AvalonBay Communities - Q1 2023
April 27, 2023
Transcript
Operator (participant)
Ladies and gentlemen, and welcome to the AvalonBay Communities first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. Following remarks by the company, we will be conducting a question-and-answer session. You may enter the question-and-answer queue at any time during this call by pressing star one. If your question has been answered or you wish to remove yourself from the queue, press star two. If you are using speaker equipment, please lift the handset before asking your question, and we ask that you refrain from typing and have your cell phones turned off during the question-and-answer session. Your host for today's conference call is Mr. Jason Reilly, Vice President of Investor Relations. Mr. Reilly, you may begin your conference.
Jason Reilley (VP of Investor Relations)
Thank you, Doug, welcome to AvalonBay Communities first quarter 2023 earnings conference call. As a reminder, this call may contain forward-looking statements and actual results may differ materially. There's a discussion of these risks and uncertainties in yesterday's afternoon's press release, as well as in the company's Form 10-K and Form 10-Q filed with the SEC. I'll now turn the call over to Ben Schall, Chairman and CEO and President of AvalonBay, for his remarks. Ben?
Ben Schall (Chairman, President, and CEO)
Thanks, Jason. In terms of key themes for this quarter, I will start by reviewing our strong start to the year and describe why we believe our suburban coastal portfolio is particularly well-positioned. Sean will discuss our operating performance and relative strength as we enter the peak leasing season. Matt will comment on the evolving development market and detail the differentiated earnings stream that our developments currently underway are set to provide. Kevin will review our strong financial position and highlight the advancements at our industry-leading centralized service center we utilize to drive revenue and operating efficiencies. Turning to our presentation, starting on page 4, we continued to meaningfully grow earnings in Q1, with Core FFO increasing 13.7%. A significant part of this uplift is related to the roll-through of leases signed last year.
We also continued to grow rents during Q one with Like-Term Effective Rent Change of 4.1%. For the quarter, we exceeded Core FFO guidance by $0.05, with the $0.01 of revenue primarily attributable to better-than-expected collection rates from residents, $0.03 due to lower operating expenses, and $0.01 related to interest income and other items. In early April, we drew down the proceeds of our equity forward, which we entered into about a year ago at the spot price of $255 per share. A couple of items to highlight here. First, the initial cost of this $500 million of capital is in the low 4% range. As was originally intended, we've allocated this capital to development projects underway, which are projected to generate development yields of 6% or more.
When we talk about funding our underway development at yesterday's capital cost, this almost 200 basis point spread is what we're referring to and leads to significant value creation for shareholders as these projects stabilize. The second aspect of the drawdown of the equity forward is unique to the current environment in which we can earn outsized returns on cash. We weren't originally planning to draw down the equity forward until Q four of this year, but we executed it now and have invested the cash at 5% plus interest rates with extremely strong banking partners. On a net basis, the incremental income on this cash is projected to increase 2023 Core FFO by approximately $0.03 per share after factoring in the incremental shares outstanding.
We in turn increased our full-year Core FFO guidance by $0.10 to $10.41 per share at the midpoint. The breakdown is as follows: $0.02 in revenue, with the $0.01 from Q1 and then an additional $0.01 in Q2 based on slightly better rental rates. There's an assumed $0.02 improvement for operating expenses for the full year, which includes the $0.03 from Q1, partially offset by $0.01 higher OpEx in the second half of the year. Six cents of additional Core FFO, primarily from the interest income on the equity forward proceeds, as well as other cash management and slightly updated assumptions related to transaction timing. We did not adjust our same store guidance ranges at this point, we'll reevaluate those as part of our more fulsome mid-year reforecast.
Turning to page 5, regarding market fundamentals, occupancy and rent trends in our established regions are experiencing less volatility than in the Sunbelt regions. Part of this is a reversion to long-term trend lines. There are also underlying demand factors providing greater stability in our established regions, and 2 are worth noting. First, rent-to-income ratios are generally in line with traditional levels. As noted in chart 3, effective market rents in our established regions have grown about 10% over the past 3 years, with income levels more than keeping pace with rent growth. Second, with limited single-family home inventory and higher interest costs, the economics of renting are considerably more favorable than buying a home in our markets. The near-term supply picture also bodes well for the performance of our suburban coastal portfolio.
As shown on page 6, our established regions have meaningfully less new supply coming online this year, estimated at 1.6% of stock, as compared to Sunbelt markets at 3.6%. As shown on the right-hand side of this page, when we look at supply that is directly competing with our portfolio, levels are even lower at 1.4% of stock overall and only 1.2% of stock in our suburban markets, which comprises roughly two-thirds of our portfolio. In terms of our portfolio allocation objectives, we do still want to shift 25% of our portfolio to our expansion regions over time in order to diversify and optimize our longer-term growth profile. That has not changed.
In the nearer term, the relative trade of selling assets in our established regions to acquire assets in the expansion regions could be more attractive to us than it has been.
Kevin (CFO)
Allowing us to more profitably reposition our portfolio for future growth. With that, I'll turn it to Sean for more specifics on the operating backdrop.
All right. Thanks, Ben. Continuing with slide 7 to address market trends. Effective rents in the East and West are up about 10% from pre-COVID levels, but took very different paths to get to the same point. Rents on the West Coast, which have historically been more volatile than the East, declined sharply in 2020, escalated significantly in 2021 and the first half of 2022, and then softened consistent with seasonal norms in the back half of 2022. Rents on the East Coast experienced a more modest decline through COVID and have grown steadily since Q1 2021, with very modest seasonality in the back half of 2022. Consistent with historical norms, both coasts posted positive sequential monthly rent growth during the first quarter.
From a year-over-year growth rate perspective, the West Coast continued to decelerate during Q1, while the East Coast showed signs of stabilization, bolstered by slightly better growth in absolute rent levels since the beginning of the year. Moving to slide 8 to address trends in our same store portfolio. Key performance indicators were healthy during Q1 and remain so heading into the prime leasing season. Our availability was in the low 5% range during the quarter. Turnover, which was relatively stable during the quarter, was lower than Q4 2022, as the volume of residents leaving our communities to purchase a home declined by roughly 25% sequentially and about a third year-over-year. Occupancy increased about 30 basis points from Q4.
