艾芙隆海灣社區公司 (AVB) 2022 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to AvalonBay Communities' Fourth Quarter 2022 Earnings Conference Call. (Operator Instructions)

Your host for today's conference call is Mr. Jason Reilley, Vice President of Investor Relations. Mr. Reilley, you may begin your conference.

Thank you, Doug, and welcome to AvalonBay Communities' Fourth Quarter 2022 Earnings Conference Call.

Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10-K and Form 10-Q filed with the SEC.

As usual, this press release does include an attachment with definitions and reconciliations of non-GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during the review of our operating results and financial performance.

And with that, I'll turn the call over to Ben Schall, CEO and President of AvalonBay Communities for his remarks. Ben?

Thank you, Jason, and hello, everyone. I'm joined by Kevin, Sean and Matt. And after our prepared remarks, we will open the line for questions.

I'll start by quickly summarizing our 2022 results and highlighting our progress on a number of strategic focus areas. As shown on Slide 4, from an operating results perspective, 2022 was a phenomenal year and one of the strongest in the company's history, with 10.9% same-store NOI growth and 18.5% core FFO growth. We ended the year with core FFO of $9.79 per share, which, just to reflect back, was $0.24 above our initial guidance at the beginning of 2022.

On the capital allocation front, we proactively adjusted during 2022 as the environment and our cost of capital changed. In April, we raised approximately $500 million of forward equity at a spot price of $2.55 per share, which is still fully available. As the year progressed, we pivoted from our original expectation of being a $275 million net buyer to ending the year as a $400 million net seller, a shift of roughly $700 million in total. We also ratcheted down new development starts given the shifting environment to $730 million from our original guidance of $1.15 billion. Collectively, these moves put us in an extremely strong liquidity position and fully match-funded with capital secured for all of the development we have underway.

We also made significant progress during 2022 on our strategic focus areas, 3 of which I want to highlight today. First, as detailed on Slide 5, we continue to make very strong inroads on the transformation of our operating model. We captured approximately $11 million of incremental NOI from our operating initiatives in 2022. In 2023, we're projecting an additional $11 million of incremental NOI from these initiatives and, looking further out, expect meaningful contributions in 2024 and beyond.

This uplift is being driven by a number of initiatives, including our AvalonConnect offering, which is our package of seamless bulk Internet; and a new developments managed WiFi, which we have now deployed to over 20,000 homes and expect to be at over 50,000 homes by the end of 2023.

During 2022, we revamped our website and fully digitized our application and leasing process. What used to take 30-plus minutes of associates' time can now be completed digitally in about 5 minutes.

We also rolled out our mobile maintenance platform across the entire portfolio, allowing our residents and maintenance associates to interact much more efficiently and seamlessly.

As a result of these initiatives, we believe we are enhancing the customer experience while also driving operating efficiencies, which over the past few years, has resulted in a roughly 15% improvement in the number of units managed per on-site FTE.

Turning to Slide 6. As the second strategic area, we are focused on optimizing our portfolio as we grow. Our goal is to shift 25% of our portfolio to our 6 expansion markets over the next 6 to 7 years. In addition to diversifying our portfolio, this shift reflects the reality that more and more of AVB's core customer, knowledge-based workers, are increasingly in these markets.

At the end of 2022, including our development currently underway, we increased our expansion market exposure to 7%. And subject to the capital allocation environment this year, we expect to be at 10% by the end of 2023. We're funding a large portion of this shift through dispositions in our established regions, which also allows us to prune the portfolio of slower-growth assets and/or those with higher CapEx profiles, which should lead to stronger cash flow growth in the portfolio in the years ahead.

Our third strategic focus area has been on leveraging our development expertise in new ways and in ways that drive additional earnings growth. More specifically, as detailed on Slide 7, we are expanding our program of providing capital to third-party developers primarily as a way to accelerate our presence in our expansion markets. In 2022, this included a project start in Durham, North Carolina and a new commitment in Charlotte.

During 2022, we also successfully launched our Structured Investment business with over $90 million of preferred equity or mezzanine loan commitments made during the year. We believe that both of these programs will be increasingly attractive to third-party developers in 2023. We're also fortunate to be building these books of business now at today's economics and bases versus in yesterday's environment.

Before turning it to Kevin to provide the specifics of our 2023 guidance, I want to provide some additional context on our underlying economic assumptions for the year.

From a forecasting perspective, we are overlaying the consensus forecast from the National Association of Business Economists, or NABE, on top of our proprietary submarket-by-submarket research data and model. The NABE consensus assumes a significant slowing in job growth during the year, down to about 50,000 jobs per month by the third quarter and a total of approximately 1 million of net job growth in 2023. The output of our models is a forecast of market rent growth of 3% during the year.

In a year in which we will need to be prepared for a wider set of potential outcomes than usual, there are a number of attributes of our portfolio, and particularly our concentration in suburban coastal markets, that we expect to serve as a ballast in a potentially softening economic environment.

As shown on Slide 8, the cost of a median-priced home relative to median income in our markets continues to serve as a barrier to home ownership and support demand for our apartment communities. This is in addition to the repercussions of today's higher mortgage rates, which make the economics of renting significantly more attractive.

The other side of the equation is supply. In softening times, having an existing asset that is in direct competition with a recently built nearby project and lease-up can be particularly challenging. Our portfolio has some of the lowest levels of directly competitive new supply across the peer group at only 1.4% of stock, which we believe positions us well.

And with that, I'll turn it to Kevin to detail our 2023 guidance.

Thanks, Ben. On Slide 9, we provide our operating and financial outlook for 2023. For the year, using the midpoint of guidance, we expect 5.3% growth in core FFO per share, driven primarily by our same-store portfolio as well as by stabilizing development. In our same-store residential portfolio, we expect revenue growth of 5%, operating expense growth of 6.5% and NOI growth of up 4.25% for the year. For development, we expect new development starts of about $875 million this year, and we expect to generate $21 million in residential NOI from development communities currently under construction and undergoing lease-up during 2023.

As for our capital plan, we expect to fund most of this year's capital uses with capital that we sourced during last year's much more attractive cost of capital environment. Specifically, we anticipate total capital uses of $1.8 billion in 2023, consisting of $1.2 billion of investment spend and $600 million in debt maturities.

For capital sources, we expect to utilize $550 million of the $630 million in unrestricted cash on hand at year-end 2022, $350 million of projected free cash flow after dividends and $490 million from our outstanding forward equity contract from last year. This leaves only $400 million in remaining capital to be sourced, which we plan to obtain primarily from unsecured debt issuance later in 2023.

