AVALONBAY COMMUNITIES INC Q4 FY2024 earnings call

Key Points

• Q4 2024 was successful with revenue and core FFO growth. The suburban coastal portfolio outperformed due to steady demand and limited new supply.
• Operating model transformation drove incremental revenue and efficiencies, with $39 million of incremental NOI as of year-end 2024, ahead of plan. In 2025, an additional $9 million of revenue and efficiencies are expected towards the goal of $80 million annual incremental NOI.
• Strategic focus areas include:
  • Optimizing the suburban coastal portfolio, now 73% suburban and moving to 80%, benefiting from steady demand and limited new supply, and capturing lifestyle preferences of aging millennials and downsizing baby boomers.
  • Increasing exposure to Sunbelt markets and submarkets, with expansion market presence at 10% in 2024 and aiming for 25% in 2025, diversifying away from certain risks.
  • Leveraging development capabilities for external growth, planning $1.6 billion in development starts in 2025, with $3.5 billion under construction by year-end 2025, setting up for earnings growth and value creation in 2026-2027.

In Q4 2024, AvalonBay Communities achieved revenue growth of 3.4% and core FFO growth of 3.6%. The suburban coastal portfolio outperformed with steady demand and limited new supply. Suburban exposure increased to 73% from 70% in the prior year, moving towards a target of 80% suburban allocation. The company also increased its expansion market presence to 10% from 8% in 2024, aiming for 25% in the future.

Forward-Looking Statements

• Expect core FFO growth of 3.5% in 2025, driven by same-store portfolio (3% revenue growth, 4.1% operating expense growth, 2.4% NOI growth) and stabilizing development.
• Development starts planned at $1.6 billion in 2025, with $30 million in residential NOI from development communities under construction and lease-up in 2025.
• Capital plan: $2.1 billion of capital uses, $960 million new capital raised, $890 million from selling equity forwards, expecting $450 million free cash flow after dividends, and unrestricted cash of ~$275 million at year-end 2025.

Risks

• Regulatory risks in certain markets, including potential impact on portfolio allocation.
• Potential impact of tariffs on development costs, though current subcontractor market shows tailwinds but could change.
• Challenges in achieving historical bad debt levels due to a tighter regulatory environment affecting eviction processing.

Question and Answer

• Q: Confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. So our first question is from Eric Wolfe with Citibank. Please proceed.

A: Kevin O'Shea discussed development accretion, noting factors like higher capitalized interest, lower occupancy, lower cash levels, and equity forward impact on share count, with an expectation of ~15 cents growth from investment platforms.

• Q: You've talked about continuing to deploy capital in the BTR product, liking it, given the large units and suburban locations. I guess, are there any additional challenges to developing or operating those communities that you've seen thus far versus more traditional multifamily? To the extent that there's some, you know, portfolios that are being marketed of product that akin to what you would develop, you know, would you be willing to take a look at those?

A: Matthew Birenbaum stated that AvalonBay would look at aligned portfolios, with BTR product typically in tertiary markets or far-flung suburbs, and they have a BTR asset in Austin, with plans to grow more BTR through development or funding middle-market builders, and are open to operating such communities if aligned with strategic priorities.

• Q: Can you provide more color on your thoughts on new renewal, you know, new leases renewal leases and what the trajectory looks like throughout the year?

A: Sean Breslin said renewals are expected to average mid-fours, new move-ins mid-one percent range, with sequential improvement in the first quarter as prime leasing season approaches.

• Q: When you look at what you have going on right now, and let's say you get everything done in 2025 that you have on your plate. Oh, how much closer do you get to your 25% target in expansion markets from the 10% that ended the year. I'm just wondering, you know, what how how much the gap closes over the course of this coming year as you see it today.

A: Ben Schall said they've been taking a measured approach, moving expansion market presence to 10% in 2024 and likely continuing to close the gap towards 25% in 2025 through trading and new investment activities, with a multiyear effort.