As noted in chart 4 on slide 8 and also in our earnings release, rent change improved from 3.7% in January to 4.9% in April. Additionally, our portfolio average asking rent has increased about 3.5% since the beginning of the year, up 4% on the East and about 3% on the West, and is slightly ahead of our original expectation. Renewal offers for May and June went out at roughly 7%. I'll turn it over to Matt to address development now. Matt?
Great. Thanks, Sean. Turning to slide 9. Our lease-ups continue to deliver outstanding results, laying the foundation for strong future growth in both earnings and NAV. We currently have 4 development communities that had active leasing in Q1, all of which started construction early in the pandemic before rents had started to rise meaningfully. As a general rule, we do not update our projected rents on lease-ups until we open for business and start to gain leasing velocity, at which point we mark those rents to current market levels. For these 4 deals, we have seen an increase of $485 per month or 17% above our initial underwriting.
This, in turn, is driving a 70 basis points increase in the yield on these investments to 6.7%, well above current cap rates and even further above the cost of the capital we sourced to fund these deals back when they broke ground consistent with our match funding approach. Looking ahead, we expect to start leasing on an additional 7 communities before the end of the year. We've not yet marked the rents on these projects to current market. In general, the locations in which they're located have seen similar increases in market rents since we started construction, providing a great opportunity for further lift in their results as well.
Shown on slide 10, with most of our development communities still early in lease-up or yet to open, we realized just $10 million of the total projected $142 million in NOI from the entire development book in Q1. This leaves over $130 million of incremental NOI to come as these assets complete construction and stabilize. As per the prior slide, that total NOI figure is also likely understated, given only four of those 18 total projects have been marked to market to date. Turning to slide 11. We look to future development starts, we are certainly starting to see shifts in the development market in response to the Fed tightening of the past several quarters. Among our competitors, many planned projects are being postponed or abandoned as third-party financing becomes scarce and costly.
Some of these dropped land contracts are starting to come back to the market with much lower pricing expectations. We've already been able to take advantage of several of these situations with recent additions to our development rights pipeline, and we do expect to see more as the market adjusts. The slowdown in starts, in turn, is starting to impact the construction market, where we are finally starting to see some retraction in subcontractor trade pricing after three years of outsized increases. An environment where capital is scarce and certainty of execution becomes more critical, both to land sellers and subcontractors, plays well to our strengths as both a developer and a general contractor, and we have traditionally seen some of our most profitable investment opportunities when these more challenging cyclical conditions have prevailed.
With that, I'll turn it over to Kevin for an update on the balance sheet and the CCC.
Thanks, Matt. Turning to slide 12. As we look ahead, our balance sheet remains exceptionally well positioned to provide financial strength and stability while also giving us the flexibility to continue funding attractive growth opportunities across our investment platforms. In this regard, we enjoy low leverage with net debt to EBITDA 4.6 times, which is below our target range of 5 times to 6 times. Our interest coverage ratio and unencumbered NOI % are at near record levels at 6.9 times and 95% respectively. Our debt maturities are well laddered, with a weighted average years to maturity of about 8 years.
In addition, as disclosed in our release, we also enjoy tremendous liquidity of about $2.8 billion today, with no borrowings under our two and a quarter billion dollar unsecured credit facility and an additional half billion dollars from just having settled our equity forward that we originated a year ago. As a result, we don't need to tap the capital markets for an extended time, and we are well positioned to lean into our balance sheet to take advantage of future investment opportunities that may emerge in our markets over time. On slide 13, we highlight our recently announced agreement to provide back-office financial administrative support to Gables Residential's portfolio of 25,000 apartment homes from our centralized customer care center, which we established in 2007 to create operating and scale efficiencies in supporting our own portfolio while enhancing our resident customer experience.
At the outset, I want to acknowledge the efforts of the entire AvalonBay team that brought this business relationship to Gables across the finish line. We highlight this achievement for several reasons. First, because we are genuinely excited to be able to extend these services to a highly respected multifamily company such as Gables and to its residents. Second, because this agreement demonstrates the appeal of the innovative capabilities that we've created in the 16 years since we established the CCC. Third, because we have embarked on extending those capabilities in a way that allows us to create additional value for AvalonBay shareholders by offering these support services to other institutional multifamily owners now and in the future.
As a reminder, we are not offering property management services under our agreement with Gables, nor do we intend to do so, as all business and operational decisions related to AvalonBay's and Gables portfolios will continue to be managed separately by each company. Rather, we are providing back-office financial administrative support to Gables. Finally, from an economic and guidance perspective, while we are not disclosing the specific terms of our agreement for confidentiality reasons, the near-term earnings accretion from this agreement is relatively modest and was included in our initial outlook given back in February 2023. With that, I'll turn it back to Ben for closing comments.
Ben Schall (Chairman, President, and CEO)
All right. Thanks, Kevin. page 14 summarizes our key takeaways and focus areas. We're pleased with our start to the year, expect our portfolio to outperform as we look ahead, and are also mindful that these are the types of environments, particularly an environment in which capital is generally less abundant in the industry, to selectively take advantage of opportunities in order to create value for shareholders. With that, I'll now ask the operator to open the line for questions.
Operator (participant)
Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Eric Wolfe with Citi. Please proceed with your question.
Nick Joseph (Global Head of Real Estate Research Super Sector and US Real Estate and Lodging Team)
Thanks. It's actually, Nick Joseph here with Eric. You know, Kevin, you mentioned the agreement announced last week with Gables. Recognize you can't talk too much on the specific terms of that. You know, if you could talk more broadly about, you know, is this a one-off deal? Are you looking to scale this business? What, what sort of margin and economics could you derive from it? You know, then I know this isn't a third-party management contract, would that be of interest as well for other property owners?
Sure. Thanks, Nick. I'll start, others, Ben or Sean may wanna chime in. You know, in terms of the go forward view of this, we're certainly excited to have this agreement in place. Without getting into the specifics of the economics, I mean, the impact is at the moment fairly modest if you just think about the relative size of our business and our main value creators outside of operations and development and so forth. We are excited to have it in place. It is accretive. There are, you know, from a contribution point of view, healthy margins for sure that make this worth the while.
As to the future potential, you know, we're certainly hopeful and inspired to do more business like this, but we are not proactively looking for that new business right now. We've just completed this transaction, of course, with Gables. But we do hope, looking ahead to be able to do more business like this over the time. You know, we think it does make sense for us to do it because, over time, because it allows us to scale and more fully invest, over time in an important capability that allows us to further differentiate ourselves from our peers. There's a lot more I could go into there, but maybe I'll just pause there. I don't know if Sean or Ben have anything else to add.
