The paragraph is an introduction to AvalonBay Communities' First Quarter 2025 Earnings Conference Call. The call is in a listen-only mode initially and will include a Q&A session later. Jason Reilley, the Vice President of Investor Relations, begins by mentioning that forward-looking statements will be made and highlights the associated risks and uncertainties. He directs listeners to the company's press release and SEC filings for more information. The call is then handed over to Ben Schall, the CEO and President, who is accompanied by other key executives. An earnings presentation is available for reference during the discussion.

The paragraph emphasizes the company's strong positioning amidst economic uncertainty, highlighting its strategic portfolio, high-quality real estate assets, and superior earnings growth potential. It discusses the ongoing transformation of its operating model and the proactive reshaping of its portfolio for optimized returns. The paragraph also points out the significant future earnings growth from $3 billion in development projects, financed with favorable capital, with construction costs mostly locked in. It notes the company's robust balance sheet and liquidity, allowing for future investments with favorable yield spreads. Additionally, the company has raised $890 million in equity for future development projects.

The paragraph discusses the company's strategic positioning and diversification across various regions and property types, which are expected to support continued growth under different macroeconomic conditions. The portfolio is distributed with nearly equal parts on the East and West Coasts and a smaller portion in expansion regions. They have increased focus on suburban markets and offer a variety of property types to meet diverse customer needs. Strong occupancy and limited new deliveries in established regions are expected to support pricing power, with new deliveries hitting a 20-year low by 2026. While expansion regions face challenges due to high deliveries, this presents opportunities for long-term growth and portfolio optimization.

The paragraph discusses the improvement in rental affordability in established regions due to recent income growth, leading to favorable rent-to-income ratios compared to pre-COVID levels. Renting remains relatively more affordable than home ownership due to high home values and mortgage rates. This favorable environment contributed to strong Q1 results, with a 4.8% growth in core FFO, exceeding prior guidance by $0.03. The growth was due to higher occupancy and favorable operating expenses. Q2 guidance aligns with expectations, anticipating a seasonal rise in operating expenses. The full year 2025 outlook, expecting internal and external growth in the latter half, is reaffirmed. Sean Breslin further emphasizes robust Q1 performance, citing low resident turnover and increased occupancy as positive indicators heading into peak leasing season.

The paragraph highlights current leasing trends and regional performance in the rental market. It indicates that inventory to lease is slightly below last year, supporting strong pricing for new leases and renewals. The DC Metro area remains stable, with occupancy similar to last year and a slight reduction in lease breaks, despite uncertainty in the job market. In tech regions like Seattle and Northern California, Seattle is performing well, driven by job growth and office returns. San Jose and San Francisco are improving ahead of expectations, with San Francisco achieving higher occupancy and leading in rent increases. The overall occupancy in Northern California is over 96%, with average asking rents up by 5%, and San Francisco seeing a 7% gain.

The paragraph discusses the real estate market in Los Angeles, noting that occupancy has modestly increased from Q4 to Q1, but rental rate improvements have been less than expected. Current occupancy and availability match last year's numbers, but rent growth is just 3%, below historical norms. The weak job growth in LA is identified as a factor limiting better performance. Despite this, the overall portfolio is strong, and the company is prepared to capitalize on opportunities during the peak leasing season. Matt Birenbaum then provides details on the company’s development strategy, highlighting that they have 19 projects under construction with four more in lease-up, totaling $3 billion. These projects are match-funded to secure favorable financial terms, with capital costs locked in early, and they are running under budget due to competitive subcontractor bidding.

The paragraph discusses the expected growth and development of a pre-funded real estate project, highlighting that 2025 will be a low point for new occupancies, with significant growth anticipated in the following years. The company aims to increase its start volume to $1.6 billion by 2025, with most activity occurring in the latter half of the year, while maintaining flexibility to adjust plans as needed. The development is largely pre-funded through an equity forward transaction. The company anticipates a slight increase in total project costs due to tariffs impacting material costs, which constitute a significant portion of the total expenses.

The paragraph discusses the company's current favorable position in the real estate project market, highlighting increased bid coverage and subcontractor availability despite potential challenges. It mentions the company's strategy of reallocating its portfolio, noting significant progress in 2024, such as increasing allocations to expansion regions and suburban submarkets. The company acquired an 8-asset portfolio in Texas, funded by sales proceeds and equity issuance, offering a strong initial yield and younger assets than their current portfolio. This acquisition is expected to enhance operating margins in Texas and serves as a strong growth foundation. The paragraph concludes with a transition to Kevin O'Shea for a balance sheet update.

