AvalonBay Communities Q2 2025 Earnings Report

AvalonBay Communities EPS Results

• Actual EPS: $2.82
• Consensus EPS: $2.80
• Beat/Miss: Beat by +$0.02
• One Year Ago EPS: $2.77

AvalonBay Communities Revenue Results

• Actual Revenue: $689.90 million
• Expected Revenue: $759.08 million
• Beat/Miss: Missed by -$69.18 million
• YoY Revenue Growth: N/A

AvalonBay Communities Announcement Details

• Quarter: Q2 2025
• Date: 7/30/2025
• Time: After Market Closes
• Conference Call Date: Thursday, July 31, 2025
• Conference Call Time: 1:00PM ET

AvalonBay Communities (NYSE:AVB) is a real estate investment trust, which engages in the development, acquisition, ownership, and operation of multifamily communities. It operates through the following segments: Same Store, Other Stabilized, and Development or Redevelopment. The Same Store segment refers to the operating communities that were owned and had stabilized occupancy. The Other Stabilized segment includes all other complete communities that have stabilized occupancy. The Development or Redevelopment segment consists of communities that are under construction. The company was founded by Gilbert M. Meyer in 1978 and is headquartered in Arlington, VA.

AvalonBay Communities Q2 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Second quarter and first half results exceeded initial guidance with higher occupancy and rental revenue driving strong performance.
• Positive Sentiment: Tight operating expense management lowered OpEx growth by 100 bps, boosting same-store NOI guidance to 2.7% for 2025.
• Positive Sentiment: Development pipeline remains robust with approximately $3 billion underway and 2025 development starts raised to $1.7 billion, yielding above pro forma targets.
• Negative Sentiment: Sunbelt markets face lower occupancy at 89.5% and underperformance in Mid-Atlantic and Southern California is weighing on rental growth.
• Neutral Sentiment: Full-year core FFO guidance holds at $11.39 per share despite regional variability in demand, expenses, and lease-up trends.

Presentation

[Operator]

Morning, ladies and gentlemen, and welcome to AvalonBay Communities Second Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. Following remarks by the company, we will conduct a question and answer session. You may enter the question and answer queue at any time during this call by pressing star and one on a telephone keypad. If your question has been answered or you wish to remove yourself from the queue, press star and two.

[Operator]

If you are using a speakerphone, please lift the handset before asking your question. And we ask that you refrain from typing and have your cell phones turned off during the question and answer session. Your host for today's conference call is Mr. Jason Riley, Vice President of Investor Relations. Mr. Riley, you may begin your conference call.

[Jason Reilley, VP - IR at AvalonBay Communities]

Thank you, Zico, and welcome to AvalonBay Communities Second Quarter twenty twenty five Earnings Conference Call. Before we begin, please note that forward looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward looking statements, and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release as well as in the company's Form 10 ks and Form 10 Q filed with the SEC. As usual, the press release does include an attachment with definitions and reconciliations of non GAAP financial measures and other terms, which may be used in today's discussion. The attachment is also available on our website at www.avalonbay.com/earnings, and we encourage you to refer to this information during the review of our operating results and financial performance. And with that, I will turn the call over to Ben Shaw, CEO and President of AvalonBay Communities, for his remarks. Ben?

[Benjamin Schall, CEO & President at AvalonBay Communities]

Thank you, Jason, and thank you, everyone, for joining us today. I'm joined by Kevin O'Shea, our Chief Financial Officer Sean Breslin, our Chief Operating Officer and Matt Birenbaum, our Chief Investment Officer. Starting with our key takeaways on slide four of our earnings presentation. Our second quarter and first half of the year results exceeded our initial guidance. As Sean will discuss further, our revenue growth was better than expected through the first half of the year with higher occupancy and other rental revenue growth driving most of the favorable variance.

[Benjamin Schall, CEO & President at AvalonBay Communities]

We also benefited from tight management of operating expenses, which contributed to our same store NOI outperformance during the first half of the year. As Kevin will detail, these operating expense savings carry through to our updated outlook for the year with OpEx growth now forecasted at 3.1, 100 basis points better than our original guidance and translating into higher NOI growth in 2025, now projected at 2.7%. While our expectations for job growth in the second half of the year are a little more muted than they were in January, demand remains healthy across most of our portfolio. And importantly, new supply in our established regions continues to decline to levels not seen in over a decade. This low level of supply should continue for the foreseeable future given that the barriers to new development, particularly in our suburban established regions, are substantially greater than most markets across the country.

[Benjamin Schall, CEO & President at AvalonBay Communities]

As Matt will further discuss, our $3,000,000,000 of development projects are expected to continue to generate differentiated external growth, with our development underway trending above our pro form a stabilized yields. While we experienced some timing delays in occupancies in the first half of the year, we expect to occupy roughly the same number of homes by year end. Looking ahead to 2026 and beyond, this unique book of business will generate meaningful incremental earnings and value creation and is one of the primary reasons we continually produce core FFO growth in excess of our same store NOI growth. We're also making strong progress in advancing on our portfolio allocation objectives. We're well on our way towards our target of acquiring $900,000,000 of assets this year, most of which is being funded by capital from dispositions, a continual process that we're confident will position the portfolio for stronger cash flow growth over time.

[Benjamin Schall, CEO & President at AvalonBay Communities]

And lastly, on the key takeaways, our balance sheet is in terrific shape, having raised $1,300,000,000 of capital year to date at an initial cost of 5%, an attractive cost of capital relative to our uses and particularly to yields of north of 6% on new development projects. Page five highlights our Q2 and first half of the year metrics, including core FFO growth of 3.3% year to date, continuing to position us toward the top of the sector. We also started $610,000,000 of new development projects in the first half of the year and have now raised our target to $1,700,000,000 for development starts for the full year, up from $1,600,000,000 We continue to believe that we are uniquely positioned to secure an outsized share of what will be a lower level of starts in the industry, utilizing our strategic capabilities to execute on high quality projects in an attractive long term basis. Page six provides the roadmap for our second quarter core FFO of $2.82 per share relative to guidance of $2.77 with revenue exceeding by $02 operating expenses better by $05 partially offset by lease up NOI and overhead. Please note that $02 of the $05 of the lower than expected operating expenses were timing related, which we now expect to incur later in 2025.

[Benjamin Schall, CEO & President at AvalonBay Communities]

As shown on Slide seven, we head into the second half of the year with very healthy occupancy in our established regions, with total market occupancy at 94.8%. In contrast, market occupancy in the Sunbelt region stands at 89.5% as those markets continue to struggle with elevated levels of standing inventory from recent deliveries. Our established regions are also well positioned from a new supply perspective, with deliveries expected to drop to 80 basis points of stock in 2026, further supporting healthy operating fundamentals. Before turning it to Kevin, I want to take a moment to say thank you and congratulations to Jason Reilly. This is his last earnings call before his retirement from AvalonBay later this summer after twenty one years at the company and over a decade as our Head of Investor Relations.

