Avalonbay Communities Inc

NYSE:AVB

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, ladies and gentlemen and welcome to the AvalonBay Communities First Quarter 2023 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.

[Jason Reilley, Vice President, Investor Relations]

Thank you, Doug and 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 is 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]

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 set to provide. And 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 continue 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 continue to grow rents during Q1 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 additional 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. So 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 Q4 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. And then $0.06 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 the transaction timing. We do not adjust our same-store guidance ranges at this point, and we’ll reevaluate those as part of our more fulsome midyear we forecast.

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 two 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. And 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 coaster 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%. And 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. So that has not changed. And in the near 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, allowing us to more profitably reposition our portfolio for future growth.

And with that, I’ll turn it to Sean for more specifics on the operating backdrop.

[Sean Breslin, Chief Operating Officer]

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. And consistent with historical norms, both coast 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 and while the East Coast shows 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 remained 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 one-third year-over-year. Occupancy increased about 30 basis points from Q4. And as noted in Chart 4 on Slide 8 and also in our earnings release, Brent 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. Also, renewal offers from May and June went out at roughly 7%.

I’ll turn it over to Matt to address development now. Matt?

[Matt Birenbaum, Chief Investment Officer]

Alright. 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 four 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 source 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 have not yet marked the rents on these projects to current market, but in general, the locations in which they’re located have seen similar increases in market rent since we started construction, providing a great opportunity for further lift in their results as well.

As shown on Slide 10, with most of our communities – 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 booked in Q1. This leaves over $130 million of incremental NOI to come as these assets complete construction stabilize. And as for the prior slide, that total NOI figure is also likely understated, given only 4 of those 18 total projects have been marked to market today.

Turning to Slide 11, as 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 cut. And some of these drop-laying 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 3 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 the developer and the general contractor. And we have traditionally seen some of our most profitable investment opportunities when these more challenging cyclical conditions have prevailed.

And with that, I’ll turn it over to Kevin for an update on the balance sheet and the CCC.

[Kevin O’Shea, Chief Financial Officer]

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 of 4.6x, which is below our target range of 5x to 6x. Our interest coverage ratio and unencumbered NOI percentage are at near record levels at 6.9x and 95%, respectively. And our debt maturities are well laddered, with weighted average years to maturity of about 8 years.

In addition, as disclosed in our release, we also enjoyed tremendous liquidity of about $2.8 billion today, with no borrowings under our $2.25 billion unsecured credit facility and an additional $0.5 billion 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 sheets 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 and 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; and third, because we have embarked on extending those capabilities in a way that allows us to create additional value for AvalonBay shareholders by offering to 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 .

And then 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]

Alright. 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 also mindful that these are the types of environments, particularly in 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]

Thank you. [Operator Instructions] Our first question comes from the line of Eric Wolfe with Citi. Please proceed with your question.

[Nick Joseph, Citi]

Thanks. It’s actually Nick Joseph here with Eric. Kevin, you mentioned the agreement announced last week with Gables. I recognize you can’t talk too much on the specific terms of that. But if you could talk more broadly about, is this a one-off deal? Are you looking to scale this business? What sort of margin and economics could you derive from it? And then I know this is in the third-party management contract, but would that be of interest as well for other property owners?

[Kevin O’Shea, Chief Financial Officer]

Sure. Thanks Nick. I’ll start and others, Ben or Sean may want to chime in. In terms of the go-forward view of this, we’re certainly excited to have this agreement in place. And 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. But we are excited to have it in a place that is accretive. There are, from a contribution point of view, healthy margins, for sure, that make this worth the while. As to the future potential, 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. So – but we do hope looking ahead to be able to do more business like this over the time. And 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 and an important capability that allows us to further differentiate ourselves from our peers. So there’s a lot more I could go into there, but maybe I’ll just pause there. And I don’t know if Sean or Ben have anything else to add.

[Ben Schall]

Yes. I think as well, but I’ll add a couple of things, and thanks for the question, Nick. I would connect for you this step as the kind of next continued evolution, both of our operating model journey but as well as the role that the CCC and centralized services are planned for us. And so part of the appeal, in addition to the revenue and profit opportunity with Gables, we are increasingly handling more services, at least in part and at a centralized way. And this relationship allows us to make continued investments. Think about technology, process people that we think can then accrue to the larger platform here at AvalonBay. So 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.

