Q1 2024 Summary
Published Jan 10, 2025, 5:10 PM UTC- Strong Demand Supported by Favorable Rent vs. Own Economics: AVB is experiencing a unique situation where, in some markets, it is almost twice as expensive to own versus rent, providing a cushion that supports rental demand and serving as a tailwind for several years.
- Improvement in Bad Debt Levels: The company has seen notable improvements in underlying bad debt, particularly in the New York metro area where bad debt declined from 3.1% in Q4 to 2.4% in Q1.
- Strong Performance of Lower Price Point Assets: AVB's lower price point assets are performing quite well, in some cases better than higher price point assets, driven by healthy demand and consumer trends.
- Urban submarkets are experiencing softness due to high supply and demand issues, particularly in the District of Columbia, urban Seattle, and downtown L.A., leading to choppy performance in these areas. As per the executive: "The District of Columbia is quite soft for both demand and supply reasons... some of these urban submarkets with plentiful supply, some still quality of life conditions that are challenging as a little more choppy."
- Inflationary impacts on consumers' wallets, including student loans and car loans, are creating crosswinds that may pressure demand, especially for higher-priced assets. Executives acknowledged that "consumers are feeling a little bit of pinch from what's happened with inflation, student loans, car leases expire, etc."
- **AVB plans to increase its allocation to expansion markets, including the Sunbelt, from 8% today to 25%, but elevated supply in those markets is expected to pressure rents and occupancy at least through 2025 and possibly into 2026, potentially impacting their performance. The executive stated, "we expect there to continue to be pressure" in the Sunbelt due to high supply in certain submarkets.
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Sunbelt Supply Impact
Q: How long will Sunbelt rent pressures last?
A: Management expects pressure on rents and occupancy in the Sunbelt to last at least through 2025 and possibly into 2026 due to elevated supply levels and the time it takes for new projects to lease up and roll through rent rolls. They highlight that Austin is among the markets that will be in pain longer due to a high percentage of new stock coming online. -
Acquisition Opportunities Below Replacement Cost
Q: How much below replacement cost are acquisitions in the Sunbelt?
A: The company is seeing assets that are 10 years old trading 15% to 20% below current replacement cost. While brand-new assets haven't come to market at compelling prices yet, they anticipate more volume becoming available and are hopeful to accelerate asset trading activity. -
Bay Area Recovery Prospects
Q: What's needed for Bay Area market outperformance?
A: Management states that improving the Bay Area's performance requires business leaders to be more confident in bringing people back to offices, addressing quality-of-life issues, and seeing signs of job growth, especially from sectors like generative AI. While supply isn't a significant issue, demand needs to strengthen. -
Renewal Rent Growth Expectations
Q: Can renewal rent growth exceed 4%?
A: Renewal offers for May and June are around the high 5% range, but they expect settlements in the low to mid 4% range, indicating potential for some upside but staying cautious based on historical norms. -
Conservative Blended Rate Assumptions
Q: Are blended rent growth assumptions too conservative?
A: With asking rent growth at 5.5% through the latest data, management believes blended rate assumptions of around 3.2% to 3.3% for the second quarter are reasonable, reflecting current trends and anticipated seasonal patterns. -
Dispositions and Asset Valuations
Q: Do recent asset sales reflect current valuations?
A: Although none of the dispositions have closed yet, the assets sold are a mix across geographies, and the market remains bifurcated. Smaller deals attract private buyers, while larger assets garner institutional interest. Cap rates vary accordingly, and there's a scarcity premium benefiting sellers. -
West Coast Revenue Growth Drivers
Q: What drives high revenue expectations on the West Coast?
A: A significant contributor to revenue growth in Southern California is the improvement in underlying bad debt, accounting for roughly 40% of revenue growth in the first quarter. Reductions in concessions, especially in markets like Seattle, also play a role. -
Increased CapEx Plans
Q: What are the planned CapEx per unit investments?
A: Asset preservation CapEx is consistent at around $1,600 to $1,700 per unit, roughly 7% of NOI. The company plans to double its NOI-enhancing CapEx this year, investing in expanded solar production and accessory dwelling units in California. -
Debt Maturities and Refinancing
Q: How will you handle 2024 and 2025 debt maturities?
A: Management does not anticipate prepaying 2025 maturities and plans to address them as they come due. For 2024, they have a capital plan involving $1.4 billion in uses, including $300 million debt maturity, and expect to source capital through free cash flow, unrestricted cash, and $850 million of external capital. -
Economic Environment and Outlook
Q: Are there any concerns about market weakness?
A: While the overall demand is healthy, management notes challenges in certain submarkets due to demand or supply issues, such as urban Seattle, downtown LA, and Washington D.C. They also mention crosswinds like inflationary impacts on consumers and the resumption of student loan repayments affecting the outlook.