[Benjamin Schall, CEO & President at AvalonBay Communities]

Jason has been an integral partner with the executive team here and a thoughtful resource to the investment community, shaping the dialogue for AvalonBay and for the wider multifamily REIT sector. Jason has also been a strong developer of talent, including most recently with Matt Grover, who will now be stepping in to lead our Investor Relations team. Many of you know Matt from his prior roles on the buy side and for the last three plus years at AvalonBay. Congrats to Jason on his retirement and we all wish him well in his next stage. I'll now turn it to Kevin to further discuss our updated outlook.

[Kevin O'Shea, Chief Financial Officer at AvalonBay Communities]

Thanks, Ben. And congrats, Jason, and excited to have Matt in the elevated role. Turning to Slide eight, we present our updated operating and financial outlook for full year 2025. We are maintaining our full year core FFO per share guidance, which at the midpoint is $11.39 per share, reflecting year over year earnings growth expectations of 3.5%. Our updated outlook reflects slightly higher same store residential NOI growth offset by modestly lower lease up NOI and the net impact of capital markets activity, transaction activity and overhead cost changes.

[Kevin O'Shea, Chief Financial Officer at AvalonBay Communities]

We now project same store NOI growth of 2.7%, which is 30 basis points above our initial outlook. This improvement is driven by a 100 basis point reduction in expense growth partially offset by a 20 basis point decline in revenue growth. We've also modestly increased this year's development starts to $1,700,000,000 up from $1,600,000,000 and we've opportunistically completed our capital plan for the year at an attractive initial cost of 5%. While our full year guidance for core FFO per share remains unchanged, slide nine highlights the impact on full year growth from updated expectations for key parts of our business as compared to our initial outlook. Specifically, a $04 increase in same store residential NOI and a $02 benefit from capital markets and transaction activity are expected to be offset by a $04 decline in NOI from new development and a $02 increase in overhead and other items.

[Kevin O'Shea, Chief Financial Officer at AvalonBay Communities]

And again, this results in an unchanged expectation for full year core FFO per share of $11.39 per share in 2025. Slide 10 provides a bridge from our second quarter core FFO per share to our projected third quarter midpoint. As is typical seasonally in our business, we expect sequential increases in same store revenue and operating expenses as well as a continued ramp in lease up NOI during the third quarter. In particular, we anticipate a $03 increase in same store revenue, a $02 increase in NOI from new development and a $01 benefit from capital markets and transaction activity and other items will be offset by an $08 increase in same store operating expenses driven by sequentially higher repairs and maintenance, utilities and property taxes. Turning to slide 11, we also provide the components of our expected sequential increase in core FFO per share during the fourth quarter.

[Kevin O'Shea, Chief Financial Officer at AvalonBay Communities]

Here again, we expect to benefit from typical seasonal sequential patterns in our business during the fourth quarter, including a $03 increase in same store revenue, a $06 decrease in same store operating expenses, a $04 increase in NOI from new development and a $01 benefit from capital markets and transaction activity and other items. And with that overview of our updated outlook, I'll turn it over to Sean to discuss operations.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

All right. Thanks, Kevin. Moving to Slide 12. Our updated outlook for same store revenue growth is slightly below our original expectations driven by a change in our same store pool and underlying bad debt. The change in the same store pool is primarily related to the pending sale of four assets in the District Of Columbia in Q3, which Matt will talk about in a minute.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

In terms of underlying bad debt, which can be difficult to forecast, we've seen steady improvement over the past year, but are expecting it to be modestly unfavorable to our original budget. In terms of rate and occupancy, we're expecting lease rate growth to be 10 basis points below our original forecast, but fully offset by higher occupancy. Turning to slide 13, our same store average asking rent exceeded our original expectations through May, but peaked in June earlier than our original outlook and is contributing to the roughly 10 basis point lower contribution from effective lease rates noted on the previous slide. Shifting to bad debt, as noted, the pace of improvement year to date has been modestly below our initial outlook, so we have adjusted our expectations for the second half of the year to reflect recent trends. Most regions are moving in a positive direction, but we continue to face some challenges regarding the impact of regulatory actions and overloaded court systems in portions of the Mid Atlantic and New YorkNew Jersey regions.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

Moving to Slide 14 to address our updated revenue outlook by region. We expect the New York, New Jersey and Seattle regions to outperform our original budget. Demand has been healthy in both regions with moderating supply supporting better pricing power and occupancy. In New York, New Jersey, our same store portfolio averaged 96.3% economic occupancy during Q2, up about 30 basis points from Q1 with positive pricing trends across most of the suburban submarkets, which represent about two thirds of our portfolio in the region. In Seattle, we averaged 96.6% economic occupancy during Q2 and achieved greater than 3% rent change.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

We continue to see a reduction in the pace of new deliveries in the region and the outlook for the second half of the year is positive. The Mid Atlantic, Northern And Southern California and our expansion regions are projected to underperform our original outlook, while Boston is expected to be in line. The Mid Atlantic had a strong start to the year, but we've seen some softening in demand and pricing momentum over the last sixty days, most notably in Maryland and the District Of Columbia. Northern Virginia has held up well thus far and produced mid-four percent rent change during the second quarter. Given the level of uncertainty in the region, we've responded with a more conservative approach to pricing, which is impacting our outlook on rates for the second half of the year.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

In Northern California, Francisco continues to lead the region with almost 97% occupancy during Q2 and strong rent change of 8%. San Jose remains healthy with mid-ninety 6% occupancy and rent change in the 3.5% range for the quarter. The East Bay is the laggard in the region, but will likely gain momentum later in 2025 and 2026 as performance there typically lags behind both San Francisco and San Jose. Looking forward, the volume of new supply in the Bay Area is expected to be the lowest of any of our regions at roughly 30 basis points of total inventory through 2026. So the overall outlook for the Greater Region is quite healthy for the next several quarters.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

In Southern California, our expectations for full year revenue growth have moderated due to continued weakness in the labor market across LA, particularly in the entertainment industry. The increase in the state's film and tax credit program, which was adopted in late June, resulted in a more than doubling of the program from $330,000,000 to $750,000,000 to support the production of television and film in the state and will hopefully provide a much needed boost to the local economy. Now I'll turn it to Matt to address our development and investment activity.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

All right. Great. Thanks, Sean. Looking at our current lease up activity, as Kevin mentioned, we now expect development NOI for the year to be modestly lower than our budget at start of the year. This is due to some delays in deliveries at several communities as shown in the chart on the left on slide 15, as well as slower leasing velocity at two Denver communities where we completed construction late last year.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

