AvalonBay Communities, Inc. Q3 FY2025 earnings call

• Ben Schall emphasized the company's portfolio strengths, including heavy concentration of communities in suburban coastal markets, $3 billion of under construction projects, strong balance sheet with low leverage and over $3 billion of available liquidity, and progress on strategic focus areas.
• Kevin O'Shea discussed the updated full-year core FFO per share guidance, lowering it by $0.14 to $11.25 per share, reflecting updated revenue and expense trends.
• Sean Breslin talked about softening revenue drivers, including economic occupancy and rent change trends, portfolio positioning for 2026 with low new supply expected in established regions and lack of affordable for-sale alternatives, and development activity.
• Matthew Birenbaum discussed development activity, with current lease-ups performing better than initial expectations, development underway details, and lease-up performance across different markets.

For the third quarter, AvalonBay's same-store residential revenue growth was expected to be 2.5% for the full year 2025, with same-store residential operating expense growth at 3.8%. Third quarter core FFO per share was $0.05 below prior outlook. The fourth quarter core FFO per share was expected to be $0.09 lower, driven by $0.06 of lower NOI from the same-store portfolio (including $0.04 decrease in same-store residential revenue and $0.02 increase in same-store residential operating expenses) and $0.03 from lower expected earnings contributions from other sources.

• Lowered full-year core FFO per share guidance by $0.14 to $11.25 per share, reflecting an updated expectation for year-over-year earnings growth of 2.2%.
• Fourth quarter core FFO per share expected to be $0.09 lower than prior outlook, primarily due to lower NOI from the same-store portfolio and other sources.

• Soft apartment demand due to reduced job growth, macroeconomic uncertainty, and government shutdown impact.
• Unfavorable variances in repairs and maintenance, insurance, utilities, and associate benefit costs.
• Potential impact of job market changes, especially in regions like D.C., and the lagged effects of events like DOGE job cuts.

Q: Maybe following up on Matt's development comments. Just curious kind of how you're looking at the next crop of projects and properties, kind of how you're thinking about those? And maybe also comparing that with you guys were active on share repurchases in the quarter. If you could kind of talk to those capital allocation decisions.

A: Sure, Jana. Thanks for the question. Let me start by just reemphasizing the strength of our balance sheet. It's in a terrific shape today and really does provide us with a ton of flexibility as we think about our capital allocation choices going forward. I'll start with reinvestment opportunities back into the existing portfolio. We're active this year on revenue-enhancing investments, see a similar set of opportunities as we look to next year. On the development side, as a baseline, we're thinking right now in terms of 2026 development starts in the range of $1 billion of starts. And that's based on looking out on our pipeline and the set of opportunities. They tend to be -- that $1 billion tend to be in our established regions where operating fundamentals are a little bit more stable today. We are seeing strong construction buyout savings in those markets as well. And based on today's rents and today's costs -- those projects aren't starting today, but based on today's rents and those costs, yields on that $1 billion are in the 6.5% to high 6% range. So a meaningful spread to where we can raise incremental capital. And then as we always do, we will flex and adjust as we need to. As folks know, we approve every development project, project by project. We have, for sure, raised the target returns that we're looking from our developers next year, but expected, and we're hopeful that we'll be able to have another year of fulsome development activity. And then given our balance sheet strength, we also have the opportunity to buy back our stock as we did in the third quarter and the extent that, that continues to present an opportunity for us to invest accretively into our existing portfolio. So that's the general setup where we sit today as we think about capital allocation choices.

Q: Maybe just going back to the capital allocation answer earlier. You mentioned development starts maybe in the mid-6s to high $6s. I think buybacks would be somewhere around the mid-6s now. How does that compare to what you're seeing kind of real time in the transaction market? Have kind of going-in yields changed at all given some of the weaker rent growth assumptions? And as you think about that, is there also a difference within some of the different markets that you're looking at today?

A: It's Matt. I guess I'll take that one. The short answer is we haven't really seen any change in where the market is pricing stabilized asset sales. It's still kind of anywhere from the mid- to high 4% cap rate range to low to mid-5% cap rate range depending on the geography. And even our own activity is kind of a good example of that. I put D.C., the district on the higher end of that range. But suburban Seattle might be on the lower end of that range where we just sold an asset this quarter at a 4.6% cap on our numbers. So it has not -- it's been pretty sticky. And if anything, as kind of long rates have come down a little bit, that's given buyers more confidence. So I think transaction velocity, multifamily trades in Q3 were up pretty materially over Q3 of '24. It is still selective in terms of the assets that are getting that bid are assets where there is reasonably good momentum in the rent roll or at least they're not backsliding. But so far, cap rates are holding firm and values.