From a transaction market perspective, we currently plan on being a roughly net neutral seller and buyer in 2023 with a continued focus on selling communities in our established markets and on buying communities in our expansion markets while being prepared to adjust our transaction volume and timing in response to evolving market conditions.

On Slide 10, we illustrate the components of our expected 5.3% growth in core FFO per share. Nearly all of our expected earnings growth of $0.52 per share is expected to come from NOI growth in our same-store and redevelopment portfolios, which are expected to contribute $0.50 per share.

Elsewhere, NOI from investment activity and from overhead JV income and management fees are expected to contribute $0.19 and $0.03 per share, respectively, while being partially offset by a headwind of $0.10 per share each from capital markets activity and from higher variable rate interest expense, resulting in an expected $0.02 per share net earnings growth from these other parts of our business.

On Slide 11, we show the quarterly cadence of apartment deliveries from development communities under construction for 2022 and on a projected basis for '23 and '24. As you can see on this slide, new deliveries declined in 2022 and remain relatively low as we begin 2023. This recent decline in deliveries was due to our decision during the early days of the pandemic, to reduce wholly owned development starts to $220 million in 2020, before resuming higher levels of development starts thereafter in 2021.

As a result, development NOI for this year is expected to be below trend at $21 million versus $42 million last year. However, new deliveries are expected to increase significantly later in the year and into next year, which should set the stage for more robust NOI growth from development communities next year.

And with that summary of our outlook, I'll turn it over to Sean to discuss operations.

All right. Thank you, Kevin. Moving to Slide 12 in terms of our operating environment. After a very strong first half of the year, we ended 2022 with several of our key operating metrics, including occupancy, availability and turnover, trending to what we consider more normal levels.

In addition, following 2 years of abnormal patterns, rent seasonality returned with peak values being achieved during Q2 and Q3 before easing in the back half of the year. More recently, the volume of prospective renters visiting our communities increased in January as compared to what we experienced in November and December, which translated into a modest lift in our occupancy, and we do see an amount of available inventory to lease as we entered February.

Additionally, asking rents have increased about 100 basis points since the beginning of the year, which is beginning to flow into rent change. Based on signed leases that take effect in February, we're expecting like-term effective rent change to be in the low 4% range.

Turning to Slide 13. The midpoint of our outlook reflects same-store revenue growth of 5% for the full year 2023. Growth in lease rates is driving the majority of our revenue growth for the year, which includes 3.5% embedded growth from 2022 and an expectation of roughly 3% effective rent growth for 2023, which contributes about 150 basis points to our full year growth rate. We expect additional contributions from other rental revenue, which is projected to grow by roughly 16%, about 2/3 of which is driven by our operating initiatives; a modest improvement in uncollectible lease revenue; and slight tailwind from the reduced impact of amortized concessions.

We're assuming that uncollectible lease revenue improves from 3.7% for the full year 2022 to 2.8% for the calendar year 2023. Of course, this improvement is more than offset by a projected $36 million reduction in the amount of rent relief we expect to recognize in 2023. The combination of the 2 reflects a projected 80 basis point headwind from net bad debt for the full year 2023.

Moving to Slide 14. We expect our East Coast regions to produce revenue growth slightly above the portfolio average, while the West Coast markets are projected to fall below the portfolio average. And our expansion markets are projected to produce the strongest year-over-year revenue growth for the portfolio.

One point to highlight is that the reduction in rent relief will have a more material impact on our reported 2023 revenue growth in certain regions and markets, for example, Southern California and Los Angeles. We have footnoted the projected impact for each region at the bottom of Slide 14 and enhanced our disclosure in the earnings supplemental so everyone has visibility into the impact of the change in rent relief as compared to underlying market fundamentals.

Turning to Slide 15. Same-store operating expense growth is projected to be elevated in 2023 due to a variety of factors. The first is just the underlying inflation in the macro environment which is impacting several categories, including utilities, wage rates, et cetera. Second, we're expecting greater pressure on insurance rates given the increase in the number and severity of various disasters over the past couple of years, combined with a relatively light year of claims activity in 2022.

We're rolling all that cost pressure into the organic growth rate of 4.8% you see on the table on Slide 15. In addition to the organic pressure in the business, about 170 basis points of additional operating expense growth is coming from the phaseout of property tax abatement programs, primarily in New York City, and NOI-accretive initiatives.

The phaseout of the property tax abatement programs is projected to add about 70 basis points to our total operating expense growth for the year. While we'll generate some incremental revenue during the phaseout period, the ultimate benefit will be the extinguishment of the rent-stabilized program for those units in a particularly challenging regulatory environment.

The impact from initiatives reflects a few key elements of our operating model transformation, including our bulk Internet, managed WiFi and smart access offering, which has been referenced as bundled -- and marketed as AvalonConnect. While we expect to recognize an incremental $5 million profit from that specific initiative in 2023, it's adding about 150 basis points OpEx growth for the full year. There's a modest impact from our on-demand furnished housing initiative, which is also generating a profit for 2023. And finally, we expect additional labor efficiencies to offset some of the growth in other areas of the business as we continue to digitalize and centralize various customer interactions.

And then if you move to Slide 16, you can see the progress we've made to date for each one of these 3 initiatives and the projected incremental impact for 2023. As I mentioned, our AvalonConnect offering is projected to deliver about $5 million in 2023, furnished housing is contributing another $1 million and our digitalization efforts are projected to generate an incremental $5 million benefit in 2023. In aggregate, we're expecting an additional $11 million in NOI from these 3 strategic priorities in 2023 with a lot more to come in future years from these initiatives and others.

Now I'll turn it to Matt to address development.

All right. Thanks, Sean. Just broadly speaking, development continues to be a significant driver of earnings growth and value creation for the company. At year-end, we had $2.4 billion in development underway, most of which was still in the earlier stages of construction. The projected yield on this book of business is 5.8%. And it's worth noting that our conservative underwriting does not include any trending in rents. We do not mark rents to current market levels until leasing is well underway.

On this quarter's release, only 4 of the 18 projects underway reflect this mark-to-market. But those 4 are generating rents $395 per month above pro forma, which in turn is lifting their yields by 30 basis points. We expect to see similar lift at many of the 14 other deals as they open for leasing over the next 2 years. And of course, this portfolio is 100% match-funded with capital that was sourced in yesterday's capital markets, when cap rates and interest rates were significantly lower than they are today.