Ben Schall (Chairman, President, and CEO)
Yeah. I think that was well put. I'll add a couple of things, thanks for the question. You know, Nick, I would connect for you this step as the kinda next continued evolution, both of our operating model journey, but as well as the role that the CCC and centralized services are playing for us. Part of the appeal, you know, in addition to the revenue and profit opportunity with Gables, you know, we are increasingly handling more services at least, at least in part, you know, at a centralized way. This relationship allows us to make continued investments, think about technology, about process, people, that we think can then accrue to the larger platform here at AvalonBay.
It's a nice next step in our overall operating model journey, and, we're excited for this first step and potentially future clients going forward.
Nick Joseph (Global Head of Real Estate Research Super Sector and US Real Estate and Lodging Team)
It's Nick. Maybe just to follow up there. You said that the initial sort of impact was included in guidance and wasn't, you know, frankly that large. I guess, you know, how many units would you sort of have to manage before it would become a sort of more material part of your, of your earnings stream? Just to make sure that I understand the last part of your answer. I think you're effectively saying that you can sort of invest in your platform, invest in technology, and even though that the financial contribution above that might not be that big, you're effectively allocating those costs to other parties. Is that the right way to think about it, or did I misunderstand that?
Yeah, Eric, let me kind of take a stab at a little bit. You know, I can't really give you, I mean, an answer what number of units have to be under this kind of an arrangement for it to be material. Partly depends on what you think is material, I guess, to some degree. I think the way we look at it is from a slightly different perspective, not the immediate financial impact, but it's kind of been alluded to what this sort of thing does for us to continue our journey to create the leading, you know, operating platform in the business. You know, we're in our seventeenth year with this experience, and I think that we're pointing this out probably for two reasons.
One, you know, to your question about what this can do, the more you do this for not only yourself but for others, the more you can, you can reinvest in that business, create a better platform in and of itself over time. Even for our own sake, when we started, we weren't at, you know, our current size of whatever, 80,000 apartment homes when we started this in 2007. We were quite a bit smaller. It has gotten better itself over time. We've really fine-tuned and honed the CCC such that it's substantially better than it was even back in 2007 and 2010. It has done a number of things you can see on the slide here for us over time.
I mean, one thing it did is when we had the Archstone transaction, we were able to add 20,000 units in 30 days. That bespoke that speaks to sort of the ability to scale quickly when you've got that capability centralized in-house. The other reason why we think it's worth highlighting for you, apart from, you know, the fact that it is a relatively modest financial significance today, is the fact that, you know, a highly respected institutional multifamily owner such as Gables, you know, by entering into an agreement with us after its own due diligence to us and our center does provide external validation of the strength and the economic value of the capabilities we've created at the CCC over the past 16 years.
We think that's something that's worth emphasizing, to our investors, given the increasing importance of generating alpha in our operating platform through innovation, which we're continuing to do across the entire business, at this point.
Steve Sakwa (Senior Managing Director and Senior Equity Research Analyst)
All right. Thanks for all the detail.
Operator (participant)
Our next question comes from the line of Steve Sakwa with Evercore. Please proceed with your question.
Steve Sakwa (Senior Managing Director and Senior Equity Research Analyst)
They were pretty back-end loaded for you guys this year. I'm just curious, given Matt's comments about costs starting to come down, but the economy's potentially weakening and rent growth is slowing, you know, how those potential starts are kind of shaping up for you and, you know, I guess, are you looking for higher hurdle rates today and maybe in the back half of the year than you were, say, six months ago?
Sure. Hey, Steve, it's Matt. Yeah. Our target yield or going-in initial return on new development has been rising really over the last year as we saw, you know, cap rates rise and cost of capital rise, both debt and equity. You know, our target yields were probably in the mid-5s, mid- to high-5s last year, and now they're kind of in the mid-6s, low to mid-6s, depending on the geography and the risk associated with the deal. You know, our start activity for the year, it is probably a little more back-half weighted just by the way these deals tend to pace out.
Also we do think that as time goes by, we're gonna see more buyout savings on our hard costs, so that probably plays to our advantage a little bit. We can play that a little more aggressively given that we act as our own general contractor, 90% of our development, which is a little different than I think, you know, many others. You know, when I look at our development starts that are slated for this year, that's about where the yields are. They're probably in the low 6s. You have to kind of look at the geographic mix and the risk profile of those deals, you know, to kind of weigh the profitability of each one, which is what we do.
Again, you know, we've been pretty consistent in saying we're continuing to look for that 100-150 basis point spread on new starts. Frankly, the stuff that we started last year and the year before, the spreads are well wider than that, which was, you know, kind of highlighted on the slide.
Yeah. I guess maybe to ask it maybe a little differently. I guess, what risk or what probability would you put that you don't hit the starts number for a host of reasons? Do you feel reasonably confident that costs are coming your way, and even if rent growth slows a little bit, that, you know, you're still able to kind of achieve the returns you need to kind of put that, you know, put those starts into the ground?
I'd say I'm pretty confident about it. When I look at the starts for the year, we started 1 in the first quarter. We have 1 that we've just started that'll be a 2nd quarter start, a 3rd one where we have all of our final budgets, and it's been approved through our investment committee. That's, you know, 3 of the 7 or 8 starts we have planned for the year. When I look at it, the other ones, I'm feeling pretty confident that we should track that unless something very unexpected happens.
Ben Schall (Chairman, President, and CEO)
Steve, maybe a little bit, a little bit more to your question about, you know, how is our development approach changing. You know, we do have a fairly fulsome development rights pipeline. Matt's, you know, Matt's talking about our nearer-term starts, which are, you know, fairly baked at this point. The next set of deals, right, in that pipeline over the next couple of years, you know, part of what we're going through right now is, you know, very proactively, effectively reworking those deals, right, to reflect, you know, today's environment. Given, you know, what's happening with some of our competitors, some of the, you know, formerly active developers there, you know, sellers are starting to increasingly acknowledge that the environment has changed. That's leading to land repricing.
That's leading to more attractive terms. You know, it's allowing us to control, you know, high-quality real estate, you know, relatively limited upfront costs. All those dynamics, you know, continue to run in our direction.