We completed at least three thirty fewer homes in total in the first half of the year than we expected, with most of those now expected to be absorbed in the second half, delaying the NOI uplift as these homes start to generate revenue into the fourth quarter and into 2026. With this reduction in 2025 lease up NOI, the projected increase for '26 should be that much greater as we still expect to occupy 3,000 additional homes next year. Importantly, these delays are not impacting the overall profitability of our development activities as shown on slide 16. Our $2,900,000,000 in development underway is completely match funded, was underwritten to a yield on cost of 6.2% based on estimated market rents at the time of construction start and continues to reflect outperformance relative to that initial underwriting as communities enter lease up. Our long standing practice is to report rents on our development underway at the initial untrended underwriting until we have leased about 20% of the homes, at which point we mark the rents to current market levels.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

Only three of the 21 communities currently underway have reached that point as of the end of Q2. But we are running 30 basis points ahead of pro form a on those three based on modest rent outperformance of $80 per month and some hard cost savings from the initial capital budget. We do have another seven communities which are just starting lease up in the second half of this year and we expect this trend to continue at those projects as well. Six of those seven have set their opening rents, which are 3% above pro form a. And many of those are also likely to finish with savings in their capital budgets.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

And the 11 communities that won't start lease up until 2026 or '27 are continuing to see encouraging early savings on their construction buyout. Turning to slide 17, while Q2 was a quiet quarter for us on the transaction front, we have a number of pending transactions expected to close in the third quarter. This includes almost $600,000,000 currently under contract for sale, with those proceeds used to fund $295,000,000 in pending acquisitions as well as to fund the cash component of the Texas acquisitions we completed last quarter. This increased trading activity further advances our long standing portfolio allocation goals as we reallocate capital within our portfolio from older urban assets in our established regions to younger suburban assets in our expansion regions. The pending dispositions includes four assets in the District Of Columbia, as well as communities in Seattle and New York.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

Executing on asset sales in DC is particularly challenging and hard to predict due to the unique Washington DC TOPA law. While these transactions have been in the works for an extended period of time dating back to 2024, the unusual level of uncertainty of the process led to these assets being included in our same store bucket at the beginning of the year. Now that the timing is confirmed, they've been removed from same store, driving 10 basis points of the reduction to our projected same store revenue growth rate as Sean mentioned. We look forward to providing more detail on all of these transactions after they close. And with that, we're ready to open the line up for questions.

[Operator]

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. A confirmation tone will indicate your line is in the question queue. You may press star and two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

[Operator]

Our first question comes from Eric Wolf with Citibank. Please go ahead.

[Nick Joseph, Head - US Real Estate & Lodging Research Team at Citigroup]

Thanks. It's Nick Joseph here with Eric. Maybe just on the delayed occupancies and development. You mentioned Denver communities. So I was just hoping to get a little more color on what's impacting the pace there and kind of what's the normal leasing pace versus what you're seeing.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

Sure. Hey, Eric. It's Matt. The so the pace has been fine. You know, the deals that we had at least up in the second quarter, we're averaging about 30 homes per month in leasing, which is more or less what we would expect for this time of year.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

And again, the shortfall is really a little bit of it is based on just some deliveries moving around to later in the year at some communities. And then there is one lease up in particular we have in urban Denver, Governors Park, where we've had to offer elevated concessions and the pace is not what we had originally anticipated. That's a very, very competitive submarket within Urban Denver. We have a second lease up in Suburban Denver up in Westminster. That one's going fine, but it's also just a little bit behind pace, but maybe not as far behind as Gov Park.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

And that I guess the other one that I didn't mention is we do have a lease up in Suburban Maryland, which is also seeing a little bit of elevated concession activity. So it really is contained to those two markets. But as we look to a lot of the lease ups we're opening now, they're in pretty strong markets. So we are seeing pretty good traction in the rest of the book.

[Nick Joseph, Head - US Real Estate & Lodging Research Team at Citigroup]

Thanks. And just given the peak leasing season seems to have occurred a little sooner than expected and maybe the delivery is a little later than expected for some of these. But what gives you the confidence by year end you'll have the same number of occupied units, you know, if traffic maybe slows down a bit from missing the peak leasing season?

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

Yeah. Nick, it's Sean. As Matt noted, we've had pretty good velocity at the various communities averaging around 30 a month even at Governor's Park in Denver, is sort of in the middle of the battle zone with a lot of supply in urban Denver. We did 35 a month in the second quarter. So just when you when you get things a little bit late from a delivery standpoint, you gotta push a little harder on concessions to try and get that velocity.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

So that's kind of the simple answer as it relates to the the deliveries and then the lagged occupancies.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

I guess I would this is Matt. I would also add just, again, you you look at the market mix of where we're expecting those occupancies in the second half, and a fair number of them are in those new release ups we're talking about. You know, we just opened for leasing, for example, in South Miami. You know, I think we're we're running ahead there of what we expected. We just opened in Wayne, in Northern New Jersey.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

We have another job just, getting ready to open in Parsippany, New Jersey. So those are markets which are seeing plenty of, plenty of strength.

[Nick Joseph, Head - US Real Estate & Lodging Research Team at Citigroup]

That's very helpful. Thank you.

[Operator]

Thank you. Our next question comes from the line of Steve Sakwa with Evercore ISI. Please go ahead.

[Steve Sakwa, Senior Managing Director & Senior Equity Research Analyst at Evercore ISI]

Yeah. Thanks. Good afternoon. I guess I wanted to talk about the chart on, I guess, page 13, the asking rent trend. And, obviously, there was a clear noticeable kinda leveling off in sort of the maybe mid May time frame.

[Steve Sakwa, Senior Managing Director & Senior Equity Research Analyst at Evercore ISI]

And I guess I'm just curious from your perspective, what do you think happened there? And why do you think things sort of softened up or didn't continue that normal seasonal upturn?

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

Yes, Steve, it's Sean. Happy to talk about that. What you can tell from looking at the chart, if things, were ahead of our expectation, for a good portion of the, the first half of the year. But I think you what we observed is, you know, demand, has been a little bit softer. Primarily, our, expectation is tied to slightly weaker job growth in the first half of the year than originally anticipated.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

So when you start to look across the footprint at that across the first half of the year, we ended up with about a 100,000 fewer jobs than originally projected. So, you know, that's probably the primary driver. It usually doesn't show up in the data till a little bit later, but you can see that in the job growth figures, that we have today.

