Dear Shareholders,
Thank you for your support and engagement throughout 2022.
We produced exceptional financial and operating results in 2022, achieving Core FFO per share growth and Same Store Residential NOI growth at some of the highest levels in the Company’s history. During the year, however, the financial markets weakened, and our cost of capital increased. And, as a result, we proactively adjusted our capital allocation plans, allowing us to end the year with a fortified balance sheet and access to significant liquidity.
In 2023, we are prepared for a wider set of potential economic outcomes than usual. In this uncertain environment, we believe our portfolio and apartment market fundamentals will continue to benefit from below average vacancy rates in the housing sector, and from relatively limited new apartment supply across our geographic footprint.
We continue to make strong progress on our five strategic focus areas, consisting of:
• Transforming our operating platform to deliver enhanced value to residents while also driving operating efficiencies.
• Leveraging our development capabilities to generate further growth for shareholders.
• Optimizing our portfolio as we grow, including our continued expansion in our new markets.
• Leading in Environmental, Social and Governance (“ESG”).
• Investing in our people and unique culture, based on our core values of a commitment to integrity, a spirit of caring, and a focus on continuous improvement.
We believe that these focus areas are essential to fulfilling our purpose of Creating a Better Way to Live and our long-term success.
The 2022 Review and 2023 Outlook sections of this letter provide further details.
2022 REVIEW
As we entered 2022, the expectations for job and wage growth were strong and we anticipated that lease expirations would provide opportunities to capture elevated levels of Loss-to-Lease within our portfolio. And while our Initial 2022 Full Year Outlook for Core FFO per share growth, Same Store Residential rental revenue growth and Same Store Residential NOI growth was robust, we are pleased to report that we significantly exceeded our initial expectations.
2022 FINANCIAL & OPERATING PERFORMANCE HIGHLIGHTS
Full Year 2022
Actual Initial Outlook Core FFO per share growth 18.5% 15.6%
Same Store Residential
Rental revenue growth 10.9% 8.25% NOI growth 13.2% 10.0%
Our Initial 2022 Full Year Outlook contemplated $1.15 billion of new development starts, and we anticipated being a net buyer in the multifamily transaction market. However, as capital market conditions evolved, we adjusted our approach by reducing our development starts to $730 million and by transitioning to become a net seller of communities. We believe these adjustments to our planned investment activity better position us to weather periods of near-term economic uncertainty.
We also took actions to improve our already strong balance sheet and liquidity profile in 2022. In April, prior to the decline in the equity markets, we entered into forward contracts to sell two million shares of common stock for approximate future proceeds of $495 million (net of offering fees). At year-end 2022, these proceeds remained entirely available to us. In addition, we upsized our unsecured revolving credit facility to $2.25 billion from $1.75 billion and extended its term to 2026. At year-end, we had over $600 million in cash and cash equivalents on our balance sheet and had no amounts outstanding under our unsecured credit facility. Our fourth quarter 2022 Net Debt-to-Core EBITDAre was 4.5x, well below our target range of 5x to 6x. We believe our balance sheet at year-end was well-positioned to support future growth, and our liquidity profile was strong.
In addition to generating excellent financial and operating results, adjusting our investment plans, and further strengthening our balance sheet in 2022, we advanced several initiatives that support our five strategic focus areas.
Transforming our operating platform to deliver enhanced value to residents while also driving operating efficiencies. We made substantial progress in transforming our operating platform to drive Incremental NOI and to enhance customer and associate experiences in 2022. Over the course of the year, we increased the deployment of a Bulk Internet | Managed Wi-Fi offering to nearly 150 communities and installed Smart Home technology at over 40 communities, which, together, generated nearly $2 million of Incremental Same Store Residential NOI. In addition, we implemented several new customer- and associate-facing digital experiences that enabled us to reduce onsite headcount by nearly 5%, resulting in approximately $8 million of labor savings. We are making significant investments in our operating platform transformation and look forward to additional advancements over the next several years.
Leveraging our development capabilities to generate further growth for shareholders. We executed on two investment vehicles in 2022 that we believe are unique extensions of our development expertise: our Developer Funding Program (“DFP”) and our Structured Investment Program (“SIP”).
• The purpose of the DFP is to accelerate new development in our Expansion Regions. In this program, we utilize third-party multifamily developers to source and manage the development and construction process, including providing cost-overrun guarantees to us. From inception of the project, these communities are wholly-owned and following the completion of construction they are managed by us. We currently have two projects under construction in this program, with a third expected to begin construction in early 2023.
• The SIP provides mezzanine lending or preferred equity for new multifamily construction sponsored by third-party developers that we expect will deliver attractive risk-adjusted returns for us. We believe the SIP leverages our long-standing core competencies in development, construction and operations, which are valued by the sponsors. We are targeting a total program size of approximately $400 million in commitments, and by the end of 2022, we had entered into over $90 million in commitments at a weighted average fixed rate of return of 9.8%.
