AvalonBay Communities(AVB) - 2024 Q3 - Earnings Call Transcript

Financial Data and Key Metrics - Core FFO guidance for 2024 increased to $11.04 per share, implying a peer-leading 3.9% core FFO growth rate [18] - Same-store revenue growth expected at 3.5%, with same-store NOI guidance increased to 3% for 2024 [18] - Economic occupancy increased from mid-summer lows and expected to remain stable in Q4 [20] - Average asking rent for the same-store portfolio was approximately 3% higher than the same date last year, with the East Coast up 4% and the West Coast up 2% [22] Business Line Performance - Portfolio now 73% suburban, up from 70% last year, with 10% allocation to expansion regions [9][10] - Development starts for 2024 increased to nearly$ 1.1 billion, with a projected initial stabilized yield of 6.3% [12] - AvalonConnect and AI utilization driving $37 million in incremental NOI towards an$ 80 million target [8] Market Performance - Established coastal regions expected to see new deliveries of 1.4% of existing stock in 2025, lower than the Sunbelt's 2.4% [26] - Suburban deliveries expected to be roughly 1% of stock in 2025, benefiting the same-store portfolio [27] - Rent-to-income ratios in established coastal regions are about 10% below 2020 levels, indicating potential for higher rent capacity [24] Strategic Direction and Industry Competition - Focus on transforming the operating model, optimizing portfolio growth, leveraging development capabilities, and ensuring cost-effective capital access [6][14] - Development yields outperformed original underwriting by 50 basis points, achieving a 6.5% yield [11] - Strong balance sheet with $850 million in forward equity activity at an implied initial cost of approximately 5% [14] Management Commentary on Operating Environment and Future Outlook - Management expects healthy job and wage growth, along with unaffordable for-sale housing alternatives, to support steady demand for apartment homes in 2025 [23] - Operating expense pressures expected to moderate in 2025, with insurance costs projected to be in the mid to high single-digit range [59][61] - Development activity expected to increase in 2025, with potential start volumes of around$ 1.5 billion [48] Other Important Information - AvalonBay's build-to-rent (BTR) strategy includes townhome communities, with a focus on acquisitions and leveraging existing operating expertise [103][105] - Insurance costs expected to stabilize, with property insurance renewals flat in May 2024, leading to lower growth rates in 2025 [55][59] - Bad debt improvement expected to continue, with underlying bad debt projected to improve by 60 basis points from 2023 to 2024 [28] Q&A Summary Question: Supply risk and Sunbelt concentration [34] - Deliveries in established coastal regions expected to trend down over the next few years due to challenging development climate and reduced starts activity [37] - Sunbelt projects underwriting yields around 6%, with unique characteristics such as land ownership and infrastructure front-loading contributing to higher yields [39][40] Question: Development pipeline and Sunbelt strategy [47] - Development starts in 2025 could increase to around $1.5 billion, with a mix of established and expansion regions [48] - Sunbelt development strategy focuses on lower-density garden-style projects, with specific market dynamics influencing yields [52] Question: Insurance and operating expense outlook [54] - Insurance costs expected to stabilize, with property insurance renewals flat in May 2024, leading to lower growth rates in 2025 [55][59] - Operating expense growth expected to ease in 2025, driven by reduced impact from tax abatement programs and AvalonConnect deployment [60][61] Question: Lease growth and bad debt improvement [64][69] - Rent change expected to improve in November and December, driven by new move-ins and higher asking rents [67] - Bad debt improvement expected to continue, with normalization likely by 2026 [72] Question: Build-to-rent (BTR) strategy and land values [79][118] - BTR strategy focuses on townhome communities, with potential for detached single-family homes in the future [115] - Land values remain sticky, with significant retrenchment in high-cost markets like California [119] Question: Market performance and economic assumptions [126][130] - Job growth expected to slow in 2025, with higher-income jobs and strong wage prospects supporting demand [128] - Suburban coastal business expected to outperform, with development and transaction activity driving external growth [131] Question: Leasing market normalization and site selection [135][142] - Traditional seasonal leasing patterns expected to return, with return-to-office trends and unaffordable for-sale housing supporting demand [138][140] - Site selection process includes third-party coastal risk modeling, with a focus on resilience to flooding and other environmental risks [142] Question: East vs West Coast market performance [145] - East Coast markets like Boston and New York outperformed in 2024, with strong earn-in expected in 2025 [146] - West Coast markets like Seattle and San Francisco have easier comps and potential upside from return-to-office trends [146] Question: Other income and operating expenses [150] - Other rental revenue growth expected to decelerate in 2025, driven by AvalonConnect deployment and lease roll-through [151] - Operating expense growth expected to ease in 2025, with reduced impact from AvalonConnect and tax abatement programs [152] Question: Renter demographics and bad debt improvement [162][165] - No significant demographic shifts observed, with aging millennials driving demand for suburban and townhome products [163] - Bad debt improvement expected to continue, with significant opportunities in New York, New Jersey, and the Mid-Atlantic [166]