Steve Sakwa (Senior Managing Director and Senior Equity Research Analyst)
Okay, great. Maybe just one question for Sean on, you talked about, I guess, the renewals going out around 7%. I know you don't provide a split between new and renewals, and you kind of just provide the blend. You know, April was a nice uptick. I guess given that we're going in the spring leasing season, you know, how much confidence do you have that, you know, kind of the May and June numbers might look like April? Could they be better? I guess, what markets are you seeing the most strength and weakness?
Yeah, Steve, good questions. Maybe I'll provide a little of high-level commentary as it relates to renewals versus new move-ins and a little bit about trends. In the first quarter, what I'd say is, if you look at the blend there, renewals were kind of in the high 5s and new move-ins were sort of in the mid 2% range. Then in April, renewals were sort of in the mid 5s, but new move-ins, just given the seasonality of rents, has kind of moved up into the mid 4s, just to give you some perspective there. Our expectation is that, you know, consistent with what we talked about on the first quarter call, that we would see the best rent change kind of in the first quarter, and then it would begin to decelerate.
You know, that's dependent upon what happens with growth and asking rents as we move through the year. Our expectation is still consistent with what we communicated in Q1, is that we would see Q1 perform well, and then we would start to see some moderation, both in rent change and in overall rental revenue growth. That's still the expectation. Part of that you're gonna have to keep in mind is, you know, on a year-over-year basis, you know, the headwind associated with the reduction in rent release becomes more material as you get into the second and third quarter. That will create some moderation from a rental revenue growth perspective.
As it relates to rent change, based on what we know today, I would say, as you get further into the second quarter, you know, we would expect that to begin to moderate, more so than what obviously we saw in the first quarter.
Great. Thanks. That's it for me.
Operator (participant)
Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.
Austin Wurschmidt (Senior Equity Research Analyst)
Great. Thanks, everybody. Going back to Gables for a minute. I guess, you know, I'm curious what sort of precipitated the discussions with Gables and whether or not you pursued, you know, any other, you know, potential portfolios to add to the CCC platform. While understanding you're not handling the property management, could we see these partnerships lead to a feeder for future acquisitions?
Ben Schall (Chairman, President, and CEO)
Yeah, Austin, you know, on the first piece, short version of it, you know, there were some existing relationships, you know, across the firms, which sort of started the conversations. We then went through a pilot with Gables on a smaller portion of this portfolio to test it both for them and for us. On the heels of that, we both decided to proceed, given the benefits that were being realized. Then to your last piece, no, this is not a, you know, acquisition, you know, type of approach or angle here. This is much more, you know, focused on operational benefits.
Austin Wurschmidt (Senior Equity Research Analyst)
Understood. Going back to development. You know, I recall, you know, some tables you've provided over time showing kind of IRRs on development. Certainly, you know, recall coming out of, you know, the GFC, there were some, you know, really attractive returns over time. Given what's going on with the availability of bank financing, you know, the more attractive land and input costs, I guess it seems like a unique opportunity today. How are you thinking about, you know, ramping development, as quickly as you can to maybe capitalize on, you know, what's going on today?
Hey, Austin, it's Matt. I can speak to that a little bit and then Ben may want to as well. The good news is we're controlling a lot of really good real estate right now for very modest upfront investment. We've kind of been operating the platform in anticipation of a potential opportunity emerging like this really for the last couple of years. We've added quite a lot to our pipeline over the last year or two. We're controlling, I think 40 or 41 potential deals, with, you know, pretty modest land on our balance sheet. I think it was $180 million. At the end of the quarter, the total investment, including capitalized pursuit costs, is only around $235 million or $240 million.
You know, a lot of those options, you know, are not yet at the point where we have to make a decision about, are we gonna close? As Ben mentioned, there are some conversations going on with some sellers about these deals were struck in a different environment. I think we're well-positioned. I wouldn't say it's quite there yet. It's not like development economics are screaming, you know, value yet. You know, we kind of have to see where asset values settle out. That's the other side of this, is what's going on in the transaction market, which is still, you know, pretty muted deal volumes.
We do have the ability, you know, to ramp it up if we see that emerging kind of later this year, particularly when we look to next year. The other thing is, you know, as I mentioned, we are starting to see the moderation in hard costs, particularly in some markets where start volume has come down. There are other markets where, you know, that's coming, but it's not here quite yet. We're watching that very closely every day. You know, that's the other opportunity that we will see. You know, there's some markets where we think it's gonna come down more. There's other markets where it's gonna take a little more time. Over particularly the next four or five months, as we have more deals out in the market actively bidding.
Sean (COO)
You know, we'll have a much better sense for where hard costs are going. What we're finding today is if you have a job that you're gonna start in a year and you're showing preliminary drawings, you're not getting particularly attractive pricing. If you have a job that's truly ready to go, you've got a permit in hand, subcontractors can see some early site work, and they have a hole in their production schedule, that's when you're seeing, you know, the more aggressive bid.
Ben Schall (Chairman, President, and CEO)
Two areas I'd emphasize. You know, one, just on the point of, you know, our relatively limited landholdings. When you look across our peer set, you know, our landholding numbers is below a number of our peers, you know, despite kind of our ability to execute at higher development levels, you know, throughout cycles. We've got, you know, some room in there. The second part is in the environment right now, we recognize we need to be selective about that. In places, you know, could be markets we know really well, have nearby operating communities, places where we can bring our platform into, we're finding opportunities there. In our expansion markets for some high-quality land, deals that are falling out of contract, ability to step in.
You know, there's been, you know, a couple of situations where land is getting repriced at, you know, 30%-35% where it was priced nine months ago. If we can step in and control that land with relatively limited cost, we look out a couple of years, and we think that'll accrue, you know, some significant benefits.
Operator (participant)
Thanks for all the detail. Our next question comes from the line of Adam Kramer with Morgan Stanley. Please proceed with your question.
Adam Kramer (Vice President and Equity Research Analyst)
Hey, guys. Thanks for the question. I just wanted to ask about bad debt. Looks like 500 basis points on kind of a gross basis in the quarter. I'm just wondering, you know, and I know you give a really helpful kind of market, by market breakdown there. Just wondering kind of how you're thinking about gross bad debt over the next few quarters. Is there a chance this could be kind of a, you know, some sort of tailwind going into next year if this does return to maybe it doesn't even return all the way to kind of normal pre-COVID levels, right? Just, you know, you get some year-over-year improvements on that number.