As additions to the value created through our wholly-owned development, we believe these investment vehicles will increase the opportunity sets in our Expansion Regions and differentiate our growth profile going forward.
Optimizing our portfolio as we grow, including our continued expansion in our new markets. We made progress toward achieving our long-term portfolio allocation targets in 2022. We acquired four wholly-owned communities over the course of the year, each of which is in our Expansion Regions, and we sold nine wholly-owned communities, all of which were in our Established Regions. In addition, two of our five new development starts in 2022 are in our Expansion Regions. By year-end 2022, our Expansion Regions represented approximately 7% of our portfolio.
Leading in ESG. We continued to lead in ESG in 2022. GRESB named us the 2022 Global and Regional Sector Leader, and we received Nareit’s Residential Leader in the Light Award for the fourth consecutive year. We made considerable progress toward achieving our 2030 Science-Based Targets for emission reductions and remained active in our local communities by donating over $2 million of cash and in-kind support to over 200 organizations.
Investing in our people and unique culture, based on our core values of a commitment to integrity, a spirit of caring, and a focus on continuous improvement. We advanced our Diversity in Leadership Vision by increasing the representation of both women and people of color at the management level. We received a perfect score on the Human Rights Campaign’s 2022 Corporate Equality Index, and we were named a 2022 National Inclusion, Diversity and Equity Excellence award winner by the Associated Builders and Contractors organization.
Overall, 2022 was a successful year for AvalonBay. We delivered some of the strongest financial and operating results in our history and strengthened our balance sheet and liquidity profile. We made meaningful strides in transforming our operating platform. We introduced two new investment vehicles. And we maintained our ESG leadership position and continued to foster a culture in which all associates can thrive.
2023 OUTLOOK
We have entered 2023 positioned for future growth. We believe demand for our communities will continue to benefit from the relative attractiveness of renting versus owning a home in our markets. And our outlook for new apartment supply in our markets is stable as compared to last year. We believe this landscape will support another year of healthy, but moderating, apartment market fundamentals for our business.
We plan to continue the transformation of our operating platform in 2023. Over the course of the year, we expect to deploy our Bulk Internet | Managed Wi-Fi offering to another 80 communities and install Smart Home technology at an additional 50 communities. Collectively, we project that these additional deployments and installations will generate approximately $5 million of Incremental Same Store Residential NOI in 2023. We also anticipate that we will continue to benefit from many of the customer- and associate-facing technologies that we have implemented across our operating platform. In 2023, we expect that these advancements will enable us to achieve another $5 million of Incremental Same Store Residential NOI through onsite labor savings. In addition, we plan to continue to pilot and evaluate several other programs and technologies that we believe may provide opportunities to increase revenue streams, enhance customer experiences, and deliver operating efficiencies in the future.
Our primary capital allocation objective in 2023 is to remain agile and well-positioned to capitalize on accretive opportunities. In 2023, we plan to complete the development of five wholly-owned communities for an aggregate projected Total Capital Cost of $485 million and to start the development of seven new wholly-owned communities for an aggregate projected Total Capital Cost of $875 million. We also plan to closely monitor the transaction market and continue to search for opportunities to rotate capital from our Established Regions, through dispositions, into our Expansion Regions via acquisitions and potential DFP opportunities. We will also look to increase new commitments within our SIP, with a goal of entering into an additional $100 million of commitments over the course of 2023.
We plan to continue to maintain a leadership position in ESG in 2023. We are targeting a 4% reduction in our Scope 1 & 2 Science-Based Target emissions for a cumulative reduction of 35% by the end of 2023, putting us well on our path to achieving our 2030 targets. We have set ambitious goals in 2023 among several other ESG-centric measures, including solar installations, water reduction targets, and philanthropic giving.
And finally, we believe our culture and people at AvalonBay are competitive advantages and we will continue to strive to be among the best places to work. Over the course of 2023, we plan to implement new programs that focus on career growth and development for our associates and modernizing systems and tools that are expected to increase productivity. We are working to improve our communication and collaboration with associates, such that we are better connected to one another and understand how each of us contribute to AvalonBay’s success. Lastly, we expect to continue to make progress toward our Diversity in Leadership Vision.
In summary, we believe we are well-positioned to deliver a strong performance in 2023.
CONCLUSION
I want to thank our nearly 3,000 associates for their dedication and commitment, for the results that we delivered in 2022, and for the way that we embraced new ways of delivering services to our residents.
We believe the outlook for our business is healthy in 2023. We expect that apartment market fundamentals will support continued demand for our offerings, and we look forward to providing services to our prospects and residents in new and more efficient ways. We plan to remain agile and well-positioned to capitalize on new, accretive investment opportunities. And we intend to remain focused on maintaining our ESG leadership position and will continue to strive to be among the best places to work.
Again, thank you for your support and engagement in 2022, and we look forward to keeping you apprised of our progress this year.
Sincerely,
Benjamin W. Schall
Chief Executive Officer & President
Read the original letter here.