If you turn to Slide 17, we do expect roughly $900 million in development starts this year across 7 different projects with roughly half in our new expansion regions. And we will continue to target yields at 100 to 150 basis point spread over prevailing cap rates. We expect the majority of the start activity in the second half of the year and are hopeful that we will be able to take advantage of moderating hard costs across our markets as these budgets are finalized. We have started to see early signs of this in a few of our latest construction buyouts as selected trade contractors have become much more motivated to secure new work.

As always, we will continue to be disciplined in our capital allocation, and our projected start activity could vary significantly from our current expectations depending on how interest rates, asset values and construction costs all evolve over the course of the year.

Turning to Slide 18. While our recent start activity has been modest, we have been building a robust book of future opportunities that could drive significant earnings and NAV growth well into the next cycle. We have increased our development rights pipeline to roughly 40 individual projects, balanced between our established coastal regions and our new expansion regions, providing a deep opportunity set across our expanded footprint. Most of these development rights are structured as longer-term option contracts, where we're not required to close until -- on the land until all entitlements are secured.

In addition, in the current environment, we are certainly seeing more flexibility from land sellers who are willing to give us more time as costs and deal economics adjust to all of the changes in the market.

We continue to control this book of business with a very modest investment of just $240 million, including land held for development and capitalized pursuit costs, as of year-end. For historical context, as shown on the chart on the right-hand side of the slide, this is a lower balance than we averaged through the middle part of the last cycle, from 2013 to 2016, even though the dollar value of the total pipeline controlled is larger today than it was, providing tremendous leverage on our investment in future business.

And with that, I'll turn it back to Ben for some closing remarks.

Thanks, Matt. To conclude, Slide 19 recaps our successes during 2022 and highlights our priorities for 2023. All this is only possible based on the tireless efforts of our AvalonBay associate base, 3,000 strong. A personal thank you to each of you for your dedication to making AvalonBay even stronger as we continue to fulfill our mission of creating a better way to live. You're the heart and soul of our culture, and we thank you.

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

(Operator Instructions) Our first question comes from the line of Nick Joseph with Citi.

Maybe just starting on development in the transaction market. You mentioned the 100 to 150 basis point spread. Can you quantify expected yields on the '23 starts? And maybe what the current transaction cap rates are you're seeing in your markets?

Sure. Nick, it's Matt. As I'm sure you're hearing from others as well, not a lot is transacting in the current environment. So there is -- I think everybody is kind of interested to see how the transaction market evolves over the course of the year. What is trading seems to be trading in, call it, the mid- to high 4 cap -- mid- to high-4% cap rate range, depending on the market. And there are certainly assets that are not trading. But as best we can tell, that's kind of where most transactions in our markets seem to be settling out today.

And just as a point of reference, the development we expect to start this year, those yields are underwriting to around a 6 -- low 6s today. So that's very consistent with the spread right -- very solidly in that 100 to 150 basis point range that I mentioned.

That's helpful. And then just on the -- I guess, the continued reallocation of the capital into these expansion regions. Do you expect any difference in cap rates between the buys and sells or as you reallocate that capital this year? And then where should we expect any asset sales to occur? From which established markets?

Yes. So I would say, if you look back at what we've done over the last 4 or 5 years, we have rotated quite a bit of capital, and it is kind of overweighted to the Northeast. And I think you can expect that to continue, that there will be continued asset sales out of the New York metropolitan area, a little bit out of Boston, some out of the Mid-Atlantic. And then, selectively, a little bit on the West Coast as well, but predominantly that -- kind of that Northeast corridor.

The cap rate spread, we'll see. I would say that, that cap rate spread has probably tightened some over the last year or 2 because there's probably been more movement up in cap rates in the regions where we're buying than that in the regions where we're selling. And that's just because those were the regions that had more embedded growth in the rent roll and lower cap rates a year or 2 ago.

That -- so as interest rates have risen, basically, a lot of the markets where we're selling, the buyers were already kind of buying for yield as opposed to growth. So there's probably been a little bit less adjustment there. So I think there might be a little bit of dilution, but I would say probably less than what we've seen in the last couple of years.

And then the other part of it is, tactically, we have shifted from kind of buying and then essentially doing a reverse exchange by picking an asset off the bench to sell to fund that. Mid last year, we shifted our tactics there to sell first so that we knew where that dispo was pricing. And then that, in turn, informed our view of how much we were willing to pay on the buy side. So we shifted to a sell first, buy second.

And Nick, yes, in terms of the environment today, I just want to make sure you have the right expectations for activity now versus later in the year. We're testing the market with a couple of potential asset sales generally on the sideline on acquisitions until we see how those assets, one, if we decide to trade on them and how the pricing is; and then we'll evaluate the potential trade into the expansion market through other acquisitions, or potentially use those proceeds for other capital allocation decisions.

Those ones being tested are in the Northeast?

They are. One in the Northeast and one in the Mid-Atlantic.

Our next question comes from the line of Steve Sakwa with Evercore.

I guess, on Page 13, you kind of break out all the drivers of growth. I was just hoping you could maybe tell me the areas where you have kind of the most confidence and the least confidence, where there could be upside, downside? And if you also think about that by region, I guess, what areas are you thinking there could be upside in your forecast, and potential downside?

Yes. Steve, this is Sean. I'll take that one. So in terms of upside and downside, first, across the various categories reflected on Slide 13, there's a couple of things I'd point to.

First is on the lease, rent side, as Ben mentioned, we have a certain macroeconomic assumption, job growth, income growth, et cetera, that's reflected in our models from NABE that drives that. Obviously, to the extent that we see either more or less improvement in the economic environment, that's going to have an impact on that. And then the timing with which that occurs. So if we don't see much of an impact in terms of a decelerating macro environment until late this year, then it really would impact more '24 than '23.

And then as it relates to the other areas, I'd probably point to bad debt as really being one of the other components that I think we're all trying to estimate the likely impact of what we're going to see in certain markets. But it is one of those items that is a little more challenging to forecast. We're starting the year at roughly 3.1% underlying bad debt here, and we expect to get down to about 2.3% by the end of the year in terms of the pace of improvement, and more of the improvement in the second half than the first half just given some of the issues in L.A. and some of the sluggishness in the courts in the Northeast.

That's the other thing I'd point to as a category that would likely move the needle one way or another depending on how things unfold. There could be some upside there since, while there has been some extensions recently, like in Los Angeles County, the extensions are getting shorter, and I think people see that they're sort of getting to the end of the tunnel on this. So at the margin, we've incorporated that, but maybe it improves. It's hard to tell.

And then geographically, I'd say, certainly, it's been more sluggish in the tech markets in Northern California and Seattle, as an example, maybe to a lesser extent here in the Mid-Atlantic in terms of the government not being back in the office and things of that sort. So depending on how the tech market unfolds here, that would be the likely impact in those regions.