[Steve Sakwa, Senior Managing Director & Senior Equity Research Analyst at Evercore ISI]

Okay. And then maybe just focusing on bad debt. I mean, your figures are still running, I guess, noticeably above many of your peers. And I'm just wondering, I don't think that's actually a market mix issue. So I'm just trying to kinda figure out, why your portfolio might be having a little bit more headwind here and not recovering as quickly as some of the other portfolios.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

Yes. Steve, happy to chat about that one. I mean, first, what I'd say is that I can't speak to everyone else's you know, policies relates to bad debt, what they reserve for, what they write off, etcetera. But, I think as you probably know, and we've stressed in the past, with our customer care center in Virginia Beach, number one, we pretty much charge for everything that is due to us under the course of the lease or under the terms of the lease. So that includes not only rent, it includes late fees, it includes utilities, it includes everything else.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

So there could be an issue there where, you know, we're charging just an absolute dollars more than potentially others. And two, you know, what I would tie it to for us in terms of the pace of improvement being good, but not as good as we expected, is we have seen things back up and actually increase in some cases in terms of the time to evict across portions of New York, and the District Of Columbia and Maryland, those particular jurisdictions. Now we might have a little bit greater footprint in terms of the suburb suburban markets around New York, but New York City is also a challenge as well. So, again, I can't speak to everyone else, but I I can tell you that we charge everything we're charged for, we can charge for, and those are the primary reasons in those specific regions that is slightly unfavorable to our initial outlook.

[Operator]

Does that answer your question, Steve?

[Benjamin Schall, CEO & President at AvalonBay Communities]

Zizik, move on to the next caller.

[Operator]

Yes, please.

[Operator]

Thank you. The next question comes from Jamie Feldman with Wells Fargo. Please go ahead.

[Jamie Feldman, MD & Head - REIT Research at Wells Fargo]

Great. Thanks for taking the question. I guess just following up on on the chart on page 13. So can you talk about what this means for your 3Q and 4Q blends in your outlook? And then also, you know, as we think about earning into '26 and your view on year end rents, you know, how much do you think this this change in your outlook affects your '26 earning?

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

Yeah, Jamie. It's Sean. I mean, we're given we're sitting here in July, I don't think we're really prepared to talk about the earn in for 2026 yet. But what I would say in terms of blends is that we're essentially expecting, what we saw in the first half to continue through the second half of the year in terms of overall rent change performance. So that that's the current expectation.

[Jamie Feldman, MD & Head - REIT Research at Wells Fargo]

Okay. I guess I was thinking about just if you look at the math like, just the math on the chart, like, how much would that change impact the '26 earning number from what you originally thought to where you are now for the year end number?

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

Yeah. We we haven't run that at this point in time. I mean, you can guesstimate it if you like just based on lease expiration volume, but there's still a lot of leasing to do. There's a lot of things that move around in terms of mix of like term and not like term, etcetera. So it's just not I think it's just way too early to even sort of guesstimate what that's gonna look like in terms of the impact.

[Jamie Feldman, MD & Head - REIT Research at Wells Fargo]

Okay. So maybe I'll ask a better question. You're a couple months into the Dallas acquisition. Can you talk about how it's going? What's better than expected, worse than expected? Just any kind of feedback on on that deal.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

Yeah. What I'd say at this point in time, as you know, we're only, you know, two, three months in here, but things are trending pretty much as expected as of now.

[Benjamin Schall, CEO & President at AvalonBay Communities]

Yeah. I'll add to that, Jamie. Jamie, I think we're tracking well. We have been investing more resources in our asset management function. And so they've been that group has been taking a more active role in the implementation of the portfolio.

[Benjamin Schall, CEO & President at AvalonBay Communities]

And then the third piece I'd add is we're definitely seeing the scale benefits in that market and particularly in Dallas and just what it brings to the our larger ecosystem down there.

[Jamie Feldman, MD & Head - REIT Research at Wells Fargo]

Okay. Thank you.

[Operator]

Thank you. Our next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.

[Austin Wurschmidt, Senior REIT Analyst - Equity Research at KeyBanc Capital Markets]

Yeah. Just going back to the asking rent growth curve this year, which markets really dragged on that specifically? And I guess, what do you think really you need to see? Is it just a pickup in job growth to kind of get back to that same steepening in the curve that you saw last year and sort of in the pre COVID period you outlined?

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

Yeah. Austin, good question. I mean, I'd I'd say, as I mentioned earlier first, it's fundamentally in our mind, it is a a job growth issue. When you look at it across, you know, the various regions, it's pretty apparent that, you know, the job growth being slower than anticipated is pretty broad based. Obviously, it impacts different regions to varying degrees.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

I'd say at this point in time, the regions where we're expecting underperformance to be most material relative to our original outlook when you start thinking about rent change and revenue performance are really the Mid Atlantic and Southern California. Southern California, I think we've all talked about LA. You know, we talked about LA in the first quarter call. We talked about it in NAREIT. It continues to kinda be more of the same in terms of relatively stable occupancy, but not a lot of pricing power there given the weaker job environment to to push rents.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

And then more recently, as I've mentioned in my prepared remarks on the Mid Atlantic, which in the last sixty to ninety days has softened up, most notably in the district and in, suburban Maryland. I'd say those are the two that kinda stand out the most in terms of expectations coming down relative to our original outlook when you look across the the footprint.

[Austin Wurschmidt, Senior REIT Analyst - Equity Research at KeyBanc Capital Markets]

That's helpful. And I I guess, you know, how how much is really that trajectory of market rents along with maybe the attractiveness of your cost of capital or certain aspects of your cost of capital today impacted your thoughts about sort of future starts given also kind of the backdrop, Ben, you referenced supply is levels not seen in a decade as you look out over the next year? Thanks.

[Benjamin Schall, CEO & President at AvalonBay Communities]

Yes, Austin, as we think about starts for the remainder of 2025, we're in a fortunate position in that we've prefunded that capital and we prefunded it at attractive cost of 5%. And so as we're looking out, thinking about our development yields relative to both that cost of capital and where we're seeing underlying market cap rates, which are still in the high 4% or 5% range. This feels like sufficient spread as we think about generating incremental value as it relates to development. Other aspects that you've heard Matt talk on, we are seeing some pretty meaningful buyout savings that started in certain regions. I'd say it's now kind of gravitated more broadly across the country.

[Benjamin Schall, CEO & President at AvalonBay Communities]

So as we get to the stage of actually starting construction and buying out these deals, we're getting that long term basis lower. And then this is a cohort of projects that also given that starts are coming down when they open in a couple of years, we'll be facing less competition. So we feel good about this book of business for the remainder of 2025. As we get into 2026, cost of capital that does look different today, right? And so as we always do focusing in on the 100 basis to 150 basis points of spread and making sure that we remain nimble and continue to adjust based on what we're seeing in the market.

[Austin Wurschmidt, Senior REIT Analyst - Equity Research at KeyBanc Capital Markets]

Thank you.