[Eric Wolfe, Citi]

Hey, it’s Eric. Maybe just a follow-up there, you said that the initial sort of impact was included in guidance and wasn’t, frankly, that large. I guess how many units would you sort of have to manage before it would become a sort of more material part of your earnings stream? And then just to make sure that I understand the last part of your answer, I think you are 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 are effectively allocating those costs to other parties. Is that the right way to think about it or did I misunderstand that?

[Kevin O’Shea, Chief Financial Officer]

Yes, Eric, let me kind of take a stab at it a little bit. I can’t really give you, I mean, an answer what number of units would have to be under this kind of an arrangement for it to be material. It probably 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 operating platform in the business. And so we’re in our 17th year with this experience. And I think that we’re pointing this out probably for two reasons. One, to your question about what this can do, the more you do this for not only yourself but for others, the more you can reinvest in that business create a better platform in and of itself over time, that even draw, for our own sake, when we started, we weren’t at our current size of, whatever, 80,000 apartment homes when we started this in 2007, we were quite a bit smaller. And it has gotten better itself over time. We’ve really fine-tuned and honed the CCC so that it’s substantially better than it was even back in 2007 and 2010 and 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. So that bespoke that speaks to sort of the ability to scale quickly when you’ve got that capability centralized in-house. And the other reason why we think it’s worth highlighting for you, apart from the fact that it is a relatively modest financial significance today, is the fact that a highly respected institutional multifamily owner, such as Gables, by entering the screen with us after its own due diligence on 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. And 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.

[Eric Wolfe, Citi]

Thanks for all the detail.

[Operator]

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

[Steve Sakwa, Evercore]

They were pretty back-end loaded for you guys this year. I am just curious given Matt’s comments about costs starting to come down, but the economy is potentially weakening and rent growth is slowing, how those potential starts are kind of shaping up for you? And what I guess are you looking for higher hurdle rates today and maybe in the back half of the year than you were say 6 months ago?

[MattBirenbaum]

Sure. Hey, Steve, it’s Matt. Yes, so our target yield or going in initial return on new development has been rising really over the last year as we saw cap rates rise and cost of capital rise, both debt and equity. So 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. So our start activity for the year is as the – it is probably a little more back half weighted just by the way the – as time goes by, we’re going to see more buyout savings on our hard costs. So in some – that probably plays to our advantage a little bit. And 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 many others. So – but when I look at our development starts that are slated for this year, that’s about where the yields are. They are probably in the low 6s. And you have to kind of look at the geographic mix and the risk profile of those deals to kind of weigh the profitability of each one, which is what we do. But again, we’ve been pretty consistent in saying we’re continuing to look for that 100 to 150 basis point spread on new starts. And frankly, the stuff that we started last year and the year before, the spreads are well wider than that, which was kind of highlighted on the slide.

[Steve Sakwa, Evercore]

Yes, 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? Or do you feel reasonably confident that costs are coming your way and even if rent growth slows a little bit, that you’re still able to kind of achieve the returns you need to kind of put that – put those starts into the ground?

[Kevin O’Shea, Chief Financial Officer]

I feel I’m pretty confident about it. When I look at the starts for the year, we started one in the first quarter. We have one that we’ve just started. It will be a second quarter start, a third one where we have all of our final budgets, and it’s been approved through our investment committee. So that’s 3 of the 7 rate starts we have planned for the year. And 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]

Steve, maybe a little bit more to your question about how is our development approach changing. And we do have a fairly fulsome development rights pipeline. And Matt’s talking about our near-term starts, which are fairly baked at this point. But the next set of deals, right, in that pipeline over the next couple of years, part of what we’re going through right now is very effectively reworking those deals, right, to reflect today’s environment. And given what’s happening with some of our competitors, some of the formerly active developers there, sellers are starting to increasingly acknowledge that the environment has changed. And so that’s leading to land repricing, that’s leading to more attractive terms. It’s allowing us to control high-quality real estate, relatively limited upfront costs. So, all those dynamics continue to run in our direction.