And then the other regions, we're seeing strong performance out of New York City, out of Boston, generally pretty good in Southern California. So right now, as you look at it, there's probably, I'd say, maybe a little more risk on the tech side of things really decelerating, but we do have some stabilizers in some of these other regions. So on par, it probably is kind of a net neutral when you add it all up.

Okay. And then just on development, maybe for Matt. As you think about construction costs and what's happened with inflation, and I assume that, that's starting to moderate. But how did that get factored into the $900 million of starts? And presumably, the yields are somewhere in that 6% to 6.5% range on what you're going to start. But I guess, what kind of cushion or upside could you possibly see if inflation continues to moderate?

Yes. I guess it's a question, Steve, of which slows down more, hard costs or rents. I think at this point, we think hard costs are moderating more. So I would agree with you that -- it's very hard to know where hard costs truly are today until you have a hard set of plans to bid and you're truly ready to start.

So what we're starting to see is, on a couple of projects that we've started in Q3 and Q4, once we actually start moving dirt and the subcontractors see the deal is real, they are coming back with more aggressive pricing, and we are starting to see some savings on the buyout. Whereas a year or 2 ago, we were scrambling, the number was going up 1% a month. That's definitely not happening, and it is starting to move the other direction. And it's regional. So it really does depend on the region you're in and how much subcontractor capacity there is.

Sorry, we got something going on here.

But -- so -- but we do -- we would expect that hard costs in many of the regions that we're looking to start business in over the next year -- or this year, I would take the under on where they're going to be relative to where they would have been, say, Q3, Q4 of last year. And so what -- we mentioned that our starts are back-loaded this year. Some of that is just the natural evolution of these deals. But some of that is actually strategic as well on our part to say we think that we'll have a better shot and it will be a better environment to buyout some of these trades over the summer once they've kind of felt the pressure of running out of work and starts decelerating pretty dramatically.

Our next question comes from the line of Austin Wurschmidt with KeyBanc.

Ben, just going back a little bit to your comments on the capital recycling side. I'm just curious how significant the volume of assets are on the market within your expansion markets that meet your underwriting criteria from a location quality perspective.

And also curious if that 6- to 7-year time frame you outlined to achieve that rotation into the expansion markets, is that just a function of what you can sell in any given year?

Yes. Thanks for that, Austin. So on the transaction side, as I mentioned, we're out in the market with a couple of assets for potential sale. Our transactions team is obviously staying close to the buying side of the market, but we're not currently actively underwriting any particular deals. We do have very detailed market-by-market analytics that are driving which submarkets we have our close eye on, type of product across various price points. So once we're ready to -- and if during this year, we decide get back into our trading activity, we'll be ready to ramp that activity back up.

In terms of your kind of broader question, the time period, we've set the broad target of getting to 25% over the next 6 to 7 years. I think we've been making some good inroads over the last couple of years through trading, through our acquisition activity and then increasingly through our development funding program.

We're hopeful that in an environment like this, capital less abundant, maybe some dislocation, that there will be opportunities for us to step in and potentially accelerate that activity. Our cost of capital, obviously, will need to be there to support that. But we could be in a window later this year where those types of opportunities start to present themselves.

Yes, that's helpful. And then I'm also just curious, with the available dry powder that you have exiting this year, I'm curious what's sort of the most development you'd be comfortable starting in a given year? As you guys highlighted, you do have significant deliveries in 2024, which will accelerate the NOI contribution. And I'm just curious, what kind of volume we could see you do maybe as you get into next year and beyond if the environment is sort of appropriate for accelerating starts.

Yes, broad strokes, Austin, I'd guide you, this is not a hard and fast sort of area. But in the range of 10% of our enterprise value that we want to have under construction at a particular period of time. We're light of that today, and that's a reflection of that we have retrenched on development starts over the last couple of years given the operating environment.

Yes, we've got the opportunity set that's there. Matt described that. So we have the pipeline. We control that pipeline at a relatively limited cost. We're spending a lot of time right now restructuring deals to our benefit because the land market has changed. So that's there. We've got a phenomenal team that has been doing this a long time.

So an element will be how do we think about the spreads, right? How do we think about -- Matt was talking the kind of rental -- the trend lines on rents relative to the trend line on costs. How we think about maintaining a 100 to 150 basis points of spread to underlying cap rates and our cost of capital. That will -- yes, those would be the signals where we start to lean in more fully.

Maybe Austin, just to add. This is Kevin here. Obviously, as we talked about in the past, the development activity in terms of what we started is a function typically of 3 variables: The opportunity set, our organizational capacity and then our funding capacity.

And on that last point, our funding capacity, we're probably set up to be able to start and self-fund through free cash flow, asset sales and leveraged EBITDA growth somewhere between $1 billion and $1.5 billion worth of new development a year. And of course, if the equity market is there, we can flex that number up.

But that's probably what we sort of aim for, somewhere in the $1 billion to $1.5 billion from a funding side, plus whatever we can additionally fund from the equity markets to the extent the opportunity set, and the organizational capacity is also there.

Got it. But it's fair to assume, with where leverage is today, that capacity may be a little bit greater?

Potentially, if you can find -- yes, certainly, from a leverage capacity standpoint, we're, as you know, 4.5x net debt to EBITDA. Our target range is 5 to 6x. So we certainly have borrowing capacity here to be -- to play offense quite a bit if we see opportunities in the development side of the house or in the transaction markets. Of course, we all just have to look at sort of where the cost of debt is for -- to fund that activity. And fortunately, we have among the lowest costs of debt capital in the REIT industry.

And today, we could probably fund 10-year debt somewhere around 4.7%. So that would be also a relevant factor as we think about the degree to which we want to lean into our leverage capacity to support additional investment.

Our next question comes from the line of Chandni Luthra with Goldman Sachs.

In terms of your outlook for your Structured Investment Program, are you seeing any deals in the market that are in distress or might be in the need for capital and could be opportunities for you? And then what gives you confidence on generating returns of 12%?

Yes. I can take the first one. I'm not sure I heard the second one. Confidence in?

Returns of 12%.

Okay, yes, sure. So yes, it's Matt here. Are we seeing distress? No, but we're not really in that market, I would say, in the sense that the SIP is really targeted at providing mezz capital, either mezz or preferred equity, for new construction, merchant builders building new apartment communities in our markets. So we're coming in at the beginning of the story when they're putting together the capital stack to build the project.