[Operator]

Thank you. The next question comes from Adam Kramer with Morgan Stanley. Please go ahead.

[Adam Kramer, VP - Equity Research at Morgan Stanley]

Great. Thanks for the time. I think you guys referenced maybe a little bit softness in D. C. In recent months.

[Adam Kramer, VP - Equity Research at Morgan Stanley]

Wondering if we can maybe just double click on that. What exactly are you seeing in the market? I think it's sort of surprised to the upside earlier in the year, maybe surprised with its stability early in the year. What sort of changed there? Is it resident uncertainty?

[Adam Kramer, VP - Equity Research at Morgan Stanley]

Is it sort of concrete job loss? And I guess just maybe let's unpack what's happening in DC.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

Yeah, Adam. Happy to talk about that. I think it's a combination of different things in terms of what we're actually seeing on the ground. As I mentioned previously, at at NAREIT, I think the, you know, we're having a lot of conversations with existing residents at renewal time about their lease options moving forward, both, you know, what term of the lease they can sign, what happens if I happen to lose my job, you know, what are the lease termination options, what does that cost me, you know, if I need to transfer to another apartment. Kind of, you know, speculating a little bit on the downside from residents, which is just pushing out the commitments that they're making, just trying to preserve optionality.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

So we're hearing that from our centralized renewals team in terms of closing on those renewals. We've also seen an uptick in concessions, again, mainly in suburban Maryland, submarkets and the District Of Columbia as I think the market has sort of prepared for what's anticipated to be maybe weaker demand. And then, you know, obviously, job growth just hasn't been there as well. So I think you have some sort of behavioral things where people are anticipating some weakness and some potential impacts to the job market. That are sort of flowing through here, and then you have some actual activity in terms of lack of jobs.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

So you got sort of a confluence of a couple different things going on there.

[Adam Kramer, VP - Equity Research at Morgan Stanley]

Got it. That's helpful. And then maybe just maybe more of a sort of geopolitical or public policy question. But obviously, the mayoral primary in New York, the CEQA sort of situation in California, wondering maybe just high level your thoughts on each of those and what it might mean for you guys in terms of your exposure to each of those markets?

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

Yes. In terms of the New York situation, I'm happy to talk about that one. I mean, you never know exactly what's going to happen there. So it's you can't speculate on what's gonna happen politically. But what I'd tell you is in terms of rent stabilized units, nothing would take effect for a while.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

It's gonna be '26, '27 if there was anything done. But in terms of our rent stabilized portfolio, it's about 2,100 units. So there could be potentially some impact on that that population of units depending on what the actions are that are taken. As it relates to CEQA, you have Mac and Chad about the development impact.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

Yeah. So, you know, the CEQA reform is really one in a series of actions that we've seen come out of the legislature in California, really over the last five, seven years trying to encourage more housing production or reduce the barriers which are at the local level primarily. So it's important to understand as it relates to the CECO reform, it doesn't actually open up more sites to multifamily development. Still only applies to sites that are zoned or planned for multifamily. So you still have to go through the same approval process that you would anywhere else in terms of getting your zoning, getting a site plan approval.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

But what it does do is in like, California has an extra layer on top of all that, which is you also have to show compliance with CEQUA, which can cost into the 7 figures and can slow the process down. You're submitting 500 page reports, sometimes to small jurisdictions that don't really have staff to review them. So we do think that it will help accelerate or take some of the pursuit cost risk and time out of our pipeline, development rights pipeline in California, and you know, get us in the ground sooner on some deals. So but, you know, I don't know that it we don't think that it fundamentally changes kind of the supply outlook kind of in the medium term for California. It's still a very supply constrained place.

[Adam Kramer, VP - Equity Research at Morgan Stanley]

Great. Thanks for the color.

[Operator]

Thank you. Our next question comes from Rich Hightower with Barclays. Please go ahead.

[Rich Hightower, MD - U.S. REIT Research at Barclays]

Hey. Good afternoon, guys. So, Matt, I'm looking at slide 16, and I appreciate your comments earlier about, you know, sort of the way you quote development yields prior to stabilization, you know, a little bit more conservatively. But if I if I look at that bucket that is, you know, kinda not as seasoned at the moment and you and you simply mark that to market today, I mean, what what does that yield uplift look like relative to the sort of low six number we see in front of us?

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

Yeah. You know, we really don't mark them to market until the time comes when we're getting ready to start leasing internally, and then we don't, you know, externally till that's validated, as I mentioned, through the 20% leasing. So if you're talking about the 11 deals that don't start lease up till '26 or beyond, you know, we really haven't looked at that. But I would when you look at the market mix, you look at where they are. The one thing I can tell you, you know, that we do know is that costs are probably gonna come in under, at least from what we can tell today.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

And, you know, you're still a year and a half to two years out from opening for lease up. So, you know, who knows what happens to market rents between now and then. I wouldn't say that their market rents in that basket is below where they were when we underwrote them. When you look at the mix of the locations of where they are, I mean, what we're seeing is market rent growth over the last, you know, twelve months, call it, has been, you know, flattish. But, you know, these aren't deals that started, you know, in Austin in the peak three years ago where rents are down, you know, 15%. We don't have anything like that.

[Rich Hightower, MD - U.S. REIT Research at Barclays]

Right. Okay. Yeah. That that kinda answers my question. Okay.

[Rich Hightower, MD - U.S. REIT Research at Barclays]

And then secondly, if I look at same store, like, term effective rent change in the supplemental and I look at the other expansion regions. So this is a question for Sean, really. You know, it looks like it looks like trends kinda went the opposite direction that that might have been expected, you know, q two sequentially versus q one. And I I think that's maybe a little bit in contrast to some other, you know, I guess, Sunbelt reporters, you know, peers of yours in the space in terms of the trends in their blended rents for February relative to q one. So, obviously, this is a small sample size relative to to those other pools, but just what what happened there?

[Rich Hightower, MD - U.S. REIT Research at Barclays]

And and and, obviously, it bounced back in July as well, so that's encouraging. But what what happened during the February specifically, if you don't mind?

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

Yeah. Happy to chat about that. I mean, if you one of the things I would just point to as it relates to the expansion regions for us, again, small sample size as you noted. But given, you know, the supply on the ground that is known, you know, we've always erred on the side, at least today, of, you know, keeping occupancy relatively stable and erring on the side of being slightly defensive as opposed to opportunistic on rents. So I think that partly is a reflection of strategy.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

I can't speak to the distribution of the portfolios for the peers on that, but, you know, that's pretty much the rent change that was required to kinda get to the occupancy targets that we had for that portfolio across those different regions. And there are different supply elements in each one, but certain submarkets are still getting a fair amount of supply. Like the South End Of Charlotte is an example. It's still getting plenty of supply and probably will for the next, you know, three, four quarters before it really abates. So it's really again, give us a small sample.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

It's a submarket by submarket assessment, and you do have pressure in some of those submarkets. And that's what you're seeing in the rent change to hold the occupancy that we targeted.

