Capital Allocation Strategy

Q: How will you balance development and acquisitions?

A: We plan to be more active in acquisitions in 2025 and 2026, expecting significant deal flow due to $650 billion in multifamily debt coming due. We'll invest in transactions offering a reasonable spread over our weighted average cost of capital. While we're starting over $300 million in development this year and $375 million next year, the balance between development and acquisitions depends on market opportunities. If our stock price offers compelling value—buying at a 6% cap rate—we may consider share repurchases.

Acquisition Opportunities

Q: What gives confidence in future acquisition deals?

A: Merchant builders need to sell to maximize profits, especially with 8% prefs eating into gains and banks wanting loans paid down. We expect increased transaction volume but not necessarily distressed sales. There's a massive wall of capital seeking to deploy into multifamily, now the top investment choice for institutional investors. Cap rates are in the mid-4% range today due to strong demand.

Reducing Houston Exposure

Q: Will you decrease exposure to Houston?

A: Yes, we're committed to lowering our Houston exposure to 6%-9% per market. We'll trim our portfolio, selling slower-growing assets and redeploying proceeds into desired markets. While Houston performs well now, we've faced challenges when oil prices fall, so rebalancing makes strategic sense.

Cap Rate Environment

Q: Do cap rates affect your investment activity?

A: With cap rates in the mid-4% range due to strong investor demand, we're willing to transact in the 4.5%-5% cap rate zone. We'll buy below replacement cost, improve operations, and benefit from expected above-average rental growth in 2026-2028. Despite recent interest rate increases, opportunities exist, and we'll sell properties to fund acquisitions and rebalance our portfolio.

Expense Management

Q: How have you managed expenses to maintain NOI?

A: We were most conservative on insurance and taxes. Property taxes, comprising 36% of expenses, are expected to be flat this year versus an initial 3% increase. Insurance costs are down about 10% after rising 40% last year, thanks to a flat renewal and proactive risk management. For 2025, another flat year in property taxes is unlikely, but we'll continue managing expenses effectively.

Supply-Demand Outlook

Q: What's the supply-demand outlook for 2025?

A: Supply and demand in 2025 are expected to mirror 2024. Employment growth across our markets is projected at around 440,000 jobs. New deliveries will be comparable to this year, so we anticipate a steady environment and are positioning accordingly.

Urban vs. Suburban Performance

Q: How are suburban assets performing?

A: Suburban assets are outperforming urban ones, with revenue growth about 80 basis points higher across our portfolio. This trend continues due to demographics, as most of our target residents live in suburbs. We expect suburban properties to keep outperforming over the long term.

Turnover and Retention

Q: What's driving lower turnover rates?

A: Turnover decreased 4% year-over-year in Q3, mainly due to fewer move-outs to purchase homes, currently at 9% versus the historical 15%-20%. This is driven by housing market conditions, and we expect this trend to persist into 2025, enhancing retention.

Leasing Strategy

Q: Why did leasing spreads decline in October?

A: In Q3, we shifted focus toward occupancy at the expense of rates, impacting Q4 numbers. This strategic move aims to maximize revenue, and we feel good about our approach as revenue results align with expectations.

Bad Debt Reduction

Q: What's the outlook for bad debt and specific markets?

A: If our plan succeeds, earn-in for 2025 should be flat to slightly positive. We anticipate bad debt reducing to about 50 basis points by end of 2025. Excluding Atlanta and California, we're already there. We're working through issues in Atlanta and L.A. County, shutting down new bad actors and expecting to resolve problems by 2025.

Land Strategy

Q: Will you sell land parcels you've written down?

A: We'll hold land until it's the right time to sell or revisit development viability. We don't need to sell in a weak market. We're also moving from urban mid-rise to more suburban, simple construction, with current land purchases in Tampa for suburban projects.

Construction Costs and Development

Q: Have construction costs increased?

A: Construction costs are flat, but we've redesigned sites, and cost changes reflect enhancements for a better product. Land prices are down 15%-20% from the peak but with few transactions, it's hard to pin down exact numbers.

Resiliency and Asset Quality

Q: How resilient is your portfolio to natural disasters?

A: Our properties have fared better than neighbors during events like hurricanes due to proactive maintenance and building quality. For example, during Hurricane Harvey, only one community suffered flood damage. We own assets out of flood plains and invest in upkeep to mitigate risks.

Market Demand Considerations

Q: Would improved Houston migration or supportive policies affect your market exposure decisions?

A: While positive factors like higher oil prices benefit Houston, our strategy to lower exposure predates such considerations. We're still committed to rebalancing our portfolio, reducing double-digit concentrations in markets like Houston and D.C.

Single-Family Rental Lease-Up

Q: How are your developments in lease-up progressing?

A: Single-family rental communities lease up slower, about 10-15 units per month, which is in line with expectations. Our Durham development is leasing up 25 units per month, performing well. Overall leasing trends are meeting our projections.

Demand Side Factors

Q: Has demand changed affecting rental spreads?

A: There's no significant change in demand. We decided to push occupancy over rates in Q3, affecting spreads into Q4. This strategy maximizes revenue, and we're satisfied with our results, as revenue aligns with expectations.

Future Lease Rates

Q: What do you expect for lease rates in late 2024?

A: We anticipate Q4 will be similar to October, with effective new lease rates down around 4.4% and renewal rates up 3.4%. As renewals increase in November and December, the blended lease rate should improve slightly compared to October's 0.8% decline.

Turnover Expectations

Q: What are your turnover expectations moving forward?

A: Turnover is influenced by fewer residents moving out to purchase homes, currently at 9% versus a historical 15%-20%. This change significantly improves retention, and we expect this trend to continue into 2025 due to stable housing market conditions.