Sure, Adam. This is Sean. Just a couple of comments on that. First, as it relates to bad debt during the quarter, the sort of uncollectible portion from our residents as we think about a sort of underlying bad debt, you know, came in around 3%, which is about 22 basis points better than what we anticipated. That's the penny that Ben basically spoke about in terms of what we picked up in the first quarter. Moving forward, for the balance of the year, we're expecting Q2 through Q4 to average roughly 2.7%, starting at about 3% in Q2 and sort of trending down throughout the year in terms of that underlying sort of bad debt percentage. That's how the sort of trajectory looks as you move forward.
You know, different markets are doing different things. We saw some nice improvement in New York, the Greater New York region in the first quarter. It was responsible for about half the variance in the quarter, about a third in Southern Cal, kind of sprinkled across the other markets as well. Overall, we were pleased with what we saw in the first quarter, but, you know, doesn't necessarily make for a trend just yet. We'll be able to revisit that mid-year once we have a better sense for how things are playing out as we move through the second quarter as well.
Great. That's really helpful. Appreciate the clarification there on the 300 basis points. I was wrong on my higher number there. Appreciate that. Just as a follow-up, is there a chance you can kind of have a, I guess, kind of more of a one-time in nature, but, you know, kind of a benefit from residents who kind of true up, right, who not only kind of get current on rent but also pay prior periods that they hadn't, that, you know, that they were delinquent on and hadn't paid? Is it possible you could kind of see a one-time benefit from that?
Adam, what I'd say is anything's possible. I don't think that is probable based on the resident behavior we have seen thus far. I would not anticipate that to the extent that we all of a sudden, you know, cash started raining in from people who haven't paid. You know, that's not necessarily what we've expected in our guidance. It would be a bump. I would not expect that as a likely outcome.
Got it. Really helpful, guys. Thanks for the time.
Yep.
Operator (participant)
Our next question comes from the line of Chandni Luthra with Goldman Sachs. Please proceed with your question.
Chandni Luthra (Vice President, Equity Research Analyst)
Hi. Thank you for taking my question. Could you talk about concessions? You know, what are you seeing across your markets, particularly on the West Coast and perhaps even on your expansion markets? How has the trend been in the last 90 days? You know, have things gotten worse? Thanks.
Sure, Chandni. This is Sean. Happy to answer that. First, in terms of Q1 activity across all the leases we signed in the quarter, which was about 16,000 leases, the average concession was less than $200. Very, very modest. Obviously, you know, more concentrated in certain places. What I would tell you is about 30% of the concession volume that we experienced in the quarter in terms of leases that were captured, were spread across Seattle and the Bay Area, particularly in San Francisco. That's where most of the volume is, frankly. If you look at concessions over the last few weeks, just to give you a little more recent data, you know, less than 10% of the transactions that we're executing are seeing a concession.
Again, it's more concentrated in those two areas, San Francisco and the Pacific Northwest, where in those markets, you know, you're.
30%, 40%, 45% of leases depending on sub-market are getting some type of a concession. Those are the two places where we're focused on it the most, in terms of moving volume. It's not a significant issue elsewhere.
Noted. Then, you know, as a follow-up, last quarter, you laid out, cap rates in the mid to high fours range. What are you seeing right now? You know, at what levels would you think that it would become appealing enough for you to dive in?
Yeah. Hey, this is Matt. I guess I'll speak to that one. What we've said, cap rates and then our own trading activity, I think what we're seeing is that there's a bifurcated market. You know, there are a lot of assets that are not trading. Those that are, you know, I would kind of put them into 2 buckets. You know, kind of the haves and the have-nots. The haves, which is highly desirable assets in locations, either markets or sub-markets that, you know, are on a lot of investors lists. For growth, you know, those assets are still trading in the mid-4s cap rates. I think, in fact, if you'd asked me 90 days ago, I probably would have said high 4s.
We do have some assets actively in the market today that hopefully will close here in Q2. You know, we have at least one that's in that, you know, haves category, I would say, that's, you know, probably more of a mid-fours cap rate. Now when I say cap rate, I'm not necessarily talking about the yield. I'm talking about kind of the market convention, the way they would quote a cap rate, which includes a management fee and a CapEx allowance and the buyer's property taxes. The other side of the equation is the assets that maybe have a little bit less of interest that have a less deep pool of bidders. There, you know, the have-nots, you might have one or two that are seriously interested.
There I'd say cap rates are probably more like low fives. You know, call that range anywhere from four and a half to five and a quarter. We may have an asset or two that's in that latter category as well, that's currently working in the market. As it relates to our own asset trading activity, you know, our plan for the year was to be net neutral, but we started last year saying we were gonna sell first and buy second. That to the extent we're trading out of assets in our established regions into our expansion regions, we would know what the cap rate and pricing was on the asset that we were selling, which in turn would inform our appetite on the buy side.
Now we do have a couple dispositions that are in process. We are gonna be looking here over the next quarter or two to reinvest that capital into potentially some acquisitions in the expansion regions. You know, we would expect, I don't know anything's gonna close on the acquisition side in Q2, but, it is our plan to kind of resume that forward trading.
Appreciate all the color. Thank you.
Operator (participant)
Our next question comes from the line of John Pawlowski with Green Street. Please proceed with your question.
John Pawlowski (Managing Director, Head of Residential Research)
Thanks for the time. I just wanna follow up on the conversation around the state of the development market and the bullets you lay out on page 11 of the investor deck. Ben, I know you threw out like a 30%-35% reduction in land value comps. Is that representative of the market right now? Like, is the volume of these broken sites meaningful right now, or we're just getting started on the repricing?
I think we are, we are still early. There are more sellers than less, who are effectively willing to give current contracts sort of time, right? Extend out and see where it heads. We are, you know, starting to see some situations where deals are breaking. The two situations I was referring to, you know, had buyers who were relatively motivated. When they're looking out on the landscape, this goes to Matt's comments, you know, about our ability to execute, our, you know, that we don't need to rely on construction financing, right, to execute projects today. Those buyers are gonna, on the margin, you know, look to somebody like AvalonBay to contract to, contract with. That's, you know, I'd say that's the kind of the general environment.
Our expectation is that there's, you know, more to come. You know, starts we're expecting to be down substantially this year. You know, a big part of, you know, underlying all this is you look out at the private market environment and, you know, the merchant builders who, you know, have been very prolific. You know, their ability to get capital for new construction deals is just very challenging. The cost of that capital has also, you know, expanded out significantly, right? So, you know, on a relative basis, this is one of, you know, one of the parts that we're starting to see. While our cost of capital is, has gone up, and our cost of debt borrowing has obviously gone up from the 2% range to a 5% range.