[Steve Sakwa, Evercore]

Okay, great. And then maybe just one question for Sean. On – you talked about, I guess, the renewals going out around 7%. And I know you don’t provide a split between new and renewals and you kind of just provide the blend. And April was a nice uptick. I guess given that we’re going in the spring leasing season, how – I guess, how much confidence do you have that kind of the May and June numbers might look like April? Could they be better? And I guess what markets are you seeing the most strength and weakness?

[Sean Breslin, Chief Operating Officer]

Yes, Steve, good questions. Maybe I’ll provide a little of a high-level commentary as it relates to renewals versus new move-ins and a little bit about trends. But 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. And then in April, renewals were sort of in the mid-5s, but new move-in, just given the seasonality of rents, has kind of moved up into the mid-4s, just to give you some perspective there. And our expectation is that 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. But that’s dependent upon what happens with growth and asking rents as we move through the year. So 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. And that’s still the expectation. And part of that, you got to have to keep in mind is on a year-over-year basis, the headwind associated with the reduction in rent relief becomes far material as you get into the second and third quarter, and that will create some moderation from a rental revenue growth perspective. But as it relates to rent change, based on what we know today, I would say, as you get further into the second quarter, we would expect that to begin to moderate more so than what obviously we saw in the first quarter.

[Steve Sakwa, Evercore]

Great. Thanks. That’s it for me.

[Operator]

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

[Austin Wurschmidt, KeyBanc]

Great. Thanks, everybody. Going back to Gables for a minute, I guess, I’m curious what sort of precipitated the discussions with Gables? And whether or not you pursued any other potential portfolios to add to the CCC platform? And while understanding you’re not handling the property management, could we see these partnerships lead to a feeder for future acquisitions?

[Ben Schall]

Yes, Austin. On the first piece, short version of it, there were some existing relationships 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. And on the heels of that, we both decided to proceed given the benefits that were being realized. And then to your last piece, no, this is not an acquisition type of approach or angle here. This is much more focused on operational benefits.

[Austin Wurschmidt, KeyBanc]

Understood. And then going back to development, I recall some tables you provided over time showing kind of IRRs on development. And certainly, recall coming out of the GFC, there were some really attractive returns over time. So given what’s going on with the availability of bank financing, the more attractive land and input costs, I guess, it seems like a unique opportunity today. So how are you thinking about ramping development as quickly as you can to maybe capitalize on what’s going on today?

[Matt Birenbaum, Chief Investment Officer]

Austin, it’s Matt. I can speak to that a little bit, and Ben maybe want to as well. But – so the good news is we have a – we’re controlling a lot of really good real estate right now for very modest upfront investment. So we’ve kind of been operating the platform in anticipation of a potential opportunity emerging like this really for the last couple of years. And we’ve added quite a lot to our pipeline over the last year or 2. We’re controlling, I think, 40 or 41 potential deals with 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 cost, is only around $235 million or $240 million. So we have – and a lot of those options are not yet at the point where we have to make a decision about are we going to close? Are we going to – as Ben mentioned, there are some conversations going on with some sellers about these deals were struck in a different environment. So I think we’re well positioned. I wouldn’t say it’s quite there yet. It’s not like development economics are screening value yet. We kind of have to see where asset values settle out, and that’s the other side of this, is what’s going on in the transaction market, which is still pretty muted deal volumes. But we do have the ability 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, 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 that’s coming, but it’s not here quite yet. So we’re watching that very closely every day. And that’s the other opportunity that we will see. There are some markets where we think it’s going to come down more. There is other markets where it’s going to take a little more time. But over – particularly the next 4 or 5 months, as we have more deals out in the market actively bidding, we will have a much better sense for where hard costs are going. Because what we’re finding today is if you have a job that you’re going to start in a year and you’re showing preliminary drawns, you’re not getting particularly attractive pricing. But 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 the more aggressive bid.

[Ben Schall]

Two areas I’d emphasize, One, just on the point of our relatively limited land holdings, when you look across our peer set, our landholding numbers is below a number of our peers, despite kind of our ability to execute at higher development levels throughout cycles. So we’ve got some room in there. The second part is in an environment right now, we recognize we need to be selective about that. But in places, it 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. And yes, there have been a couple of situations where land is getting repriced at 30% to 35%, where it was priced 9 months ago. If we can step in and control that land with relatively limited cost to look out a couple of years, and we think that will accrue some significant benefits.

[Austin Wurschmidt, KeyBanc]

Thanks for all the detail.