And what we're seeing there is, given where interest rates have gone and given what's happened to proceeds, their construction loan proceeds is coming down. So developers are looking to fill that gap, where maybe they were getting 60%, 65% construction loan before, now they're only getting 50% or 55%. So we have seen kind of our investment move from maybe 65% to 85% of that stack down to, call it, 55% to 70% or 75%. And the rate has gone up, and we -- there are deals getting done in that 12% range.

There are folks out there looking for short-term bridge money who started jobs 2 and 3 years ago, and their first -- their construction loans are coming due, and they don't have enough refi proceeds to pay that off, and their mezz. So there is a little bit -- I don't know if I'd call that distress, but there's a little bit of a recapitalization of newly built asset opportunity out there. That is not a market that we have gone to at this point. We're pretty much focused on the new construction side of this.

And Chandni, this is -- just to add to what Matt -- just to emphasize sort of the broader market. And we do expect our capital through the -- through our SIP to be more attractive to developers this year than it has been over the last couple of years, which inherently then means we're going to have the opportunity to be more selective, right, about quality of the sponsor, amount of capital they're putting in, our views on the underlying real estate.

And we're not entering into these SIP deals with the prospect of owning the assets to the end. But we do, do very detailed underwriting to make sure that we're comfortable with the prospect of owning the assets if we need to.

Great. And then as we think about tech layoff headlines, obviously, January was a very big month. We saw a big bump in layoffs in January, and that was significantly higher than November, which obviously, when you think about the impact of November, December, everybody -- you guys talked about sort of seeing the slowdown. But then you talked about, towards the end of January, rents accelerated a little bit.

So as we think about the fact that we are only sort of just coming off these headlines that keep hitting our screens every day. This morning, we saw from Disney. Are you seeing any early signs in your conversations with tenants, be it around move-outs or lease negotiations, any notices? I mean what gives you confidence that things are in -- sort of on the right path, and we are not looking at things just falling off a cliff?

Yes, Chandni, that's a good question. I'm not sure there's a knowable answer to it. I can tell you about what we're seeing. But in terms of how it unfolds, I think that's what everybody is trying to understand well. What I would say is, just based on the data that we collect from residents as it relates to relocation, rent increase, et cetera, et cetera, we're not seeing anything that's material at this point that would indicate that there is a significant issue underlying the economy in some of the tech markets.

So relocation has actually come down in terms of reason for move-out. Rent increase is up a little bit. But not surprising, rents have gone up quite a bit over the last 12 to 14 months. So I don't think those are indicators that are a surprise to us, and there's nothing yet in the data that would tell us that there's a significant underlying issue.

Now the question, I think, that a lot of people have is severance, unemployment, et cetera, et cetera, is that sort of supporting people for a period of time? And they are, in fact, transitioning into new roles into other organizations. And there's a little bit of this sort of rotational effect from maybe some of the tech companies that took on more employees that they needed to during the pandemic, and now they're rotating into other organizations, more mainstream corporate America. It's hard to tell all that, but we're not seeing anything specifically in the data, and we're not hearing a lot anecdotally from our teams on the ground saying that there is a significant issue there. I was in San Jose last week speaking to our teams, talking to people on the ground. And they're just not seeing it yet.

The sound bites and the headlines are there in terms of layoffs, but it's not showing up in terms of the front door yet. So we're being proactive in some of those markets in terms of how we're thinking about extending lease duration, how we look at lease termination fees and other things to hedge a little bit. But thus far, it's not showing up in the data.

Our next question comes from the line of Adam Kramer with Morgan Stanley.

I just wanted to ask about the same-store expense guide. I think I really appreciate kind of the deck overall but I think specifically that slide in the deck kind of breaking out the different components. Specifically on the tax abatement, just wondering kind of -- if that's a one-timer or if that's going to repeat in future years? And again, just trying to figure out what is kind of the proper recurring run rate kind of same-store expense number to kind of use as a proxy.

Yes, Adam, good question. And what I can tell you, because if things do change in terms of the assets that we have in the portfolio, what we trade and sell a lot of, et cetera, et cetera, but for the assets that are contributing to the phaseout of the tax abatements in our '23 same-store bucket, 1 does phase out by the end of 2023, 2 phase out by the end of 2024 and then the other 4 extend out another 2 or 3 years. So you're going to see a little lumpiness over the next few years as some assets slowly drop out of that phaseout.

Now as I mentioned, there are some benefits we get along the way in terms of an incremental fee each year of the phaseout. And then, ultimately, in what people would consider as New York as a pretty challenging market from a regulatory standpoint, eventually, we just get off that program at the end of the phaseout and there should be a nice -- a pretty nice lift there in terms of rents.

So that's sort of the way to think about it a little bit. I can't give precise sort of guidance as to what to expect for years beyond 2024 in terms of what the headwind might be from that activity, but there will be some kind of headwind for the next few years.

That's really helpful. And then just a follow-up, thinking through the expansion markets, recognizing potentially better job growth there, I think that makes a lot of sense. But just thinking about the supply -- the supply side of things, right, and look, I think it's kind of well-publicized that some of the expansion markets, Sunbelt broadly, just the elevated supply, call it, maybe for the next 12 months or so, how are you guys thinking through that? Is that kind of just weather the supply storm and there's probably less supply on the other side, given financing challenges today for kind of development starting today for others out there? Or is it maybe the supply thing is overblown? And actually, the next 12 months is not going to have as much supply as maybe people think?

Yes, let me handle it big picture and others can add on. The first comment I'd make, our portfolio allocation objectives, these are long-term objectives, right? We're setting these because we think they're the appropriate allocation to have over the next 20 to 30 years, right, not necessarily based on the supply and demand dynamics out of the next couple of years.

With that said, we do expect the next couple of years and potentially with some reversion to the mean on the rent side and the high levels of supply could lead to more muted growth in some of these high-growth markets. We're fortunate we don't have any new deliveries. We have very limited deliveries coming online over the next couple of years. So most of our activity that you hear us talking about, including our own development, which we're now starting, and our Developer Funding Program, those are projects that are going to be coming online in 2025, 2026, which currently looks like could be some lighter years from a supply perspective.

Yes. I'd just add one other thing to that, which is we are conscious of submarket selection as well as market selection as we build the portfolio in these markets. So if you look -- and I would point you to our Denver portfolio as a good example. It's been a great market. Our portfolio, I think, has done even better than the market. And if you look at where we bought assets, it's mostly been suburban garden assets in jurisdictions where it is more supply-constrained. There's a lot of supply in Denver, but the vast majority of it is within the city of Denver proper. And we have not bought an asset in Denver. We completed one lease-up development deal there in RiNo last year, and we have another one under construction, but we're balancing that out with a suburban-heavy acquisition strategy.