The private market, you know, players, if they can get construction financing, you know, those senior mortgages are at 7.5%-8.5% now, right? That's before putting on some preferred equity or mezz, and that's before getting to equity. Our relative advantage in a period like this, we think is, you know, we're relatively well-positioned. Selectively, you know, we're gonna start stepping into some of these types of opportunities.
Okay. On that point, I'm just curious if you guys have any internal theories on why we haven't seen a more precipitous fall off in permanent and start activity? I mean, the credit market's been volatile for a while, and they've been tightening for a while. I know they're down a little bit more in your markets, but I'm just curious if you guys have any internal views on why we haven't seen the relief yet in the permanent and starts data?
Yeah, John, it's Matt. It's I ask Craig Thomas, our Head of Market Research, that question every month when the permit numbers come out. It is a little bit of a head scratcher. I mean, I think in the fourth quarter, a lot of that was probably capital that was committed and had been lined up. Then a lot of the permit and even start activity I've come to learn is not kind of what we would think of as our product. As much of half of it is other things. Affordable housing production is actually running pretty high right now. There was a lot of one-time money, through, you know, some of the COVID relief funds, which has gotten out there.
That could be inflating it a bit. In some cases, people may be pulling permits and then getting bids and not liking the numbers they're seeing. It is a little bit of a head scratcher, I would agree with you.
John Kim (Managing Director, Equity Research)
Okay. Thanks for the time.
Operator (participant)
Our next question comes from the line of Jamie Feldman with Wells Fargo. Please proceed with your question.
Jamie Feldman (Managing Director, Head of REIT Research)
Great. Thank you. I guess, as you think about potential acquisition opportunities, do you think there could be some portfolios or platforms out there for acquisition, or you think it'll be kind of singles and doubles on the land side or on the asset side?
Hey, Jamie, it's Matt. I would expect it's probably more the latter. You know, usually portfolio transactions, unless they've bought a portfolio and put a lot of short-term debt on it all, which, you know, would be pretty unusual. Usually sellers selling portfolios, it's more opportunistic and, you know, those things happen when, you know, there's an abundance of capital and, you know. Go back 3, 4 years, there was a kind of a portfolio premium. I don't. You know, today, we talked about, I think on the last call, there's a portfolio discount, just given, you know, given, the capital markets. We haven't heard of anything like that, and I guess I'd be a little surprised.
Okay. Thank you. As you think about the suburban versus urban assets, you know, whether it's the April data or your views on what's to come in spring leasing, any thoughts on how they're performing versus each other and, versus your expectations and what we can see going forward or expect going forward?
Yeah, Jamie, it's Sean. What I'd say is that, yeah, generally, you know, things were in line. The rent change that we experienced in Q1, it's gave out 10 basis points better than what we anticipated. If you double-click through that and look at urban and suburban, again, very, very nominal variances. You know, certainly as we move forward, particularly if we get into an environment that is weaker from an economic standpoint, we do feel very good about our suburban coastal portfolio, given the exposure to new supply is quite a bit less than what we're anticipating in urban environments. You know, I would say, you know, kind of as expected right now, but as you look forward, depending on how the environment unfolds, we probably pivot more towards the suburban assets outperforming.
Suburban assets outperforming? Did I hear?
Yes.
Okay. All right. Great. Thank you.
Operator (participant)
Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.
John Kim (Managing Director, Equity Research)
Hi. Thank you. I know you talked a little bit about Gables already, I was wondering how big you think this revenue opportunity could be as far as offering these kind of back office support functions for other operators.
Hey, John. We, yeah, we haven't sized it yet at this point. You know, we went through the pilot, as I described, wanted to get our first third-party client fully implemented. You know, we get a little bit further out, we'll start thinking about the profile of additional clients and even further down the road, thinking about where it could come. We're not at that stage yet.
Okay. Where do you see the most attractive opportunities, whether it's the broken deals that you talked about in the presentation versus mezz or other ground-up developments?
Yeah. I'll hit maybe on 3 areas, and Matt can add in because, you know, he and his team are living and breathing this. First is the development side, you know, which we've talked about. Second is on acquisitions, and this gets into we do think our relative trade, selling out of the established regions and into the expansion regions is more attractive today. We've got a couple assets now that hopefully we will sell over the next couple of months. When we look to deploy that capital, you know, the types of situations we can be looking at are, could be deals in lease up, right, which are harder to finance for most buyers today.
Could be a place where we can bring our platform to bear for a particular reason, you know, nearby asset. You know, generally in this type of environment where we're not doing a ton of buying and selling, you know, on the buy side, we're gonna be looking for places where we can add and create some incremental yield on those acquisitions, you know, over the first couple of years. Then the third category that I'd highlight goes, you know, broadly to theme in a world where capital is less abundant. We believe opportunities will present themselves to us, but it also makes our capital more attractive, right?
You think about our programs, the Developer Funding Program, our Structured Investment Program, and we look out over that book of business, and we think we'll have the ability, stronger sponsors, stronger quality real estate, better returns. That's another place where we can selectively put capital to create value.
Very helpful. Thank you.
Operator (participant)
Our next question comes from the line of Joshua Dennerlein with Bank of America. Please proceed with your question.
Ben Schall (Chairman, President, and CEO)
Yeah. Hey, everyone. Thanks for the question. I'm gonna go back to the opening remarks about the development pipeline and how you don't mark-to-market the yield until they're in actively lease up. Is that implied at the potential uplift from those seven projects that haven't gone into lease ups yet, but we'll go into it later this year, not included in the guidance range?
Yeah, this is Matt. It's the guidance for the year, most of those deals are gonna really impact earnings in 2024 and 2025 because they're not gonna start leasing till later this year. We do have lease up budgets on those deals, which is reflected in the guidance, which does reflect higher rents than, you know, kind of what's shown on the, on the development attachment. The real lift there isn't, you know, till 2023, it's 2024.
Okay. That's super helpful. One follow-up to that, the 70 basis uplift for these said projects you have currently with the updated projections, is that a fair uplift at this point for those 7 projects?
I would say that, you know, that was kind of the point of including the slide, yeah, that, you know, if the 17% uplift in rent is, you know, roughly comparable to what we've seen across our entire same store book over that time, you know, if those seven lease ups experience similar kind of, rent growth to kind of what we've seen broadly over that time frame, then, yeah, I mean, we would be expecting to see the yields on those deals rise by like, you know, roughly similar amount.