[Operator]

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

[Adam Kramer, Morgan Stanley]

Hey, guys. Thanks for the questions. I just wanted to ask about bad debt. It looks like 500 basis points on kind of a gross basis in the quarter. Just wondering – I know you have a really helpful kind of market-by-market breakdown there. So just wondering kind of how you’re thinking about gross bad debt over the next few quarters? And is there a chance that this could be kind of abate – some sort of a tailwind going into next year if this does return to – maybe it doesn’t return all the way to kind of normal pre-COVID levels, right, but just you give some year-over-year improvements on that number?

[Sean Breslin, Chief Operating Officer]

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, came in at around 3%, which is about 22 basis points better than what we anticipated. And that’s the $0.01 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 then sort of trending down throughout the year in terms of that underlying sort of bad debt percentage. So that’s how the sort of trajectory looks as you move forward. 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 third in Southern Cal and then kind of sprinkled across the other markets as well. So overall, we were pleased with what we saw in the first quarter, but it doesn’t necessarily make for a trend just yet, and we will 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.

[Adam Kramer, Morgan Stanley]

Great. That’s really helpful, and I appreciate the clarification around the 300 basis points. I was wrong on my higher number there. I appreciate that. Just as a follow-up. Is there a chance that you can kind of have a – I guess, kind of more of a one-time in nature, but kind of a benefit from residents who kind of true up, right? Who not only kind of pay current on rent but also pay prior periods that they had, that they were delinquent on and hadn’t paid? Is it possible you can kind of see a one-time benefit from that?

[Sean Breslin, Chief Operating Officer]

Adam, what I’d say is anything is possible. I don’t think that is probable based on the resident behavior we have seen thus far. So I would not anticipate that. To the extent that we, all of a sudden, cash started ringing in from people who haven’t paid, that’s not necessarily what we’ve expected in our guidance, it would be a bump. But I would not expect that as a likely outcome.

[Adam Kramer, Morgan Stanley]

Got it. Really helpful, guys. Thanks for the time.

[Operator]

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

[Chandni Luthra, Goldman Sachs]

Hi, thank you for taking my questions. Could you talk about concessions? What are you seeing across your markets, particularly on the West Coast and perhaps even on your expansion markets? And how has the trend been in the last 19 days? Have things gone worse? Thanks.

[Sean Breslin, Chief Operating Officer]

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 is less than $200. So very, very modest. Obviously, 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. So that’s where most of the volume is, frankly. But if you look at concessions over the last few weeks, just to give you a little more recent data, less than 10% of the transactions that we’re executing are seeing a concession. And again, it’s more concentrated in those two areas, San Francisco and the Pacific Northwest, where in those markets, you’re 30%, 40%, 45% of the leases, depending on submarket or getting some type of a concession. So those are the two places where we’re focused on at the most in terms of moving volume, but it’s not a significant issue elsewhere.

[Chandni Luthra, Goldman Sachs]

Noted. And then as a follow-up, last quarter, you laid out cap rates in the mid- to high-4s range. What are you seeing right now? And at what levels would you think that it would become appealing enough for you to dive in?

[Matt Birenbaum, Chief Investment Officer]

Yes. This is Matt. I guess, I’ll speak to that one. So what we’ve said of cap rates and then our own trading activity, I think what we’re seeing is that there is a bifurcated market. There are a lot of assets that are not trading. Those that are, I would kind of put them into two buckets, kind of the haves and the have nots. The haves, which is highly desirable assets in locations, either markets or submarkets that are on a lot of investors’ lists. For growth, those assets are still trading in the mid-4s cap rates. I think, in fact, I would have – if you’d asked me 90 days ago, I probably would have said high 4s, but – and we do have some assets actively in the market today that hopefully will close during Q2, and we have at least one that’s in that haves category, I would say, that’s probably more of a mid-4 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 report 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 a interest that have a less deep pool of bidders. And there, the have nots, you might have one or two that are seriously interested. And there, I’d say cap rates are probably more like low 5s. And so call that range anywhere from 4.5 to 5.25. And 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, our plan for the year was to be net neutral. But to – really, we started last year saying, we were going to sell first and buy seconds. So 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. So now we do have a couple of dispositions that are in process. And so we are going to be looking here over the next quarter or two to reinvest that capital into potentially some acquisitions in the expansion regions. So we would expect – I don’t know if anything is going to close on the acquisition side in Q2, but it is our plan to kind of resume that forward trading.