The paragraph outlines the company's strong financial position, highlighted by their investment-grade ratings from Moody's and S&P, substantial liquidity, and minimal leverage. They have $890 million in undrawn equity capital, raised at a gross price of $226 per share with a 5% initial cost, which will drive future earnings growth through new developments. Additionally, the company has enhanced its liquidity and access to cost-effective capital by increasing its unsecured credit facility to $2.5 billion, extending its maturity to 2030, and expanding its commercial paper program to $1 billion. They also closed a $450 million delayed draw term loan with a hedged fixed interest rate of 4.5%, aiming to utilize this by late May. Collectively, these measures provide $2.8 billion in liquidity, enabling them to pursue planned developments and tackle current challenges and opportunities from a strong financial standpoint. The paragraph ends with a transition to a Q&A session.

The paragraph covers a Q&A session in which Eric Wolfe from Citibank asks about rent growth rates compared to the previous year, suggesting a focus on occupancy or economic disruptions as potential factors. Sean Breslin responds, explaining that they are tracking according to plan, with differences from last year due to earlier occupancy acceleration in the prior year. Wolfe also inquires about the company's plan to expand to 25% in new markets and whether any economic or policy changes might alter this plan. Ben Schall responds, noting that most expansion progress has been achieved through trading.

The paragraph discusses the strategy of reallocating capital from older assets in established regions to expansion regions, regardless of current capital market conditions. The focus is on monitoring underlying transaction markets, which remain active but not overly fluid. If transaction markets slow down, progress may be hindered, but active markets will support continued efforts towards goals. Eric Wolfe and Steve Sakwa from Evercore ISI participate in a discussion where Steve asks Matt Birenbaum about criteria for deciding on development starts. Matt explains that each project updates its proforma for review by the investment committee before construction begins. Each project is evaluated individually based on costs, net operating income (NOI), and market conditions, confirming that the pipeline remains as profitable as initially expected. However, costs may change over time.

The paragraph discusses the current positive financial trends, with costs for recent deals being lower than previous quarters and the impact of these costs on projected yields. Steve Sakwa asks Sean Breslin about any changes in the leasing process given these trends. Sean responds that their strategy varies by region. For example, in Los Angeles, which is facing challenges in the employment and port sectors, they might adopt a higher occupancy hedge and offer more flexible renewal terms. However, he notes that there isn't a single global strategy being applied.

The paragraph addresses market strategies and potential adjustments based on macroeconomic conditions. Steve Sakwa and Jana Galan from Bank of America ask questions about the development pipeline and its impact on financial performance. Kevin O'Shea responds, explaining that there are variations in the delivery of home completions from year to year, affecting earnings growth. He notes that 2,300 homes are projected to be occupied this year compared to 2,600 last year. Additionally, he highlights the developmental net operating income (NOI) figures, indicating an impact on earnings that varies based on the number of homes occupied each year.

The paragraph discusses anticipated changes and challenges in financial growth for a company from 2024 to 2026. It highlights two main headwinds for 2025: decreased development NOI (Net Operating Income) and lower interest income on cash. These factors contribute to a projected decrease in core FFO (Funds From Operations) growth compared to the previous year. An estimated external growth of $0.14 in earnings, equating to 130 basis points, is expected in 2025 but is muted due to lower occupancies and cash income. As for 2026, there is a positive outlook, with anticipated increases in both occupancies and development NOI. The paragraph also briefly notes optimism about economic activity around Greater DC, especially in terms of job growth and demand from defense companies, despite potential concerns highlighted in news headlines.

In the paragraph, Sean Breslin discusses the chatter and uncertainty surrounding job security in the region, which hasn't yet impacted behavior significantly. He notes the need to observe upcoming economic data, particularly job growth. Austin Wurschmidt from KeyBanc Capital Markets raises a question about the moderating renewal rate growth in the first quarter, despite some improvement in April. Sean Breslin responds by saying that overall rent changes are tracking as expected and reaffirms that they projected stronger rent change in the second half of the year due to year-over-year comparisons.

The paragraph discusses the current state of occupancy rates and rent growth, noting that rates increased earlier than expected last year, allowing for a stronger push on pricing. However, this year shows less room for rate growth at present, with expectations for improvement later in the year. The conversation then shifts to investment opportunities, specifically a unique transaction involving a Sun Belt portfolio of assets well-suited to the company's acquisition criteria. Matt Birenbaum explains that while such opportunities to buy multiple assets from a single seller are rare, the company remains open to similar opportunities and usually focuses on purchasing individual properties.

