions, but forecasting slower growth in the coming year.

Kevin provides an overview of the company's guidance for the year and the expected earnings growth. He mentions the expected growth in core FFO per share, driven by the same-store portfolio and stabilizing lease-up communities, but offset by capital markets and transaction activity. He also discusses the projected capital plan and sources of capital for the year. Sean then outlines the three primary drivers that will support same-store revenue growth in 2024.

The company expects to see a 1% growth in embedded rent, an 80 basis point increase in other rental revenue, and a 60 basis point improvement in bad debt from residents, partially offset by a $6 million reduction in rent relief and net concessions. Revenue growth is expected to be higher in established regions due to lower new supply, with Southern California expected to have the strongest growth. The company is also proud of their team's efforts in generating an additional $27 million in NOI and expects to see another $9 million benefit in 2024.

In 2024, Avalon Connect, bulk Internet and managed Wi-Fi deployments, and smart access features will be the key drivers for the company. The shift to a new organizational model, with neighborhood staffing and centralized teams, is also expected to bring additional value for associates, residents, and shareholders in the long term. The same-store operating expense outlook includes an organic expense growth of 340 basis points, 140 basis points from profitable operating initiatives, and 75 basis points from the expiration of tax abatement programs. The deployment of Avalon Connect will pressure expense growth during the deployment period, but is expected to enhance portfolio NOI by more than $30 million. The company plans to be fully deployed by the end of 2024, leading to a decrease in operating expense impact in 2025. The company also plans to continue its accretive investment activity across all investment platforms in 2024.

The company plans to break ground on seven new developments, grow their SIP business, and expand investments in their existing portfolio. They also plan to sell assets in established regions and use the capital to acquire assets in expansion regions. This activity is expected to be neutral in terms of volume and return. The company is prepared to adjust their plan in response to changes in the market. Existing developments are performing well, with rents exceeding initial underwriting and leading to a 20-basis point increase in yield.

The company's rents are based on current market rates at the time of development and are not updated until significant leasing occurs. Market rents are expected to increase by 5% in 2024, providing a 30 basis point yield increase. The company will continue to focus on strategic areas and take advantage of opportunities with its strong balance sheet. The line is now open for questions.

The speaker is discussing the blended rent outlook for the company's portfolio, with an expected 2% rent change for the year. They expect to see some acceleration in rent change in the second half of the year compared to the first half. The speaker also mentions the variability and opportunities in the revenue and expense side, with the macroeconomic environment being a significant driver. They expect a slowdown in job growth in 2024 compared to the previous year.

The speaker discusses factors that are outside of their control, such as the economy and the court system, that could impact their company's performance. They also mention potential improvements in bad debt rates and expenses, but note that most of their expenses are already accounted for. They expect modest shifts in line items, such as payroll and benefits. The speaker concludes by acknowledging the need to keep an eye on these factors.

The company is expecting $870 million in development starts, with a back-loaded schedule for the year. The timing of the starts is dependent on various factors, such as changes in deal economics, rents, and hard costs. The company remains focused on the spread between development yields and market cap rates, as well as the source and cost of capital.

The speaker thanks the group for discussing the January rent changes and asks for a breakdown of trends by coast. The response is that the East Coast is trending at a low 2% range, the West Coast is slightly positive, and the expansion region is flat. The next question asks for a comparison of lease rate growth between the established and expansion markets, and the speaker refers to a slide that shows the revenue decomposition, with the majority of the portfolio coming from established regions. The speaker expects better performance from established regions, but there is uncertainty in Northern California due to job market conditions.

In the paragraph, the speaker discusses the company's financial performance and forecasts for the upcoming year. They mention that while the company has seen growth in their suburban markets, their urban markets have been relatively flat. They also provide a breakdown of growth in different regions and mention that urban areas in certain markets, such as Seattle, have been struggling.

The north and east side portfolio is performing better than the Bay Area, which is facing challenges. The company expects this trend to continue in the LA market. The 200 basis points in the fourth quarter may not be a good proxy for the future, as seasonality may play a role. The company previously estimated a 175 basis point annual earnings contribution from the development pipeline, but this year's contribution may be larger due to specific factors. The contribution may be larger in 2025 as communities are leased up.

The speaker is discussing the earnings accretion from development undergoing lease up, estimating it to be around $0.18 per share and contributing to 170 basis points of earnings growth in 2024. They mention the multiple sources of capital used for various investment purposes, making it difficult to attribute specific capital sources to specific uses. They also note that much of the capital used to fund the current development projects was sourced two to three years ago. They give a breakdown of the capital raised in the past three years and mention that a portion of it was used for the current projects.

The company plans to invest $850 million at a 5% cost of capital this year, which will not be used to fund completed developments in the lease-up phase. The $1.6 billion in lease-up developments has a yield of 6%, resulting in potential annualized profit of $25.5 million and 170 basis points of earnings growth on last year's core FFO. However, when looking at the earnings impact on a specific calendar year basis, there may be a $0.29 headwind from capital market transactions.

The speaker is willing to discuss the topic further but believes that $0.29 can be attributed to investment activity, with $0.18 coming from funding investment after subtracting lower interest income and financing costs. This equates to a growth contribution of 150-200 basis points from lease up activity this year. The speaker also confirms that the right way to think about the decrease in capitalized interest is by dividing the interest by the weighted average interest rate, and explains that this is due to the natural ebb and flow of construction progress.

The company has more completions this year than deals entering new construction, causing a bit of volatility in the capitalized interest expense calculation. The earn in for the year is now around 1% instead of 1.5% due to the timing of growth in the first nine months. About a third of the development starts will be in expansion markets, but there may be less upside due to supply issues and slowing rent growth.