Our next question comes from the line of John Kim with BMO Capital Markets.

Thanks for all the color and additional disclosure on uncollectible lease revenue. It did strike us as surprisingly high in New York and Southeast Florida. And I was wondering if you can comment on that if this is due to affordability? And could you see this potentially remaining high, just given what's happening in the economy?

Yes, John. It's Sean. Yes, New York certainly has been high in certain pockets. Even pre-pandemic, places like Long Island took forever to get through the court process. So that's not necessarily a significant surprise. And as you might imagine, the environment is relatively pro-resident-friendly. And so any opportunity as they get to sort of kick the can down the road through the court system, we've generally seen that happen over the last 12 to 14 months.

As I mentioned earlier, I think a lot of that is slowly coming to an end, and things are opening up, but it is moving slowly. And you basically have the same phenomenon happening in Florida. Things are moving along. Obviously, it's not as kind of "pro-tenant-friendly" as a place like New York by any stretch. But courts are back up, have lot of cases that have just been on the docket for months and months, and it's taking time for things to move through the system at this point in time, just much longer than average.

So in terms of is there a particular reason in Florida, I wouldn't say necessarily that's the case. It's a market that has had a higher bad debt historically. So we're not necessarily surprised by that.

And John, from an overall portfolio perspective, I know you know this, but just for the broader audience, I mean pre pandemic, right, our traditional bad debt number was in the 50 to 75 basis point range. So still a significant runway from the types of figures we're assuming for this year over the next couple of years. It may take a while, given Sean's comments, but we're hopeful we'll be headed in the right direction.

Okay. My second question is on Page 11 of your presentation. You show the NOI contribution from development completions, which is very helpful. I'm just curious why you estimate that '23 NOI will be about half of last year's. Just given if you look at the first half of this year's deliveries versus the first half of last year, it looks about the same.

Yes, John, this is Kevin. I'll take a crack at this. Others may want to chime in. And essentially, as you build out the model for forecasting NOI from communities undergoing lease-up, obviously, you have to start with when we began to put shovels in the ground. And as I mentioned in my opening remarks, we did start to ramp back up in 2021. And usually, most developments take 8 to 10 quarters to complete, and then that results in deliveries, and then that then thereafter results in occupancies, which is where you start to see revenue growth. So there is a little bit of a lag when you play this out.

So this is -- the bar chart here on Slide 11 in our deck are not meant to be a coincident proxy for when we expect NOI to ramp. Rather, it's showing deliveries when they ramp. And so therefore, you'll have to have occupancy that follows that an NOI that follows that. So it tends to create a lag effect as you move it through the P&L.

Our next question comes from the line of Alan Peterson with Green Street.

Just had 2 quick questions on the transaction market side. Matt, in regards to the asset sale commentary being out of the Northeast corridor as well as California, when you think about dispositions in California, are they wholly owned dispositions? Or would you look to enter into a joint venture for property tax reasons on the West Coast?

It's a good question, Alan. We have -- so far, the only partial interest sale we've done was the New York JV that we did back in late 2018. So the dispose we've done out of California, and there haven't been a lot over the last couple of years of wholly owned dispose, were just fee simple. We have talked about that. Obviously, if you sell a 49% interest, you don't suffer the Prop 13 reset, the Prop 13 overhang or reset was probably a lot larger last year, at this time when you think about where asset values were than where they are today, there's been some correction there. So the spread isn't quite as wide as it was. But that is something that we have talked about that we might consider at some point.

Appreciate that. And then I'm curious whether you're starting to see your portfolio premiums [have all] potentially swing to a portfolio discounts with the financing markets becoming a little bit more challenging and whether acquisitions start becoming more attractive to the AVB team there?

Yes, I would say their -- the portfolio discount today is 100%, right? They're just -- their own portfolio is transacting today for the most part, because the debt markets. So -- and what we are seeing is, of course, in general, right now, what's transacting are deals with assumable debt or deals of modest deal size, $100 million or $150 million or less.

So you're right, a year or 2 ago, the efficiency -- debt was so cheap and the efficiency of being able to buy a large portfolio put a lot of debt on that all at once, that's gone into reverse. I think the expectation is, as the debt markets stabilize, you will start to see some more sizable asset sales come to market later in the year. That's kind of what everybody's waiting for. I know there was a lot of talk at NMHC about, are you going to go, are you going to go. So -- but yes, I would say that I would certainly expect that this year a much higher percentage of the total transaction volume will be one-offs as opposed to portfolios.

Our next question comes from the line of Rich Anderson with SMBC.

So back to Slide 11. Can you -- I got what you said about timing to John's question, but the kind of trend upwards in deliveries, does that inform us at all about what you're thinking about in terms of the overall macroenvironment, the economy and potential recession? I assume you prefer to deliver into strength. So can you comment at all on this image and what you're thinking broadly about what the overall landscape will look like by the time 2024 rolls around?

Rich, this is Kevin. I'll start here. Others may want to join. So in terms of Slide 11, just to sort of recap, it shows the timing of apartment deliveries from completing development over '22 through '24. And that is really a lagged effect of what happened 8 to 10 quarters previously. And if you kind of just step back and look at the last few years for us and tie it with a comment that I made in Austin's earlier question about kind of our typical start capacity, as you know, we typically try to start somewhere in the $1 billion to $1.5 billion range. If you look over the last 3 years, on average, I think we started about $700 million or $800 million when you include the $200 million or so in 2020 and $1.7 billion or so last year. So it's been a below-trend level of starts over the last few years, which, with the lag has created in the last year or so and then probably for, maybe the better part of the next year, a little bit of a below-average trend NOI realization from the lease-up portfolio. So that's just sort of how the mechanics work.

In terms of your question about what does this say, I think really, our lower levels of starts is more reflective of the volatility and the uncertainty of the environment over the last few years when we were looking to start jobs. As we look at where we are today, certainly, the company is in a terrific financial position to start not just the $875 million that we have in the plan for this year, which as an aside is a below-average level of starts generally. But we are in a position to start a whole lot more not only because our lower level of leverage today, which gives us debt capacity.

So we are looking to lean in and increase development starts in the next 2 years if the environment is broadly accommodative of our doing so and is a reasonably stable environment from a capital markets perspective and a macroeconomic perspective with respect to the likelihood for realizing decent NOI growth.

So that is kind of our general look at the macro environment, and our capacity is there to sort of ramp things up as we want to do. So as things stand in terms of what's already underway, we are well positioned just on the $2.2 billion of development under construction that's essentially paid for to deliver robust NOI growth irrespective of what we start in the next year or 2. So I don't know, Matt, if you want to add.

