Austin Wurschmidt: That’s all very helpful. Thank you.
Operator: Thank you. Our next question comes from the line of Brad Heffern with RBC Capital Markets. Please proceed with your question.
Brad Heffern: Hey, thanks, everybody. Occupancy in January was about 50 basis points above the ‘23 level, but guidance assumes flat occupancy. So I’m just curious is the expectation that you plan to trade that occupancy for rent growth in the spring? Or is that just a conservative assumption?
Mike Lacy: It’s a good catch, Brad. We’re starting to see that today. So again, we wanted to build our occupancy in a period of time where our lease expirations are the lowest. It allows you to just push your occupancy up. And then as you move into the leasing season, you can start to get more aggressive as leases start to turn. And so the 97.2% is probably a high mark for us. I think as we move through the quarter, we expect that to come down closer to 97%, maybe even the high 96% range and continue to test our blends. And from all you can see is that rate of change from December to January. Again, very positive momentum, a lot of that is on the new lease side. So we had negative 5.6% new lease growth in December. January was negative 3.6%. February, it’s only 7 days in. So it’s probably too early to call, but things are promising, and it looks like it’s trending upwards.
Brad Heffern: Okay, thanks for that. And then how are you treating the DCP book going forward as you take back assets and redemptions come in? Do you plan to shrink the book just based on recent experience? Or do you plan to reinvest in DCP and kind of keep it at the same size that it always was?
Joe Fisher: I think naturally, you’re going to see a little bit of potential shrinkage. Embedded in guidance, we mentioned that binary outcome there with that Philadelphia asset, which if we were to take that back, that’s plus or minus $100 million balance. So that would bring it down to $475 million. And then we mentioned that we have about $75 million of assumed redemptions in the back half of the year. So you could see that balance flow down, which near-term is a little bit dilutive. That said, I don’t think there is any desire to continue to shrink beyond that. I think the hope is that as we get some of those paybacks we find opportunities to continue to redeploy into either on the traditional DCP side or the recap side.
That said, it’s kind of a double-edged sword in terms of – we’re not seeing a lot of opportunities out there in that space right now, but that speaks to the fact that starts have dropped off to kind of annualized 200,000-unit level. So not a lot of developers out there starts today. But I do think over time, you’ll see us continue to pivot between that, between acquisitions, redevelopment, development as it makes sense. But I wouldn’t expect it to continue to shrink much beyond that.
Brad Heffern: Okay, thank you.
Operator: Thank you. Our next question comes from the line of Joshua Dennerlein with Bank of America. Please proceed with your question.
Joshua Dennerlein: Yes. Hey, guys. Appreciate the time. Mike, I just want to explore your guidance assumption for 3% renewal rate growth in 2024. Are there specific markets driving that lower? Or is there just some kind of split the difference between conservatism I think you said recessions are 2% versus maybe more normal years, it’s closer to 4%, just trying to engage in where you guys are coming from?
Mike Lacy: Yes. Good question. I’ll tell you, just as we think about renewals and new leases in general, just as we started the year, you can see our renewals started to come down closer to that 4% range. And it feels to be a pretty comfortable we’re still spending on that 3.5% to 4% as we move forward over the next 2 months or so. Our expectations are with seasonality picking up even though we’re facing supply, typically, your market rents start to pick up as well. So if we can continue to see our new lease growth continue to improve. You’re going to see that, that spread between new and renewal is in a more healthy range. And then we can start testing our renewals again as we move forward. But as it relates to just regional performance, there is not a big difference typically between the Sunbelt versus the East Coast, West Coast, usually in that range of, call it, 2, 2.5 to all the way up to around 5% on renewals, but it’s pretty tight overall.
Joshua Dennerlein: Okay. And then maybe just one follow-up on that. Does that imply the second half renewals like 2.5% or the spreads 2.5?