Okay. you mentioned, like, if you could start a project today, you're seeing good construction pricing bids, versus, like, if you had something that might not start for a year, you're not seeing that. Like, what's driving that dynamic?
I think it's just certainty. I mean, you know, when you ask somebody to give you a price on a deal you're not gonna start for a year, it's just, you know, they're just giving you an estimate number. It's not. You know, you can't take that number to the bank anyway. You don't even, you know, you don't have final construction drawings, so, you know, you're not contracting at that number. It's more of an allowance.
It's natural for people to say, "Well, you know, here's where I did the last job at." When you have a job that's ready to go and it's like, "I need your guys on site in 90 days," that's when some subcontractors are busy and don't need the business, and, you know, will not give you a number that's any better than the number they would have given you 90 days ago. There are others where, you know, as I said, maybe they were working on five jobs, they only see two coming up, they have availability, and they're essentially willing to lean into their margins, which got very inflated over the last couple of years when all these subcontractors were stretched beyond their capacity.
Okay. Thank you.
Operator (participant)
Our next question comes from the line of Haendel St. Juste with Mizuho. Please proceed with your question.
Haendel St. Juste (Managing Director and Senior REITs Analyst)
Good afternoon. A couple quick ones from me. I guess first, a question on the equity that you pulled from your forward investment with the bank with the 5%. How much is that? Can you request to withdraw it at any time at your option? What's the longer term plan for that capital? Is it ultimately earmarked for development funding, or would you also consider acquisitions or, or other DCP? Thanks.
Yeah, sure, Haendel. This is Kevin. Well, the amount that we pulled down the equity for was $490 million. Roughly speaking, that's the amount that we incrementally invested, and we did so in latter time deposits with banking partners that are very highly rated, known to us, part of our credit facility syndicate. You know, the latter time deposits are essentially mapped to when we think we will be pulling that capital down or need the cash in order to reinvest into development. That's how we've structured that set of cash investment activities so far. We retain, you know, liquidity, you know, to fund development from that source, as well as liquidity in our line of credit. We of twenty-quarter billion where there's nothing drawn.
We have plenty ability to respond to new opportunities that may, you know, justify an earlier deployment of cash, either from the cash we've invested or from our line of credit.
Got it. Thanks, Kevin. That's helpful. Ben, maybe one for you. For those of us who followed AvalonBay for some time, the recent changes you've made, entering the mezz lending business, delving deeper into third-party services, and even a more proactive cash management strategy, capitalizing on the environment to generate some incremental FFO that you outlined. I guess I'm curious, how should we be interpreting these changes and what they suggest for Avalon's longer term strategy as you evolve the platform? Curious what else you're considering, what else is top of mind as you navigate the company forward. How did you think about the trade-offs for perhaps growing the revenue, but maybe adding a bit of complexity and maybe a lower multiple as well? Thank you.
Ben Schall (Chairman, President, and CEO)
Yeah, I appreciate that. I'd start by emphasizing, I mean, this is about this executive team, right? We're the ones setting the course for this business over the coming years. We're looking for ways to continue to drive earnings, profit, and ways to differentiate that we think can, you know, lead to long-term value creation. A number of the recent announcements, you know, including the DFP and SIP, you know, there have been versions of this that have existed, you know, elements that we were working on. We've decided as a team in certain play areas where we think we can accelerate that activity. You've seen that come.
You know, in terms of our, you know, strategic focus areas, we've communicated this externally and, you know, continue to emphasize it internally.
First is, you know, our operating model transformation, and driving margin, and value to customers through that. Second is optimizing our portfolio as we grow, and part of that is our movement to the expansion markets and also, you know, looking to prune assets out of our established regions. Third is leveraging our development DNA in new ways, and so that gets into, you know, our programs like our DFP and our SIP. We don't talk a lot on this call, but particularly for certain investors it matters and for associates, and increasing our residents, our leadership in ESG. The fifth one we always drive home, and this is what's special about here, is people and culture.
That's, you know, those are what are driving us as we look ahead and believe will create outperformance for us.
Chandni Luthra (Vice President, Equity Research Analyst)
Appreciate the thoughts. Thank you.
Operator (participant)
Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Alexander Goldfarb (Managing Director, Senior Research Analyst)
Hey, good afternoon. Two questions here. First, on the expansion market, you know, can you just remind us where you're targeting, you know, urban versus suburban, just from some of your peers who have spoken and then speaking to the private operators in the Sun Belt? It definitely seems like the supply competition is much more concentrated in the urban areas, whereas those out in the suburbs tend to be less impacted. Just sort of curious, as you look at the Sun Belt, how you're framing out your exposure?
Yeah. Hey, Alex, it's Matt. You know, we don't necessarily start with a particular kind of goal in mind. Really what we're looking for is the best risk-adjusted return, and we are taking it as an opportunity in these expansion regions to construct a portfolio from the ground up. What we found over the last couple years as we've started our investment phase is we've felt like the supply-demand fundamental and the pricing of the assets was just more attractive in the suburbs. If you look at our Denver portfolio, the assets we bought there, they've all been suburban assets. We did develop the 1 deal in Reno to a very high development yield, but, you know, we're gonna supplement and ultimately have a diversified portfolio.
You know, we tend to be finding better value in the suburbs, not just better supply-demand fundamentals, but also better pricing. You know, until recently, probably, higher cap rates as well. Same thing in Southeast Florida. If you look at where we've bought in Southeast Florida, it has tended to be more, you know, we bought in Boca, we bought in Margate. We just recently bought a couple of different assets, in Broward County. You know, we've tended to find better value there, and we are very mindful of that as we invest. We may develop a little bit in urban areas if we find a really strong opportunity, but a lot of our development pipeline, is also suburban.
Right now in Denver, we have the one deal under construction in Westminster, and then we have one deal in Governor's Park, which is more of an urban sub-market. You know, these Sun Belt markets, in the first place They're not as urban in the first place. I don't, I don't know that there is an urban sub-market in all of Raleigh-Durham, for example, maybe downtown Raleigh, and, you know, we're not looking there. You know, in Charlotte, all of our development has been in the suburbs. We did buy the portfolio in the South End, which is kind of the one urban sub-market there that is very, very dynamic. I'd say that's the exception. Generally speaking, you're right.