[Rich Hightower, MD - U.S. REIT Research at Barclays]

Okay. That makes sense. Thanks.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

Yep.

[Operator]

Thank you. Our next question comes from John Kim with BMO Capital Markets. Please go ahead.

[John Kim, MD - U.S. Real Estate at BMO Capital Markets]

Thank you. On the pending DC asset sales, I think, Matt, you mentioned that you started marketing that last year. I'm wondering how

[Operator]

Sorry to interrupt you, John. I'm extremely sorry to interrupt you. But your audio is not clear. Could you please use your handset, please?

[John Kim, MD - U.S. Real Estate at BMO Capital Markets]

Is that better?

[Operator]

Yes, please. Go ahead. Thank you.

[John Kim, MD - U.S. Real Estate at BMO Capital Markets]

Okay. About that. On the forward DC asset sales, Matt, you mentioned that those started marketing you started marketing those last year. I was wondering if you could discuss how pricing has changed during that time frame.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

I don't know. You know, DC specifically is a very difficult market to sell assets in, maybe the most difficult in the country with the way their topo law works there. So there's not a lot that does trade there. There were a couple of recent trades that closed in DC. I think one that closed a month or so ago that maybe JBG sold.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

So there have been a few, but I would tell you in general, cap rates today in most of our markets relative to where they were when we struck that deal, you know, kind of October, November, probably about the same. You know, some markets might be up a little bit. Some might be down a little bit. But generally speaking, you know, if you look at where the tenure is, it's kind of gone all over the place, but it's not far off of where it was then. And I would say the same about cap rates.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

So I don't have any reason to believe it would be significantly different today.

[Benjamin Schall, CEO & President at AvalonBay Communities]

John, is definitely an element as we think about our overall portfolio allocation approach. And part of that is shifting further from 70% suburban to 80% suburban. There are a select set of urban assets that have been on our target list, either we haven't had the right buyer on the other side. But more recently, we haven't been comfortable with where values were, right? And so part of what helped facilitate the transaction here was the recovery, particularly in rent roll in these DC assets as we're building up to the end of last year.

[Benjamin Schall, CEO & President at AvalonBay Communities]

And so we got the values where we then were comfortable transacting.

[John Kim, MD - U.S. Real Estate at BMO Capital Markets]

Okay. And then on on the blended lease growth guidance that you took down a little bit, I think you mentioned it's gonna be somewhere to second half of the year, will be somewhere to the first half of the year. But I was wondering if you could provide any more color on how the third and fourth quarter plays out for you.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

Yeah. I mean, what you would typically expect, John, is that things would trail off, you know, given normal asking rent curves. What I would tell you is that for this year, you know, we do have softer comps relative to the fourth quarter of last year. So it may flatten out a little bit more as we get into the fourth quarter as compared to third quarter, but don't think it'll be terribly different from what you would typically see from us.

[John Kim, MD - U.S. Real Estate at BMO Capital Markets]

Great. Thank you.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

Yep.

[Operator]

Thank you. Our next question comes from Jeff Spector with Bank of America. Please go ahead.

[Jeffrey Spector, Managing Director at Bank of America]

Great. Thank you. First, I just wanna congratulate Jason and Matt. My question is on the the the development homes occupied, the expectation for '26, and tying that to, you know, your more muted job growth forecast. I guess, you know, can you talk about that a little bit, the 3,000 development homes occupied for '26? Has that changed?

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

Hey, Jeff. It's Matt. No. That hasn't changed. That's really a function of deliveries.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

And so when you look at you know, we are in a a down year for us for deliveries, which goes back to, you know, two, three years ago, we had started less development. So, you know, we're ramping up development starts. Last year, we started a billion. This year, we're starting a billion 7. That's gonna translate into more deliveries in 2627, '28 than we had in, you know, '24 and '25.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

So, you know, we'll generally price the homes to absorb them. So it's not really a function of a macroeconomic view of what '26 is gonna look like.

[Jeffrey Spector, Managing Director at Bank of America]

Okay. But so you're saying the more muted job growth forecast is not concerning to you on what you're planning to deliver for next year?

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

No. I mean, those those those are shovels in the ground. Those that train is is that train left the station a couple years ago.

[Jeffrey Spector, Managing Director at Bank of America]

Yeah.

[Benjamin Schall, CEO & President at AvalonBay Communities]

Yeah. And and, Jeff, just to, yeah, reemphasize, you know, we're we're also, spot point in time, kind of running above pro form a on those rents, right? So there's a little we'll see what the market rent environment looks like between now and then, but we are going into next year with some cushion on those development deals as you think about the value that's being created for shareholders.

[Jeffrey Spector, Managing Director at Bank of America]

Okay. And then my second, I just want to confirm on the delays in development. I know you talked about specific projects, but just to confirm, it had nothing to do with the tariffs, delays in imports or or materials, please.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

Yeah. No. It's we haven't really seen those supply chain bottlenecks for a while now. It's still a little bit tough with, electrical switchgear, but, it's just, you know, occasionally, you get the normal delays about, you know, getting elevator inspections, getting final COs from some of these smaller local jurisdictions. So it's, you know, that kind of stuff.

[Jeffrey Spector, Managing Director at Bank of America]

Great. Thank you.

[Operator]

Thank you. Our next question comes from Nick Yulico with Scotiabank. Please go ahead.

[Nicholas Yulico, Managing Director at Scotiabank]

Thanks. I I want to turn back to the development pipeline and and thinking about future starts and the magnitude of what that could be, you know, beyond this year. What I'm wondering is how how much your equity price is gonna factor into that since, you know, you did have the forward equity at very attractive, price and and cost of capital. It's not exactly where you'd want it to be right now. So in terms of your stock price, I imagine.

[Nicholas Yulico, Managing Director at Scotiabank]

So, you know, if your stock price kinda stays around where it is today, how how much does that, you know, impact the size of a potential development start number for 2026?

[Kevin O'Shea, Chief Financial Officer at AvalonBay Communities]

Sure, Nick. This is Kevin. I'll start on the funding side, and others may wanna chime in. So the way to think about our business model is that on a leverage neutral basis in a typical year, we are able to start about a billion a quarter of new development through a combination of free cash flow, dispositions where we can keep the proceeds, and then leveraged EBITDA growth all in a leverage neutral basis. And so if you wanna try to understand so that's the capacity component.