[Chandni Luthra, Goldman Sachs]

Appreciate all the color. Thank you.

[Operator]

Our next question comes from the line of John Pawlowski with Green Street. Please proceed with your question.

[John Pawlowski, Green Street]

Thanks for the time. I just wanted to 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% to 35% reduction in land value comps. Is that representative of the market right now? And like is the volume of these broken sites meaningful right now? Or we’re just getting started on the repricing?

[Ben Schall]

I think we are still early. There are more sellers than less who are actually willing to give current contracts to the time, right, extend out and see where it heads. But we are starting to see some situations where deals are breaking. And the two situations I was referring to had buyers who are relatively motivated. And when they are looking at on the landscape, this goes to Matt’s comments about our ability to execute our – that we don’t need to rely on construction financing, right, to execute projects today, those buyers are going to own the margin, look to somebody like AvalonBay to contract to – contract with. So that’s – yes, I’d say that’s the kind of the general environment. Our expectation is that there is more to come.

Starts are – we’re expecting to be down substantially this year. And a big part of underlying all of this is you look out at the private market environment and the merchant builders who have been very prolific, their ability to get capital for new construction deals is just very challenging. And the cost of that capital has also expanded out significantly, right? So on a relative basis, this is one of the parts that we’re starting to see. While our cost of capital has gone up or in our cost of debt borrowing has obviously gone up from the 2% range to 5% range, the private market players, if they can get construction financing, those senior mortgages are at 7.5% to 8.5% now, right? And that’s before putting on some preferred equity or mezz and that’s before getting to equity, right? So our relative advantage in a period like this, we think, is we’re relatively well positioned. And so selectively, we’re going to start stepping into some of these types of opportunities.

[John Pawlowski, Green Street]

Okay. On that point, I’m just curious if you guys have any internal theories on why we haven’t seen a more precipitous falloff in permitting and start activity? I mean the credit markets have been volatile for a while, and they have been tightening for a while. And I know they are down a little bit more in your markets. But I’m just curious if you got to have any internal views on why we haven’t seen the relief yet in the permitting and starts data.

[Matt Birenbaum, Chief Investment Officer]

Yes, John, it’s Matt. It’s – I ask Craig Thomas, my 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 have been lined up. And then a lot of the start – 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 some of the COVID relief funds, which has gotten out there. So that could be inflating it a bit. But – and in some cases, people may be pulling permits and then getting bids and not liking the numbers they are seeing. But it is a little bit of a head scratcher, I would agree with you.

[John Pawlowski, Green Street]

Okay, thanks for the time.

[Operator]

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

[Jamie Feldman, Wells Fargo]

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 do you think it will be kind of singles and doubles on the land side or on the asset side?

[Matt Birenbaum, Chief Investment Officer]

Hi, Jamie, it’s Matt. I would expect, it’s probably more of the latter. Usually, portfolio transactions, unless somebody has some kind of – unless they bought a portfolio and put a lot of short-term debt on it all, which would be pretty unusual, our portfolio – usually sellers selling portfolios, it’s more opportunistic. And those things happen when there is an abundance of capital. And go back 3, 4 years, there was kind of a portfolio premium. Today, you talked about – I think, on the last call, there is a portfolio discount just given the capital markets. So we haven’t heard of anything like that. And I guess I’d be a little surprised.

[Jamie Feldman, Wells Fargo]

Okay, thank you. And then as you think about the suburban versus urban assets, whether it’s the April data or your views on what’s to come in spring leasing, any thoughts on how they are performing versus each other and versus your expectations? And what we can see going forward – expect going forward?

[Sean Breslin, Chief Operating Officer]

Yes. Jim, it’s Sean. What I would say is that, yes, generally, things were in line. The rent change that we experienced in Q1, that’s gave out 10 basis points better than what we anticipated. And if you double click through that and look at urban and suburban, again, very, very nominal variances. 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, new supply is quite a bit less than what we are anticipating in urban environments. So, I would say, kind of as expected right now. But as you look forward, depending on how the environment unfolds, we would probably pivot more towards suburban assets outperforming.

[Jamie Feldman, Wells Fargo]

Suburban assets outperforming?