Yes, Rich, just to clarify, those deliveries, the way they show, that die is already cast. So they'll deliver into the market that it is at that time. We're not smart enough to say, yes, we deliberately plan to have fewer deliveries in '23 because we thought there might be a recession 2 years ago. It's just playing out that way because we had less start activity a couple of years ago, as Kevin said. But those are all underway, and we'll take those deliveries as soon as we can get them.

Okay. Fair enough. And the second question is on the Developer Funding Program. Can you talk about the economics of that relative to everything being done in-house, assuming a fee paid to the third-party developer and all the different moving parts there? And if this program is sort of like a stepping stone for you to get into these markets more efficiently in that over the course of time, you kind of would revert back to the more conventional approach to development longer term? Is that the way to think about it?

Yes. Rich, this is Matt. I can respond to that, although Ben may want to as well. The way we think about that program is the returns are somewhere between a development and an acquisition because the risk is somewhere between a development and an acquisition. So the developer is taking the pursuit cost risk, the construction risk, we're taking the lease-up and the capital risk. And so the yields on that are a little bit less than an AVB straight-up development because we are paying fees and then there's an earnout based on how the deal does. But we think it's a good risk-adjusted return.

And I guess it does 2 things for us. One, it accelerates our investment activity in the expansion regions because it does take time to get the teams on the ground as -- and we're further along in some markets than others where we're doing the DFP so far has been more like say, North Carolina, where we just started there a year or 2 ago, not so much in Denver where we've been there for 5 years already.

But we also view it as a supplement to our own development activity in the sense that it's a dial -- we can dial up or down more quickly and more opportunistically in response to market conditions and our own cost of capital. So even when we are fully established in these expansion regions, it may well be an additional line of business for us, but it may be a line of business for us that we're more nimble in terms of turning it up and down than our own development.

No, it's well put. And the last piece I'd add, we definitely also see synergies within a market. Being able to talk with third-party developers could be something they've just completed and they're looking to sell. It could be a deal they're wanting to develop so they're needing a piece of capital, right, and/or places where they need a fuller capital stack and we have an interest in owning that asset long term. So that also helps the kind of flywheel accelerate in these expansion markets.

Our next question comes from the line of Michael Goldsmith with UBS.

Can you talk a little bit about the gap in performance trends for your suburban portfolio relative to the urban? And then kind of connected to that, there's a chart that says suburban supply growth is 1.2%, while urban supply growth is 1.8%. How does that compare with historical norms?

Yes. So good questions. As it relates to performance in terms of suburban versus urban as an example, certainly, urban, as we moved through the pandemic, took the greatest hit. So as we've continued to recover from that, we have seen stronger growth to date in terms of our urban assets, but they are recovering, to keep in mind.

To give you an example like, in Q4, rent change was a blended 5%. It's about 4.5% in our suburban portfolio but just north of 6% in the urban portfolio. And I think, yes, that's a function of decline and people coming back to the office slowly and steadily in various urban environments.

As it relates to the urban/suburban supply mix, suburban submarkets within our regions have always been difficult in terms of development, more nimbyism, local jurisdictions concerned about impacting school districts, et cetera, et cetera. It's always been challenging. Coming out of the GFC, there was a little more of a renaissance in terms of the urban environment, and all of a sudden economics for urban development made good sense, and there was demand there in terms of you had millennials flocking to urban environments. So that's why you saw a significant pickup in urban supply over the course of the last cycle.

As you look at it today and where we are, from a development standpoint, almost everything we're doing right now is suburban. But given some things that are happening in the urban environments, there will likely be, at some point in time, opportunities to play urban development. Supply is -- right now, if you look at it from an economic standpoint, there's not much of anything that makes sense in an urban environment. So things may overcorrect there, in some cases, and there will be opportunities for us to play there. But the demographic wave that sort of supported that is moving on at this point. So we'll probably be more selective than we were in the last cycle in terms of urban development opportunities.

That's very helpful. And as a follow-up, you started a Kanso project in the quarter. How do construction cost per unit differ for this type of development relative to a fully amenitized development? How do the rents compare? So essentially, how do the yields compare? And how has the resident reception been to the Kanso development? Is that a product that will more likely to pencil in maybe just a less certain macroeconomy?

Yes, sure. This is Matt. I can speak to that one a little bit. We only have a little bit of it out there. The customer reception has been strong. And the brand really started with customer research insights that there are a lot of customers out there who want a nice new apartment and don't -- we're overserving as an industry today, they don't value necessarily all the on-site service, don't value all the amenities and the other pieces of the offering that Avalon provides and a lot of our competitors provide.

So our goal is to be able to bring that offering in at a rent that is 10% to 15% below the rent of a new fully amenitized Avalon or comparable in the same submarket in the same type of location. I think, so far, the little we've done would suggest that the discount might actually be a little bit less than that. It might be more like 7% or 8%. And the costs, there's really -- there's savings in the upfront capital cost because you're not building a pool, you're not building a fitness center, et cetera. And then there's also savings in the ongoing operating expenses because you're not operating and cleaning those spaces and then, ultimately, in CapEx because you're not remerchandising those spaces.

The upfront hard cost savings, it's not -- I mean we might typically spend $7,000 to $10,000 a unit on amenities at a community at a new build, maybe a little bit more than that. So you're saving most of that. And then on the operating expense side, the savings is at least a couple of thousand a door in controllable OpEx. So actually, the yield winds up being about the same, but it serves a different customer, and it kind of gets us further down the pricing pyramid. So it expands the market.

Our next question comes from the line of Alexander Goldfarb with Piper Sandler.

So 2 quick ones. First, initially on the DP, I think in response to one of the questions, you said that your intent wasn't to own the DLP (sic) [DFP] end, but then in a subsequent question you referenced, it's a good way to accelerate into the market. So maybe I misheard or maybe it's just the way of how you look at deals in different markets. Maybe there are markets that you're looking to more grow in and use DP to actually own the deals versus other markets where it's more of just an investment because you already have an establishment. So I just want to get some clarity.

Yes, Alex, it's Matt. I think you're referring to -- we really have 2 different programs. The DFP, the Developer Funding Program, those are assets that we own really from the beginning, we fund the construction and those we're taking into our portfolio day 1. The SIP, the Structured Investment Program, that's the mezz lending program. Those are the assets that were -- that's really about generating earnings and leveraging our capabilities, and that's the program Ben was referring to where we do not expect to own those assets, although we're prepared to if we need to.

