Release Date: April 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Q & A Highlights
Q: It's Nick here with Eric. Maybe just on the capital allocation and then rotation into the Sunbelt. You made a comment in the prepared remarks about seeing opportunities below replacement costs. And so I was just curious if you can quantify kind of that. Obviously, it's probably range, but kind of how far below replacement costs you're seeing on average then also the size of the opportunity you're seeing in terms of product, I mean, on the market in those expansion markets.
A: Yes. Sure. Nick, it's Matt. I would say the discount replacement cost is obviously going to vary to some extent based on the age of the asset. I mean, in theory, assets that are 10, 20 years old should be trading below replacement cost because there is some depreciation there. But we are -- I'd say we are seeing assets that are 10 years old. It might be trading 15% to 20% below current replacement cost. We haven't seen kind of brand-new assets coming out of lease-up come to market yet at compelling prices. I think people are getting extensions on their construction loans, and there's a pretty active bridge lending space. So we would look at those as well.
Q: Great. So I want to go back to a comment you made on -- I think you said rents and occupancy in the Sunbelt could last, at least, through '25. The pressure on rents and occupancy in the Sunbelt could last, at least, through '25 and possibly into '26. So first, I want to make sure I heard that correctly.
A: Yes, Jamie, I'll start with a couple of comments. So one is just the sort of the facts and the known dynamics that exist. Supply in the Sunbelt, yes, it is going to be peaking later this year, but it is going to remain elevated into 2025. Second known dynamic is we know when projects are -- we know which projects are under construction, you know when those projects are completing, and you know the period of time associated with lease-up. So that inherently takes you out another 12 to 15 months depending on the size of the project and the velocity of that lease-up.
Q: Great. Matt, I just want to go back to the dispositions. You kind of highlighted the scarcity premium, but I'm curious if there was any specific factors related to the assets you sold sort of idiosyncratic factors that maybe benefited valuations you achieved? Or if you think that is reflective of valuations today? And then can you just share how deep the buyer pool was and whether or not there is financing contingencies?
A: Sure. Well, the first thing I'd say is none of them have closed yet. So be able to provide more detail at the end -- on the second quarter call. But it's a pretty good mix. Three of the 4 assets are AVAs, so a little bit more urban than what we've been selling in the past, one in Jersey, one in Seattle, one in Boston, one in Southern California. So a good mix of geographies. And it continues to be a little bit of a bifurcated market.
Q: Just wanted to ask about your expectations for West Coast markets. I think these are markets that lagged a little bit if I just look at your kind of market-by-market effective (inaudible) growth in the supplemental. But they also have pretty high expectations for same-store revenue if I'm looking at your presentation correctly.
A: Yes, Adam, it's Sean. Good question. And one of the factors to keep in mind is what's changing in underlying bad debt across the markets. If you think about it, it was like rent change is one component, but changes in occupancy, bad debt, et cetera. And particularly for the Southern California market, I would say that is a meaningful contributor to total revenue growth in 2024.
Q: Part of your beat and guidance raise was due to better-than-expected capital markets activity. And I was wondering what component of capital markets outperformed your expectations. Last quarter, you gave a pretty good breakdown on that $0.29 headwind, which has improved slightly.
A: Yes, John, this is Kevin. Really, the $0.02 from better-than-expected capital markets activity was primarily driven by a combination of favorable interest expense and interest income as well as slightly higher budgeted -- higher-than-budgeted capital interest expense. So it's really in those categories where most of the favorability was realized.
Q: Ben, I just want to explore a big picture topic you mentioned. You were talking about the differential between owning and renting in your markets is really wide. Rents are benefiting from that. Is there any historical time period where we could kind of look back at where the delta was this wide? And if so, just like how did it play out on the rent growth front?
A: I mean the rent versus own economics that we're seeing today are really unique, not something that we've seen. We've obviously, over time, seen small variations in that. But the combination of home price appreciation, particularly in our markets and the rise in mortgage rates has led to all-time levels, right? I mean you're approaching where it's some of our markets 2x more expensive to own versus rent. And if we think about it kind of longer term and looking forward, I would frame it as that's an incremental cushion that we have that's supporting our demand on rental economics. So it may not stay as peak as it is today. Obviously, part of that is based on the trajectory of interest rates. But there's a nice cushion that should serve as a tailwind for us for a number of years.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