[Sean Breslin, Chief Operating Officer]

Yes.

[Jamie Feldman, Wells Fargo]

Okay. Alright. Great. Thank you.

[Operator]

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

[John Kim, BMO Capital Markets]

Hi. Thank you. I know you talked a little bit about Gables already, but I was wondering how big you think this revenue opportunity could be as far as offering this kind of office – back-office support functions for other operators?

[Ben Schall]

John, yes, we haven’t sized it yet at this point. We went through the pilot, as I described. We want to get to our first third-party client fully implemented. We get a little bit further out. We will start thinking about the profile of additional clients and even further down the road, thinking about where it could come, but we are not at that stage yet.

[John Kim, BMO Capital Markets]

Okay. And 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?

[Ben Schall]

Yes. I will hit maybe on three areas, and Matt can add in because he and his teams are living and breathing this. First is the development side, which we 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 have got a couple of assets now that hopefully, we will sell over the next couple of months. And so when we look to deploy that capital, 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, nearby asset. But generally, in this type of environment we are not doing a ton of buying and selling. On the buy side, we are going to be looking for places where we can add and create some incremental yield on those acquisitions over the first couple of years. And then the third category that I would highlight goes broadly to the theme in a world of capital is less abundant. We believe opportunities will present themselves to us. But it also makes our capital more attractive, right. So, 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 have the ability, stronger sponsors, stronger quality real estate, better returns. So, that’s another place where we can selectively put capital to create value.

[John Kim, BMO Capital Markets]

Very helpful. Thank you.

[Operator]

Our next question comes from the line of Josh Dennerlein with Bank of America. Please proceed with your question.

[Josh Dennerlein, Bank of America]

Yes. Hi everyone. Thanks for the question. Kind of go back to the opening remarks about the development pipeline and how you don’t mark to market the yield until they are impacted lease-up, does that imply that the potential uplift from the seven projects that haven’t gotten to lease up yet, but will go into it later this year, not included in the guidance range?

[Matt Birenbaum, Chief Investment Officer]

Yes. This is Matt. The guidance for the year, most of those deals are going to really impact earnings in ‘24 and ‘25 because they are not going to start leasing until later this year. So, we do have lease-up budgets on those deals, which is reflected in the guidance, which does reflect higher rents than kind of what’s shown on the development attachment, but the real lift there isn’t ‘23, it’s ‘24.

[Josh Dennerlein, Bank of America]

Okay. That’s super helpful. And then one follow-up to that, the 70 basis uplift for that, you said projects you have currently with updated projections, is that a fair uplift at this point for those seven projects?

[Matt Birenbaum, Chief Investment Officer]

I would say that, that was kind of the point of included in the slide, yes, that if the 17% uplift in rent is roughly comparable to what we have seen across our entire same-store book over that time, if that – if those seven lease-ups experience similar kind of rent growth to kind of what we have seen broadly over that time period. And yes, I mean we would be expecting to see the yields on those deals rise by like roughly similar amount.

[Josh Dennerlein, Bank of America]

Okay. And then you mentioned – like if you could start a project today, you are seeing good construction pricing bids versus like a few had something that might not start for a year, you are not seeing that. What’s driving that dynamic?

[Matt Birenbaum, Chief Investment Officer]

I think it’s just certainty. I mean when you ask somebody to give you a price on a deal you are not going to start for a year, it’s just – they are just giving you an estimate number. It’s not – you can’t take that number to the bank. Anyway, you don’t even – you don’t have final construction drawing. So, you are not contracting at that number. It’s more of an allowance. And so it’s natural for people to say, “Well, here is 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 we will give you a – we will not give you a number that’s any better than the number they would have given you 90 days ago. But there are others where, as I have said, maybe they were working on five jobs, they only see two coming up, they have availability, and they are 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.

[Josh Dennerlein, Bank of America]

Okay. Thank you.

[Operator]

Our next question comes from the line of Haendel St. Juste with Mizuho. Please proceed with your question.

[Haendel St. Juste, Mizuho]

Hey. Good afternoon. A couple of quick ones for me. I guess first a question on the equity that you pulled from your forward and investing with the bank at the 5%, how much is that? Can you request to withdraw it at any time at your option? And what’s the longer term plan for that capital? Is it ultimately earmarked for development funding, or would you also consider acquisitions or other DFP? Thanks.