It is maybe a little bit of a different strategy than the way some others have pursued it. It's also kind of just more the way the lifestyle is in a lot of these Sun Belt metros. They don't necessarily have the same transit orientation. They don't have the concentration of employment. A lot of the reason people are moving there is frankly to have more space and have more of that suburban lifestyle.
The second question is, just given what's going on in the insurance market, are you seeing more, I don't wanna say opportunity, but are you seeing that it's financially better for you to take on more self-insuring your portfolio to reduce the cost? Or maybe especially as you partner with developers, where you guys are self-insuring more to try and, you know, mitigate some of the, pretty, you know, the sizable premium jumps or the, ability or inability to get certain carriers or reinsurers?
Alex, this is Kevin. Maybe I'll just respond strictly to the insurance aspects of this, and Ben or Matt may wanna respond to the development implications. Yeah, you're spot on with respect to highlighting, you know, the self-insurance aspects and really the relative strength of well-capitalized REITs and particularly, you know, residential REITs that absorb this risk as opposed to passing on to commercial tenants. You know, having that capability to self-insure has been a helpful thing in recent years as the insurance market has become increasingly challenging. I'm not gonna get too specific about what's going on with our property renewal now because we renew on May 15th, so we're actually in the market for that.
We have in the past, I'd say 7 or 8 years, used our wholly-owned regulated captive insurance company in order to be strategic in these property renewals to mitigate bearing the full impact of market increases in property insurance premiums to the extent individual insurers have become inefficient in their pricing. That has helped keep our insurance costs in the property program to a far, far lower than market rate of growth. For example, last year, total insurance costs, which property is the biggest piece. Grew down by 4% or 5% last year. We do expect a higher level of growth this year in the property program.
As we look at this year's renewal, we're likely to be willing to take on more self-retained risk through our captive in order to mitigate, you know, inefficient pricing from some of the market participants should that be necessary.
Operator (participant)
Thank you. As a reminder, star one to ask your question. Our next question comes from the line of Amy Previte with UBS. Please proceed with your question.
Amy Probrant (Equity Research Analyst)
Hi. Turnover was up from the 2022 lows, but remains low on a historic basis. I'm wondering, over the next couple of years, do you think we trend back toward a more historic level, or has demand shifted in a way where turnover could remain below the historic level?
Yeah, Amy, this is Sean. Good question. Obviously, somewhat speculative in nature in terms of what happens. I mean, the one thing I would say is that we continue to remain in a relatively tight housing market overall. If you look at the sort of aggregation of multifamily, single family, et cetera, and the ability for people to access the kind of inventory they want may be more limited, particularly on the single family side, maybe condos, townhomes, et cetera, for the next couple of years. That does not seem to be likely to correct. I'd say that's probably the one macro factor that may put some cap on, sort of churn, and people, you know, that would typically 13%, 14%, 15% that might go buy a home. You know, this past quarter, that was less than 10%.
That's not likely to get better in the near term given the financing market, but also just the production in terms of what's actually being put on the ground. That's one factor that may kind of keep a lid on things here for the next several quarters.
Okay, great. Another quick one. How do yields on the projects in the Developer Funding Program compare with AvalonBay development yields?
Hey, Amy, this is Matt. The way we think about that program is basically, we're allocating the risk differently than on our own development. Consequently, the target returns are also allocated differently. Our target is for the yield to be, you know, roughly halfway between an acquisition and a development. What we found so far in the few we've done is that it's been higher than that. You know, the way I would think about it is the yield on those deals is probably gonna be 30, 40 basis points less than the yield on if we'd done the development ourself, but still probably at least 50, 60 basis points north of where an acquisition yield would be, if not more.
Great. Thanks.
Operator (participant)
Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.
Anthony Powell (Analyst, Equity Research)
Hi, good afternoon. Broader question, I guess, on the governor of New York's housing proposal that is stalled now in the Senate, in the House there, that would have expanded zoning for multifamily in the suburbs. Was that an opportunity for you to develop or was that more supply? How do you view those kinds of, I guess, initiatives nationwide going forward?
Go ahead. This is Matt, I think, and Ben and Sean may wanna weigh in as well. You know, it's really interesting to see these states try to engage in that dialogue about... One of the things that has really led to the supply constraints that have in turn led to really an underproduction of housing has been local control. That is a bit of a third rail politically in California and New York and other states. It's interesting to see the state legislatures try to chip away at it. I think you're right, it's both, right? It would be an opportunity for us as a developer. You know, if it was really effective in the long run, it might lower the long-term rent growth trajectory of some of those markets.
Frankly, from a public policy point of view, that's kind of would be the point of it. What we've seen so far, at least in California, has been every time there's been something that in theory would have opened up more sites to development, there's been something else on the other side that's come with it that has made it a bit of a poison pill. It's been very difficult to actually effectuate. You know, they say they'll allow multifamily near transit, but then they're saying it has to be prevailing wage construction cost, which is a 20-30% premium, and so economically, it doesn't work. They'll open it up in certain sites, but they need 20-25% affordable. Again, you can't afford the going price for land, you know, and make that economics work.
The one place we've seen it truly be effective so far has been with this smaller program in California, the ADU, accessory dwelling unit. We actually have over 100 of those currently in our pipeline, where we can just add 2, 3, 4, 5, 6, 7 apartments in kind of underutilized storage or parking areas at existing communities and not have to go through a zoning process. That's not gonna move the needle kind of on the problem at a macro level, but that's one small program we have been able to take advantage of.
Maybe just to add kind of, you know, the higher level, you know, regulatory dynamics, you know, are influencing our portfolio allocation decisions. It's, you know, been a part of the reason why, you know, over the last number of years, we've been moving more and more to a suburban-oriented portfolio. If you see where we're allocating capital, you know, we're two-thirds suburban today, probably headed towards three-quarters there. It's influenced, you know, our move to the expansion regions, right, at a minimum to diversify away from regulatory environments. The reality is, you know, at a more local level, based on some of the steps of, you know, certain municipalities, you know, effectively the bar is higher for allocating new capital there, and it's playing into how we're shifting capital around our portfolio and within our regions.
All right. That's it for me. Thank you.
Operator (participant)
If there are no further questions in the queue, I'd like to hand the call back to Ben Schall for closing remarks.
Thank you. Thanks, everyone for joining us today. We appreciate your support and look forward to speaking with you soon.
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.