The paragraph discusses the strategy of trading and managing a portfolio of assets, specifically focusing on selling assets from established regions and reinvesting in expansion areas. It highlights a recent opportunity to trade eight assets at once, which the speaker, Sean Breslin, sees as timely due to favorable market conditions, such as rent trends and entry costs exemplified by a transaction in Texas. Cooper Clark, filling in for Jamie Feldman, asks about the performance of suburban versus urban assets. Sean Breslin responds that year-over-year revenue growth is stronger in suburban areas, but near-term rent changes are currently similar between suburban and urban markets.

The paragraph discusses trends in urban and suburban real estate markets, noting improvements in areas like San Francisco and Seattle, though suburban regions still hold more promise for long-term investment. Despite expectations that urban supply would dwindle, there is still more urban than suburban supply expected through 2026. This is surprising given urban projects typically take longer due to easier entitlement processes and factors like opportunity zones. The speaker expresses a belief in the suburbs due to demographic trends and regulatory constraints in urban areas, suggesting a preference for suburban investment in regions like Denver and Charlotte. The question at the end inquires about the impact of lower tenant turnover, specifically whether it's more due to fewer tenants moving out to buy homes or benefits from a specific rollout.

In this paragraph, Sean Breslin discusses the impact of tenant move-outs to buy homes on the overall turnover rate. He notes that move-outs to purchase homes are occurring at relatively low and stable levels, within the 8% to 9% range, but the overall turnover rate has been decreasing. Other factors beyond purchasing homes are influencing tenants to stay longer. Breslin also mentions that buying a home remains increasingly unaffordable in many established regions due to high housing values and interest rates. Even though there is some softening in the housing market, particularly in the Sun Belt with excess inventory, significant changes in housing values and interest rates would be necessary to make buying more affordable than renting. The conversation concludes with Cooper Clark thanking Breslin and the operator introducing the next question from Adam Kramer with Morgan Stanley.

In the paragraph, Ben Schall discusses the outlook for job growth, noting that the initial forecast for the year suggested moderating but healthy growth, with a consensus from the National Association of Business Economists (NABE) predicting a million net new jobs, which has since been reduced but remains positive. Adam Kramer shifts the focus to renewal offers for May and June, with Sean Breslin explaining that renewal offers are in the low to mid 5% range and there is typically a spread of 100 to 150 basis points between the offer and where they settle. Rich Hightower from Barclays then begins a new line of inquiry.

The paragraph discusses a Texas portfolio deal and its funding strategy. The market reaction to the initial and stabilized yields was not very positive. However, Avalon found the deal attractive as their equity yields and cost of debt were favorable. They funded the Dallas transaction through a mix of downrate units and operating partnership units, while the Austin deals were funded via 1031 exchanges. This aligns with Avalon's capital allocation strategy, with an initial cost of capital at 5%. Despite concerns about the 11-year-old units potentially needing capital expenditures, Avalon's approach focuses on maintaining a balance between cost of capital and yield, alongside achieving portfolio objectives and benefiting from economies of scale.

In the paragraph, a discussion about recent acquisitions in specific submarkets is outlined, emphasizing geographic overlap with existing assets, which enhances operational density. This increased density could lead to operational efficiencies and potential cost savings in future acquisitions. The acquired assets, averaging 11 years old, are comparatively younger than the existing portfolio's average of 18-19 years, and they are simpler garden-style assets without parking decks or enclosed corridors. Consequently, the expected capital expenditures (CapEx) on these new assets should be lower on a per-unit basis than the current portfolio average. While the $230,000 per door cost doesn’t include initial CapEx, the 5.1% stabilized yield calculation does consider it.

In the paragraph, Michael Goldsmith from UBS asks Sean Breslin about the factors driving the strong market in Northern California, particularly in San Francisco. Sean attributes this strength to a few key factors: the return-to-office mandates due to improved quality of life, efforts from local leadership, positive job growth and office leasing, the impact of AI, and a significant decrease in new housing supply. He indicates that these trends are influencing current performance and are expected to be durable, with negligible supply expected in the near future.

In the conversation, Sean Breslin and Alexander Goldfarb discuss the seasonal increase in operating expenses (OpEx) from the first to the second quarter. Breslin highlights that about a third of this increase is due to a benefit from lower property taxes in the first quarter, which lowered the base. Additionally, there is a natural rise in costs in the second quarter due to higher lease expirations and turnover. Spring also sees an increase in non-routine maintenance projects, contributing to the seasonal OpEx rise. Breslin mentions that renewal offers for the second quarter are in the low to mid 5% range, though specific guidance wasn't provided.