[Kevin O’Shea, Chief Financial Officer]

Yes, sure, Handel. This is Kevin. Well, the amount that we pulled down the equity for was $490 million. And so roughly speaking, that’s the amount that we incrementally invested, and we did so. And latter time deposits with banking partners that are very highly rated, known to us, part of our credit facility syndicate. And so – and 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. So, that’s how we have structured that set of the cash investment activity so far. So – and we would retain liquidity to fund development from that source as well as liquidity on our line of credit, so we – of $2.25 billion, where there is nothing drawn. So, we have plenty of ability to respond to new opportunities that may justify an earlier deployment of cash, either from the cash is – the cash we have invested or from our line of credit.

[Haendel St. Juste, Mizuho]

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 have made entering the mezz lending business still being 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 am 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 are considering, what else top of mind as you have to get the company forward? And then 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]

Yes. I appreciate that. I would start by emphasizing, I mean this is about this executive team, right. So, we are the ones setting the course for this business over the coming years, and we are looking for ways to continue to drive earnings, profit and ways to differentiate that we think can lead to long-term value creation. A number of the recent announcements, including the DFP and SIP, there have been versions of this that have existed, elements that we are working on. And so we have decided as a team, in certain areas, where we think we can accelerate that activity. And so you have seen that come. In terms of our strategic focus areas, we have communicated this externally and continue to emphasize it internally. First is 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 looking to prune assets out of our established regions. Third is leveraging our development DNA in new ways. And so that gets into 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. And then the fifth one, we always drive home, and this is what’s special about here is people and culture. So, that’s what – those are what are driving us as we look ahead and I believe will create outperformance for us.

[Haendel St. Juste, Mizuho]

Okay. Appreciate the thoughts. Thank you.

[Operator]

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

[Alexander Goldfarb, Piper Sandler]

Hey. Good afternoon. So, two questions here. First, on the expansion market, can you just remind us where you are targeting urban versus suburban? Just from some of your peers we have spoken and then speaking to the private operators in the Sunbelt, 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. So, just sort of curious, as you look at the Sunbelt, how you are framing out your exposure?

[Matt Birenbaum, Chief Investment Officer]

Yes. Hey Alex, it’s Matt. So, we don’t necessarily start with a particular kind of goal in mind. Really what we are 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. And what we found over the last couple of years as we have started our investment there, that we felt like the supply/demand fundamentals and the pricing of the assets was just more attractive in the suburbs. So, if you look at our Denver portfolio, the assets we bought there, they have all been suburban assets. We did develop the one deal in RiNo to a very high development yield. But – so we are going to supplement and ultimately have a diversified portfolio. But we tend to be finding better value in the suburbs, not just better supply-demand fundamentals, but also better pricing until recently, probably higher cap rates as well. So, same thing in Southeast Florida, if you look at where we bought in Southeast Florida, it has tended to be more we bought in Voka [ph]. We bought in Margao. We just recently bought a couple of different assets in Broward County. So, we have 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 submarket. But these Sunbelt markets, in the first place is not as much. They are not as urban in the first place. So, I don’t know that there is an urban submarket in all of Raleigh, Durham, in the Downtown Raleigh. And we are not looking at that. So – and in Charlotte, all of our development has been in the suburbs. We did buy the portfolio in the South kind – which is kind of the one urban submarket there that is very, very dynamic. So, I would say that’s the exception. But generally speaking, you are right, it may be a little bit of a different strategy than the way some others have pursued it. And it’s also kind of just more of the way the lifestyle is in a lot of the Sunbelt metros. They just – they don’t necessarily have the same transit orientation. They don’t have the concentration of employment. And a lot of the reason people are moving there is frankly to have more space and have more of that suburban stuff, so.

[Alexander Goldfarb, Piper Sandler]

Okay. The second question is, just given what’s going on in the insurance market, are you seeing more of – I don’t want to 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 mitigate some of the pretty – the sizable premium jumps or the ability or inability to get certain carriers or reinsurers?