[Kevin O'Shea, Chief Financial Officer at AvalonBay Communities]

If you're trying to look at the the spread cost or the incremental cost of that source of funds, really just functional looking at how you wanna treat our free cash flow, which, you know, is free from an accounting point of view, but obviously has an opportunity cost reinvestment rate that you have to put in there for the company. And then debt, which, you know, today depends on where we're tapping the debt markets. Fresh ten year debt for us today would be around five and a quarter, give or take. We did just do a debt deal ten year basis at $5.00 5 a few weeks ago. And we typically achieve on the best spread pricing in our sector.

[Kevin O'Shea, Chief Financial Officer at AvalonBay Communities]

So that's a relative cost of capital advantage for us. We also have been able to do debt by leaning into the term loan market where we did term loan debt at mid fours. And we have capacity for leverage. So the number I gave you about a billion a quarter is sort of leverage neutral. If it made sense, we could lean into that leverage capacity.

[Kevin O'Shea, Chief Financial Officer at AvalonBay Communities]

And then, you know, we've got asset sales, which, you know, has as Matt and Ben have alluded to, are still tracking and it's sort of the the high four, low five kind of range for most transaction transactions that are being completed. So generally speaking, we can, in the current environment, fund in the low fives, about a billion a quarter of capital to fund development and and do so in accretive basis given the opportunities that particularly in our established markets where supply remains constrained and our lease up activity remains generally quite strong. So that's generally what we have been doing in most years every now and then like last year, we're able to tap the equity markets. But by no means are we dependent on the equity markets in order to drive differentiated earnings growth through a significant amount of development activity.

[Nicholas Yulico, Managing Director at Scotiabank]

Alright. That's helpful, Kevin. Thanks. And then second question, maybe going back to Sean and what you're talking about with the, you know, the weaker job growth, you know, expectations so far this year. I'm I'm wondering if there's also it's not just a level, you know, number of jobs, but it's also a composition of jobs issues issue.

[Nicholas Yulico, Managing Director at Scotiabank]

I mean, we've seen, you know, at the national day, it's been more education, leisure, health care jobs, not professional services. Maybe you could just talk about there's also just a composition of jobs issue that that you see unfolding in in multifamily right now. Thanks.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

Yeah. Nick, good observation and definitely on point as being accurate there. So not only of the absolute number of jobs were disappointed relative to the original forecast, but the composition does not favor sort of, you know, higher end multifamily right now given the the weaker environment for finance, professional services, technology, etcetera. So that is expected to improve as we get into the second half of the year. And there's a lot of money pouring into AI and other technology sectors, etcetera.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

So there may be a better picture for that in the second half of the year even in the context of lower absolute levels of job growth than we originally anticipated. But year to date, you are correct that the mix has not been necessarily supportive either.

[Nicholas Yulico, Managing Director at Scotiabank]

Thanks.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

Yep.

[Operator]

Thank you. Our next question comes from Michael Goldsmith with UBS. Please go ahead.

[Ami Probandt, Equity Research Analyst - REITs at UBS Group]

Hi. Thanks. This is Amy on for Michael. I thought that there was a really interesting chart in the presentation on market occupancy across the Sunbelt. So my question is, do you think that we need to see occupancy trend back towards essentially the pre COVID level in the Sunbelt in order to really see pricing power in that region?

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

Yeah. Amy, this is Sean. I mean, it certainly needs to move that direction. You will gain some incremental pricing power, you know, as it moves up, but you won't realize sort of full pricing power until you get back to a more normal stabilized level of occupancy. You know, in the case of that big spread there, there's a ton of standing inventory as Ben mentioned in his prepared remarks.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

And so that stuff, whether it's a month free, two months free, you look and lease specials, etcetera. Concessions in those communities will be pretty heavy getting them leased up, which will certainly impact the existing stock, just not to the quite the same degree. But you need those communities to lease up, and then the whole market to come back to a stabilized level before you have really, I'd say, firm or strong pricing power.

[Ami Probandt, Equity Research Analyst - REITs at UBS Group]

And then what do you think is, the timing to get back to that level?

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

That is a good crystal ball question. That depends a lot on, job and wage growth in these markets. So, yeah, you have to kinda take a look at what your forecast is for each one of those individual markets in terms of job growth, and then the level of standing inventory that's required to achieve it. But, you know, I think one thing to keep in mind here is if you're thinking about when they actually occupy versus when it shows up in the rent roll and revenue growth, that typically takes longer than most people anticipate. Because you've gotta get it leased up, then you've gotta burn off the concessions, the leases have to expire.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

It's usually a couple year process to where you see things actually start to impact revenue growth in a material way. You'll see it show up in rent change first, but that's not really gonna drive revenue growth in the short run until you roll the whole rent roll through. So just keep in keep that in mind as you think about the sequence of the events that lead to revenue growth.

[Ami Probandt, Equity Research Analyst - REITs at UBS Group]

Great. Thank you very much.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

Sure.

[Operator]

Thank you. Our next question comes from Alexander Goldberg with Piper Sandler. Please go ahead.

[Alexander Goldfarb, MD & Senior Research Analyst at Piper Sandler Companies]

Hey. I guess, good afternoon. So two questions here. First, just big picture, yes, there's the debate over return to office, you know, how that's impacting apartments. You know, certainly, you know, for urban apartments would make sense that that would be a a clear benefit.

[Alexander Goldfarb, MD & Senior Research Analyst at Piper Sandler Companies]

As you look at your suburban portfolio, just given predominantly that's what you have, have you seen any nuance where return to office has actually been a negative in any in any of the locations?

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

Yeah. Alex, it's Sean. What I would tell you is it's it's not often that we see that. I'd say the one place where maybe two places we have seen that over the last year, it's not really recent, would say, during q two, q three of last year. We definitely saw more people moving from parts of Central New Jersey, you know, up into Northern New Jersey to be closer to the city, as an example.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

And then we did see some migration out of Florida back to some of the major employment markets in the Northeast. Those would be the two places where I'd say we've seen that really occur. But, I mean, the other thing to think about is, given our footprint, you know, some of these suburban markets are job centers. Right? So you think about Microsoft and where they're located, you know, outside of Seattle, you know, Google and Facebook and others, you know, and around Mountain View and parts of San Jose.

[Sean Breslin, Chief Operating Officer at AvalonBay Communities]

So it's not just an urban situation that's creating that demand. You do have these core sort of suburban job center locations that definitely have benefited from return to office.

[Alexander Goldfarb, MD & Senior Research Analyst at Piper Sandler Companies]

Okay. And then the second question is, you know, certainly, the risk profile of development in REIT land is a lot higher today than it has been historically. You guys have, like, almost a 100,000,000, if I look at your sub correctly, of, you know, development related cost, you know, 60% of that being overhead and 40% interest. You know, how do you guys manage that in the sense of, you know, that capitalized impact driving deals? Meaning, you know, if you wanted to scale back, it's certainly an impact, you know, on a personnel basis.