Mike Lacy: They are pretty consistent right now. Our playbook is around 3% for the year. And again, when we send out 3.5% to 4% we typically negotiate on 25% to 30% of our renewals, and it’s usually in that 50 basis point range. So I feel comfortable at least in the foreseeable future in the first couple of quarters with that range. And we will see what happens with market rent. And again, if we can test the waters and push rent renewals back up, we will.
Joshua Dennerlein: Thanks. Appreciate, guys.
Operator: Thank you. Our next question comes from the line of Jamie Feldman with Wells Fargo. Please proceed with your question.
Jamie Feldman: Great. Thank you. So I guess just thinking about Slide 10, more than 250 basis points above historic average markets. I mean, how do you even guide in those markets – excuse me, right now? I mean, what do you – like what gives you – can you just talk about how you think about visibility in terms of like where rents could really go? What gives you comfort giving any kind of numbers on those, whether it’s historic cycles or maybe the numbers you’re seeing from third parties or however else you’re thinking about it. Really, just a question on kind of visibility in the highest supply markets.
Joe Fisher: Hey, Jamie, it’s Joe. Maybe I’ll start off and Michael will come in behind me here. But I do think, to your point, on the visibility. When you look at the deliveries that we were facing kind of in the back half of ‘23 and here to start this year, there really isn’t a material difference between deliveries that we are facing at that point in time versus what we expect to face as we get in the middle of the year. It goes a little bit higher as we kind of get into 2Q, 3Q, but it’s really not a big change. So the fact that we are already facing kind of a run rate delivery schedule during a typically seasonally weak period of time, and we’re putting up the results that we did in terms of blends and renewals and the traffic that we saw and we were able to drive occupancy.
That gives you some conviction as we go into a seasonally stronger period of time, and we have seen concessions come back a little bit. We’re seeing good traffic the pricing power to start the year is off to a good start in terms of pushing rents up on a month-over-month basis. It gives you some conviction that maybe not the worst is behind us, but at least we’re finding a little bit of a floor here as we move into the year. So it helps a little bit in that approach to those high supply markets.
Mike Lacy: If I could just add. I think for us, we spend a lot of time doing both a top-down and a bottom-up approach and whether it’s coming from the field and they are telling us how the supply is impacting them directly versus all of our third-party data that we’re able to look at here in Denver, we triangulate around a range of outcomes, and that’s why we’ve provided that by region here and again, we feel pretty good to start the year and we will see how it plays out, especially as it relates to moving into the leasing season.
Jamie Feldman: Okay, thank you. That’s very helpful. And then a big week for headlines in terms of distressed and commercial real estate, KRF guides, all kinds of stories out there. What are you guys seeing now in terms of merchant stress you think it will present even more opportunities than you originally thinking for the year? And any change in merchant developer behavior on concessions as you’re starting to see more things seem to have issues?
Joe Fisher: Hey, Jamie, it’s Joe. I guess maybe just stepping back first as you think about the sector versus broader commercial real estate. I do think it’s important to think about multifamily, maybe a little bit differently than some of the headlines that are out there. A lot of that bank stress revolves around other sectors because the reality is that when we have Fannie Mae and Freddie Mac in the multifamily space, they do take the majority of the financing for our space. And so the banks end up having to go heavy some of those sometimes more risk factors. So you got to delineate between those two to start and the fact that in a needs-based business, but plenty of capital still flowing through it or wanting to flow into it, you typically don’t see that same level of distress within multi.
So I think I’d keep with a little bit of what we’ve talked about in the past, which you’ll see some distressed developers for sure. So to the extent that you have pro forma NOIs that are below expectations, obviously, higher interest rates and cap rates or delays, as we talked about earlier, you are going to see some of these developers that feel distress just like on this Modera Lake Merritt deal that we are talking about. That said, do you see distressed pricing on the other side is another discussion, and with well-priced capital from the GSEs and availability of that capital, yes, you’re still seeing quite a big demand for multifamily. Andrew Cantor and team just spent a ton of time out at NMHC, meeting with a lot of different partners, brokers, capital providers.