So what's the difference -- I mean, since you guys are pretty thorough in your underwriting and your -- and how you pick deals. Why have 2 different buckets that would seem like basically, it's sort of the same bucket. You're picking assets that you'd want to own. So why the difference between the 2?

It's a very different investment profile. The SIP we're lending $20 million to $30 million for 3 years, call it, at 11% or 12% and then we're getting paid back. And we're actually focused on doing that in our established regions, where we're not necessarily looking from a portfolio allocation point of view to grow the portfolio, but we have the construction and development expertise to underwrite it and to understand what it takes to do that kind of lending. The DFP is very similar to the way we would underwrite development or an acquisition that we expect to own for the long term. And that's 100% focused on the expansion regions.

Okay. Second question is, on the AvalonConnect and the launching of WiFi and other connectivity, obviously, we're all familiar with what the White House said, extra fees, having the regulators look at fees, et cetera, whether it's hotels or apartments, et cetera, obviously, you guys feel pretty comfortable with what -- these programs. But do you feel like the regulators are going to look harder at these type of additional fees? Or your view is that there's already regulation covering this stuff and so it's already sort of covered under existing regulations?

Yes. Alex, this is Sean. Happy to take that one, and a good question. What I would say is 2 things. One is it's hard to know exactly where regulators might go in terms of what they're looking for. But this has been addressed by the FTC a couple of different times, including last year, in terms of what's appropriate, what's inappropriate with telecom providers and people that are providing this kind of service.

So at least now, I think it has been addressed. That doesn't mean something might not change in the future, but I think we all have sort of a playing field that we feel comfortable with, has been blessed by the regulators. And we're all moving forward under that particular regime, I guess, is the way I'd describe it.

Our next question comes from the line of Joshua Dennerlein with Bank of America.

I wanted to touch base on that AvalonConnect and furnished housing, same-store expenses. I like what you broke out on Page 15. How should we think about the associated same-store revenue from those programs?

Yes. No, good question. Based on -- and I mentioned this in my prepared remarks as it relates to other rental revenue growth. But if you look at it overall, for 2023, on an incremental basis, roughly 60 basis points or so of our revenue growth is associated with those various initiatives that I identified.

So does that include AvalonConnect, furnished housing and the labor efficiencies?

That included AvalonConnect and furnished housing; there's no labor efficiencies and revenue. That's on the expense side.

Okay. Yes, that makes sense. For the AvalonConnect and furnished housing, are those kind of onetime bumps to same-store expenses? Or is that something that kind of carries through on a go-forward basis and you have offsetting same-store revenue growth as well?

Yes. No, good question. I mean the expectation right now is that for both AvalonConnect and furnished housing, and also even on the labor side as well, is that we're going to continue to see additional enhancements to those programs over the next couple of years. So you'll probably see them stabilize around 2025 or so.

And at a high level, the way I think about it is our expectation is that these programs overall will probably contribute about $50 million of incremental NOI to the portfolio, of which, if you -- without getting into the detail on the accounting, about $18 million is projected to flow through the P&L for 2023.

So we're about 35% of the way there. There's still a lot to come, but you will see some pressure on OpEx for the next 2 years, specifically for furnished and AvalonConnect until it stabilizes. But again, it's a highly profitable activity that is contributing meaningfully to earnings over the next couple of years when you look at it in aggregate.

(Operator Instructions) Our next question comes from the line of Sam Choe with Credit Suisse.

I'm on for Tayo today. Just one question. I know your portfolio strategy is to invest in the expansion regions. But just wondering if the rent control and the regulatory, I guess, noise has contributed to any strategic changes in how AVB is thinking about portfolio construction going forward.

Yes. Thanks, Sam. Short answer is when we arrived at our portfolio allocation decisions a couple of years ago, it incorporated in the prospect of regulatory environment. And it continues to be a motivator on why we want to get our exposure in the expansion markets at a minimum for diversification as it relates to various regulatory dynamics.

Our next question comes from the line of Jamie Feldman with Wells Fargo.

I guess sticking with rent control, I mean, have you factored in at all any changes in your '23 guidance? And where do you see the most risk, whether at the municipal level or state level?

Jim, this is Sean. That is probably a very long answer. What I would say is that, obviously, housing affordability is a significant issue in the country mainly as a result of just the lack of new supply. So we continue, us, our peers in the industry and various industry associations educate both federal, state and local governments about what will work in terms of trying to ease some of the issues that they are hearing about from the electorate. So it's going to take continued efforts to make sure that people understand it. In terms of what might happen in 2023, that's purely speculative at this point and wouldn't be appropriate for us to necessarily go there.

If I heard your discussion right, it sounds like you've got the $600 million of unsecured, you plan to take those out and replace with $400 million of new unsecured. Is there a price point -- I mean we'll probably see some volatility here on rates and pricing. I mean, is there a price point at which you have to think about other sources than the new $400 million? Or maybe a comment on what do you think of pricing today or where it may head?

Yes. I mean I guess, Jamie, at some level, when you've put together a capital plan, you always have that debate about what your uses are and then how -- what's the most efficient source of capital to address those uses. And I think the budget we have today reflects a view that raising that $400 million primarily through the issuance of additional unsecured debt is today and is likely going to be the most cost-effective source of capital for us.

Certainly, there could be other sources that might arise, but basically, our choices are relatively straightforward. It's asset sales or common equity, and common equity is unattractively priced today. Asset sales could be a potential source. But as we've just discussed, there's less transparency and liquidity around pricing in that market. So that's why we ended up with unsecured choice as our likely expected choice.

And so that's -- we've got some time and room to figure that out, and we've got abundant liquidity with potentially nothing drawn on our $2.25 billion line of credit that gives us abundant time and room to figure out what the right source of capital is to take that maturity out.

Okay. That makes sense. And then how early can you take out the $600 million?

Well, the $600 million is -- it consists of 2 pieces of debt, $250 million in March and then $350 million in December. And so they're bond offering that typically can't be prepaid materially before they are due, absent some yield maintenance payment. So it's just part of our business that, as an unsecured borrower, we typically have $600 million to $700 million of debt coming due in any given year. This is a typical year for AvalonBay, so it's not a particular concern. It's just part of the business of financing our company, and we typically have 2 pieces of debt that usually total about $600 million. So kind of a regular way year from our standpoint where we got the first part coming in March and the second one in December.

There are no further questions in the queue. I'd like to hand it back to Mr. Schall for closing remarks.

All right. Thank you. Thank you for joining us today, and we look forward to visiting with you in person over the coming months.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.