[Alexander Goldfarb, MD & Senior Research Analyst at Piper Sandler Companies]

It's an impact to your expense, you know, interest expense versus, you know, maintaining that. And I guess to the earlier question, I think it was Nick who asked on, this equity funding, sort of is $100,000,000 of capitalized overhead and interest for development, is that an appropriate amount just given the increased risk profile? And just how do you manage that?

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

Hey, Alex. It's Matt. I'm not I'm not sure I would agree that it's an increased risk profile. I think we've been doing it for a long time and have a pretty impressive track record of managing those risks well. But

[Alexander Goldfarb, MD & Senior Research Analyst at Piper Sandler Companies]

I was saying this in general, not not specific in general.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

But

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

I you know, the first thing I'd say is all of our capitalized basis on all of our deals includes capitalized interest and includes all that capitalized overhead in our basis. So the deals pay for it. And a 100,000,000 on, you know, what do we have? 2.8, 2,900,000,000.0 underway right now, is a pretty small percentage. And if you if you at any given point in time, you know, that's all funded.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

So and if you think about this year, we're starting a lot more than we're completing. So, you know, this time next year, we're gonna have more than 2,800,000,000.0 underway. If we saw a shift in the environment that we thought was durable, you know, we have the next two or three years worth of that overhead already funded and covered because it's in those projects that are underway and in those budgets that we prefunded and match funded. So, you know, if that were to be the case, we could definitely see it coming and adjust. And and we have over over the years.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

You know, we we cut back the overhead pretty materially, in the teeth of the GFC. And, you know, even we had cut it back, really in the latter part of the last cycle where we saw that, you know, kind of the cycle is getting a bit long in the tooth. So but we have a we have a pretty well oiled machine, that it that we can see it coming. The other part of it, I would say, is a lot of that is incentive comp. So there is some of this that's self correcting.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

The less business we do, the less profitable it is, the less that compensation is.

[Alexander Goldfarb, MD & Senior Research Analyst at Piper Sandler Companies]

Okay. And, again, it was a general comp general

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

Yeah.

[Alexander Goldfarb, MD & Senior Research Analyst at Piper Sandler Companies]

Obser yeah.

[Kevin O'Shea, Chief Financial Officer at AvalonBay Communities]

Yeah. Just maybe a couple comments, Alex. This is Kevin. I mean, as you look at those costs cost components you mentioned, first of all, they all do work their way into the cost of the project and it pays for itself when you look at the yield relative to our initial cost of capital. I would separate, however, capitalized overhead from capitalized interest expense and look at them differently.

[Kevin O'Shea, Chief Financial Officer at AvalonBay Communities]

The capitalized overhead cost essentially reflects the payroll cost for the groups that are working on the entire development book of business, which is the sum of the development underway of, call it, roughly 3,000,000,000 plus our development rights pipeline, which we sometimes disclose, but that's probably another $4,000,000,000. So essentially, you've got 40 to $50,000,000 of annual overhead costs associated with, you know, $7 worth of business. That's called whatever sixty, sixty five basis points. I think if you were to compare to that that cost structure to what you see in the private sector, what you would find is that essentially, the development machine we have built over three decades at AvalonBay is remarkably efficient and adds to our profitability and helps explain why our development yields are incrementally more profitable than many private market participants are able to achieve. So it's a very profitable machine we've been able to build.

[Kevin O'Shea, Chief Financial Officer at AvalonBay Communities]

And if you're looking at the the profitability of development, I think the way we frame it is the way I would suggest you sort of look at it, which is the incremental stabilized yield relative to our incremental funding cost. And that's the way to think about the associated all the capital cost including capitalized interest, which is really more of an accounting charge, which is intended to reflect those costs on an accounting basis. But the way we track it is to show you what the actual cash funding costs are putting that capital that development into service.

[Alexander Goldfarb, MD & Senior Research Analyst at Piper Sandler Companies]

Thank you.

[Kevin O'Shea, Chief Financial Officer at AvalonBay Communities]

Yep.

[Operator]

Our next question comes from Michael Stefani with Mizuho Securities.

[Michael Stefany, Senior Research Associate - REITs at Mizuho Financial Group]

In your 1Q investor presentation, I noticed you had a construction hard cost pie chart that broke down input costs. I didn't see that in your 2Q investor deck. My question is what inputs are you seeing? Higher cost now and or lower cost than when you forecast this six months ago?

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

Yeah. Hi. This is Matt. I don't think it's necessarily changed. That Q1 presentation was really kind of illustrative, and it was really put out there to kind of orient investors to the fact that the hard the materials component of the hard cost is a relatively small percentage of the overall deal capitalization of a deal.

[Matthew Birenbaum, Chief Investment Officer at AvalonBay Communities]

So, you know, I I don't we haven't seen that that's necessarily changed. And, again, right now, what we're seeing is that, headwind of potentially higher materials cost is being more than offset by the tailwind from subcontractors, getting hungry for work. And if anything over the last quarter, that's just accelerated with you're starting to now see a reduction in, for sale starts activity. And again, we're continuing to see great bid coverage and, you know, biosavings relative to our, budgets. So, you know, the trend continues to be favorable in that regard.

[Michael Stefany, Senior Research Associate - REITs at Mizuho Financial Group]

Thank you.

[Operator]

Thank you. As there are no further questions, I would now like to hand the conference over to Ben Shaw for closing comments.

[Benjamin Schall, CEO & President at AvalonBay Communities]

Thank you. I appreciate everyone joining us today, and we look forward to connecting soon.

[Operator]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Participants

Executives

• Jason Reilley, VP - IR
• Benjamin Schall, CEO & President
• Kevin O'Shea, Chief Financial Officer
• Sean Breslin, Chief Operating Officer
• Matthew Birenbaum, Chief Investment Officer

Analysts

• Nick Joseph, Head - US Real Estate & Lodging Research Team at Citigroup
• Steve Sakwa, Senior Managing Director & Senior Equity Research Analyst at Evercore ISI
• Jamie Feldman, MD & Head - REIT Research at Wells Fargo
• Austin Wurschmidt, Senior REIT Analyst - Equity Research at KeyBanc Capital Markets
• Adam Kramer, VP - Equity Research at Morgan Stanley
• Rich Hightower, MD - U.S. REIT Research at Barclays
• John Kim, MD - U.S. Real Estate at BMO Capital Markets
• Jeffrey Spector, Managing Director at Bank of America
• Nicholas Yulico, Managing Director at Scotiabank
• Ami Probandt, Equity Research Analyst - REITs at UBS Group
• Alexander Goldfarb, MD & Senior Research Analyst at Piper Sandler Companies
• Michael Stefany, Senior Research Associate - REITs at Mizuho Financial Group