Historically, the company has delivered yields that are 20-30 basis points higher than their initial underwriting due to not trending. In the last two years, this has been closer to 70-80 basis points due to rising rents, but they expect it to return to the typical range. The company has confidence in their investments in expansion regions, such as North Carolina, despite some market rent declines in 2023. They believe they can hit their NOI numbers and potentially see some lift in the long term. Starts are decreasing this year, but the company sees potential for these investments to open up into a favorable window in three years.

The speaker clarifies that the $870 million mentioned earlier will mostly be backloaded in terms of deliveries, possibly into late 2025 or even 2026. In response to a question about the earn-in metric, the speaker explains that it reflects the rent roll or gross potential in January compared to the average for 2023. This growth tends to occur in the first nine months of the year and then decelerates in the fall. There is not much growth seen in Q4.

The speaker explains that the average increase in revenue is around 1.5% over a period of eight or nine months, with the last two or three months being closer to zero, resulting in a lower overall increase. They offer to provide more details offline and mention that other companies may report their estimates differently. They also clarify that the costs associated with Avalon Connect are fully expensed. When asked about the impact on revenue, they point to the slide on revenue decomposition, which shows an 80 basis point increase in other rental revenue, mostly due to Avalon Connect. They also note that there may be other factors contributing to the increase, such as higher trash fees.

The speaker explains that they will provide a quarterly cadence at a later time and that expenses are expected to increase in various categories such as property taxes, insurance, utilities, and payroll. They also mention the impact of Avalon Connect on utility expenses.

The company expects to see low growth in the low threes due to increased office operations expenses related to legal and eviction costs. The start of the year has been consistent with their outlook, with asking rents slightly below historical norms. They are expecting average asking rent growth of 2.25% to 2.5% and actual rent change of 2% in the portfolio. The macro scenario used is 1% GDP growth and 55,000 jobs per month.

The speaker explains that the sensitivity of rent growth to macro forecasts depends on various factors, such as when and where the acceleration in the economy occurs. They also mention that the recovery in Northern California and Seattle is still ongoing, with rents currently down 10% from pre-COVID levels.

The speaker discusses the challenges facing the real estate market in San Francisco and Seattle, noting that San Francisco is 12-13% below its peak and has a long way to go before people feel comfortable returning to the office and living in the city. They also mention that Seattle's market is bifurcated, with the urban core facing similar challenges to San Francisco, but the suburban areas being more well-positioned. The speaker then references a recent issue with New York Community Bank.

The speaker says that there is not a significant amount of distress in the system, but there is potential for dislocation due to maturities and some lenders and equity providers may not be able to extend loans. They are preparing to take advantage of this situation. They also mention the importance of considering the sophistication and scale of players when looking at opportunities for assets.

The speaker discusses the company's opportunities for growth, which include utilizing their balance sheet and operational capabilities. Despite an oversupply of units in the Sunbelt, the company is still predicting positive revenue growth in their expansion markets. However, there may be more challenges in the Sunbelt in the future as supply continues to increase. The speaker also clarifies that while overall rent change in the expansion regions is flat, new move-ins are negative while renewals are positive.

The speaker discusses the impact of supply in the real estate market, specifically in Charlotte and Denver. They mention that their portfolio is not greatly affected because it is distributed across suburban areas. However, they note that in the Sunbelt region, there has been a decrease in occupancy and increased discounting in rent prices, which will likely have a significant impact on revenue and NOI in 2025. The speaker then takes a question from Alexander Goldfarb.

The speaker agrees that the company is primarily focused on suburban submarkets for its expansion into the Sunbelt region. They are targeting areas with less supply and more affordable product, such as garden-style apartments. This is because they are easier to operate and can help offset the higher operating costs in these markets.

The company is focusing on suburban submarkets and their portfolios in these regions are performing better than the overall market. They wrote off four development deals in the fourth quarter due to changes in economic realities, but they were able to revise some deals to make them profitable. One of the deals was in Urban Denver and the other was a public-private deal in California.

The speaker discusses the company's decision to let go of certain cases, but notes that they have a strong book of development rights worth $265 million. They also mention that they have gotten through deals that were underwater and feel confident about their pipeline going forward. In response to a question about rent growth, the speaker explains that it typically improves in the spring and summer months, and they expect to end the year flat.

The speaker is responding to a question about the impact of Avalon Connect on NOI growth in 2025. They decline to provide guidance for 2025 but mention the impact on revenue and operating expenses for 2024. The next question is about rental trends in San Francisco and Seattle, and the speaker provides data on blended rent changes for Q4 2023. They note a decrease in new move-ins and an increase in renewals in Seattle, particularly in suburban areas.

The impact of people returning to work from top companies like Microsoft and Amazon in Seattle is expected to have a positive effect on the city's real estate market in 2024. The supply in Bellevue has been holding up well, with most concessions coming from Seattle and Northern California. The most competitive sub markets in Seattle offer two to three months free rent, while in the Bay Area it is closer to two months. There is still a wide bid-ask spread in the transaction market, with some sellers hoping for lower interest rates to drive down cap rates before selling later this year.

Matt Birenbaum, responding to a question about cap rates and IRR expectations for coastal versus Sunbelt markets, explains that there is still a significant bid-ask spread for many assets. He notes that the market is currently divided into "haves" and "have-nots," with only highly desirable assets likely to transact at cap rates in the fives. He expects some transactions to be signed in the next two to three months at cap rates between five and five and a half, but only for assets considered highly desirable.

This summary was generated with AI and may contain some inaccuracies.