The paragraph discusses seasonal trends in leasing, emphasizing the importance of starting projects in the spring to prepare for the summer leasing season. It notes that while certain trends are typical, there was an unexpected benefit in the first quarter. Alexander Goldfarb asks about resident concerns mentioned in the opening comments. Sean Breslin responds by clarifying that despite hearing concerns, there has been no observable negative impact on leasing performance or pricing, suggesting resident concerns don't necessarily indicate upcoming economic downturns.

The paragraph discusses the current market environment where there is chatter and anxiety among people about job security and economic impacts, although this chatter is not backed by scientific data. This concern is widespread, including in areas outside of D.C., due to the prevalence of federal employment across the country. Typically, such chatter leads to a lag effect of about six to eight months before any significant changes occur, during which people tend to reduce discretionary spending and remain in their current homes due to uncertainty. The context suggests that people are anxious but are not making immediate drastic changes. The paragraph ends with Alexander Goldfarb thanking Sean Breslin, and the operator introducing a new question from Haendel St. Juste of Mizuho Securities, who asks the team about providing guidance for second-quarter blends.

The paragraph discusses expectations and current conditions in the real estate markets of Los Angeles and Boston. Sean Breslin notes that renewal offers are in the low to mid-fives and highlights that while LA has seen an uptick in occupancy, rent growth is limited due to weak employment growth and uncertainty around tariffs affecting economic activity. In New England, after a slow start in January and February, asking rents have shown significant improvement in March and April. The conversation includes consideration of any potential negative impacts from government funding changes. Haendel St. Juste acknowledges Breslin's comments and inquires about the financial outlook, particularly the implied increase in Funds From Operations (FFO) later in the year.

The paragraph features a discussion primarily led by Kevin O'Shea, who explains the expected drivers of sequential earnings growth for a business throughout 2025. O'Shea highlights that the growth is anticipated to follow a typical pattern, characterized by a sequential increase in same-store revenue and a seasonally driven rise in sensor offbacks in Q2 and Q3, followed by a decline in Q4. He also mentions expected developments over the year, referencing a chart showing quarterly occupancy projections. While some increase in capital costs is anticipated in the second half, the overall expectation is that earnings growth will mirror previous years, with notable Q1 to Q4 increases in core FFO per share. Haendel St. Juste acknowledges the explanation, and the operator concludes the segment.

In the paragraph, Linda Tsai from Jefferies asks about the timing of the settlement for $890 million in undrawn forward equity, to which Kevin O'Shea responds that the majority is expected in the third and fourth quarters, with some potentially in Q2. They will provide more clarity in the next quarterly call. Linda then asks if improvements in San Francisco and California's political climate affect their diversification strategy away from coastal markets. Matt Birenbaum replies that their long-term plan remains unchanged, despite economic improvements in California, emphasizing their goal of having a diversified portfolio across different regions and regulatory environments.

The paragraph discusses various factors influencing development costs in real estate projects, particularly focusing on the differences between suburban garden-style assets and mid-rise developments. Matt Birenbaum explains that most constructions are high-density wood frame buildings, such as podium or wrap styles with structured parking. There is also a shift towards more three-story walk-up and built-to-rent (BTR) products. The variation in costs is primarily attributed to location rather than product type, with land being a significant cost factor in high-rent areas like California. In contrast, site costs can be higher in regions like North Carolina, where land is cheaper but requires more site preparation.

The discussion involves Sean Breslin addressing questions about renewal processes and market conditions. Breslin explains that the typical basis point spread on renewals versus what was initially proposed ranges from 100 to 150, which is consistent historically, except in particularly weak or strong markets. He clarifies that negotiations are now more disciplined due to a centralized renewal team. John Kim inquires if tenants are more likely to negotiate through an app, which Breslin denies, noting the influence of current market rates on negotiations. Alex Kim from Zelman and Associates then asks about leasing velocity and concession usage, to which Breslin responds positively, noting limited community lease-ups in the quarter.

In the paragraph, Alex Kim and Sean Breslin discuss leasing and occupancy rates in the first quarter, which were around 22-23 units per month, with concessions averaging about half a month. Sean Breslin explains that concession usage is influenced by market conditions as they aim to lease up an entire community within a year, unlike stabilized assets with typical turnover. He does not foresee changes in concession levels unless there is a significant market shift. Ben Schall concludes the discussion, and the operator ends the teleconference.

This summary was generated with AI and may contain some inaccuracies.