[Kevin O’Shea, Chief Financial Officer]

Alex, this is Kevin. Maybe I will just respond strictly to the insurance aspects of this, and then may Ben or Matt may want to respond to the development implications. But you are spot on with respect to highlighting the self-insurance aspects and really the relative strength of well-capitalized REITs and particularly, residential REITs that absorb this risk as opposed to passing on to commercial tenants. So, having that capability to self-insure has been a helpful thing in recent years as the insurance market has become increasingly challenging. I am not going to get too specific about what’s going on with those property renewal now, because we renew on May 15th, so we are actually in the market for that. But we have, in the past, I would say, 7 years 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. And so that has helped keep our insurance costs in the property program to a far lower than market rate of growth. And so for example, last year, total insurance costs, which properties have the biggest piece, grew then by 4% to 5% last year. We do expect a higher level of growth this year in the property program. But 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 inefficient pricing from some of the market participants should that be necessary.

[Alexander Goldfarb, Piper Sandler]

Okay, thank you.

[Operator]

[Operator Instructions] Our next question comes from the line of Ami Probandt with UBS. Please proceed with your question.

[Ami Probandt, UBS]

Hi. So turnover was up from the 2022 lows, but remains low on a historic basis. 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?

[Sean Breslin, Chief Operating Officer]

Ami, 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, etcetera 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, in the last couple of years. That does not seem to be likely to correct. So I’d say that’s probably the one macro factor that may put some cap on sort of churn and people that would typically 13%, 14%, 15% that might go buy a home, this past quarter, that was less than 10%. And 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. So that’s one factor that may kind of keep a lid on things here for the next several quarters.

[Ami Probandt, UBS]

Okay. Great. And then another quick one. How do yields on the projects and the developer funding program compare with AvalonBay development yields?

[Matt Birenbaum, Chief Investment Officer]

Hey, Ami, this is Matt. They are – the way we think about that program is basically we’re allocating the risk differently than on our own development. And so consequently, the target returns are also allocated differently. Our target is for the yield to be roughly halfway between an acquisition and a development. What we found so far, and the few we’ve done is that it’s been higher than that. So the way I would think about it is the yield on those deals is probably going to be 30, 40 basis points less than the yield on if we’ve done the development ourselves, but still probably at least 50, 60 basis points north of where an acquisition yield would be, if not more.

[Ami Probandt, UBS]

Okay, thanks.

[Operator]

Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

[Anthony Powell, Barclays]

Hi, good afternoon. Broader question, I guess, on the Governor of New York’s housing proposal that is stalled now in the Senate and 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? And how do you view those kinds of, I guess, initiatives nationwide going forward?

[Matt Birenbaum, Chief Investment Officer]

I would have – this is Matt. I think – and Ben and Sean may want to weigh in as well. It’s really interesting to see these states try to engage in that dialogue about. But 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. And that is a bit of a third rail politically in California, in New York and other states. So 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. 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 is been something that, in theory, would have opened up more sites to development, there is been something else on the other side that’s come with it that has made it a bit of a poison pill. So it has been very difficult to actually effectuate. They say they’ll allow multifamily in your transit, but then they are saying it has to be prevailing wage, construction cost, which is a 20%, 30% premium. And so economically, it doesn’t work. Or they’ll open it up in certain sites, but they need 20%, 25% affordable. And again, you can’t afford the going price for land and make that economics work.

So the one place we’ve seen it truly be effective so far has been with the 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 two, three, four, five, six, seven apartments in kind of underutilized storage or parking areas at existing communities and not have to go through its zoning process. So that’s not going to move the needle kind of on the prominent macro level, but that’s one small program we have been able to take advantage of.

[Ben Schall]

And then maybe just to add kind of – yes, the higher level regulatory dynamics are influencing our portfolio allocation decisions. It’s been a part of the reason why over the last number of years, we’ve been moving more and more to a suburban-oriented portfolio. And if you see where we’re allocating capital, we’re two-thirds suburban today, probably headed towards three quarters there. It’s influenced our move to the expansion regions, right, at a minimum to diversify away from regulatory environments. And then the reality is, at a more local level based on some of the steps of certain municipalities. And 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.

[Anthony Powell, Barclays]

Great. That’s it for me. Thank you.

[Operator]

There are no further questions in the queue. I’d like to hand the call back to Ben Schall for closing remarks.

[Ben Schall]

Thank you. Thanks, everyone, for joining us today. We appreciate your support and look forward to speaking with you soon.

[Operator]

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.