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    AVB
    Earnings call· Mar 2025(Q1 FY25)

    AVALONBAY COMMUNITIES Q1 FY25 earnings call AVB

    May 1, 2025 Source

    Executive summary

    AvalonBay Communities Q1 FY25 — Strong Operating Metrics and Development Pipeline Drive Outlook

    AvalonBay delivered strong Q1 FY25 results, outperforming FFO guidance and benefiting from healthy operating metrics as it enters peak leasing season. The company is well-positioned with a diversified portfolio, a substantial match-funded development pipeline set to drive future earnings, and a robust balance sheet. While monitoring job market uncertainties and potential tariff impacts, management remains nimble in its capital allocation and operational strategies, continuing to execute on long-term portfolio optimization goals.

    Highlights

    5

    • Core FFO grew 4.8% year-over-year in Q1 FY25, exceeding prior guidance by $0.03 per share.

    • Q1 same-store revenue performance was slightly ahead of plan, driven by modestly higher occupancy.

    • Development pipeline of $3 billion is underway, match-funded with attractively priced capital and costs substantially locked in.

    • Balance sheet and liquidity are strong, with $890 million in undrawn forward equity and $2.8 billion in total liquidity.

    • Resident turnover continues to set new historical lows, supporting higher physical occupancy.

    Concerns

    4

    • Operating softness is expected to continue in expansion regions until new deliveries decline and market occupancies rebuild.

    • Potential tariffs could increase total development hard costs by ~5% and overall total basis by ~3-4%.

    • Job growth in Los Angeles has been weak, leading to year-to-date asking rent growth of only 3%, below historical norms.

    • The consensus job growth outlook for the year has moderated to 1 million net new jobs, down from 1.4 million.

    Guidance & targets

    6
    CategoryTargetConfidence
    Full-year 2025 Outlook
    Reaffirmed
    high materiality
    High
    Q2 2025 Guidance
    Generally consistent with original expectations
    medium materiality
    High
    Development Starts Volume
    $1.6 billion
    high materiality
    High
    New Occupancies from Development
    2,300 homes
    high materiality
    High
    New Occupancies from Development
    2,800 homes
    high materiality
    High
    Renewal Offers
    Low to mid-5% range
    medium materiality
    High

    Operational metrics

    32
    Core FFO growth
    4.8%YoY
    Q1 FY25

    Exceeded prior Q1 guidance by $0.03.

    Q1 FFO outperformance
    $0.03vs prior guidance
    Q1 FY25

    Reflected $0.01 from revenue due to slightly higher occupancy and $0.02 from favorable operating expenses, with approximately half of the OpEx benefit being timing related.

    Development NOI
    $30 million
    FY25 forecast

    Forecasted for the full year 2025.

    Development NOI
    ~$45 million
    FY24

    Estimated for the full year 2024.

    External growth contribution to FFO
    $0.14130 bps
    FY25

    Estimated contribution to earnings growth from external growth platforms in FY25 vs FY24, somewhat muted by lower occupancies and lower cash income.

    Q1 to Q4 FFO per share ramp
    $0.10
    last year

    Difference in core FFO per share between Q1 and Q4 last year.

    Q1 to Q4 FFO per share ramp
    $0.17
    year before last

    Difference in core FFO per share between Q1 and Q4 two years ago.

    Equity forward average gross price
    $226
    last year

    Average gross price for $890 million of equity raised on a forward basis.

    Equity forward initial cost
    5%
    last year

    Initial cost of the $890 million undrawn forward equity.

    Unsecured credit facility
    $2.5 billionup from $2.25 billion
    current

    Renewed and increased unsecured credit facility.

    Commercial paper program
    $1 billionup from $500 million
    current

    Expanded commercial paper program, backstopped by credit facility.

    Unsecured delayed draw term loan
    $450 million
    current

    Closed a 4-year unsecured delayed draw term loan, hedged to an effective fixed interest rate of 4.5%.

    Total liquidity
    $2.8 billion
    current

    Total liquidity including renewed credit facility, expanded commercial paper program, and undrawn forward equity.

    Development yield spread
    100 to 150 bps
    future

    Target spread between development yields and both cost of capital and underlying market cap rates for next cohort of development starts.

    Texas portfolio acquisition basis
    $230,000
    Q1 FY25

    Compelling basis for the 8-asset portfolio acquisition in Texas.

    Texas portfolio initial stabilized yield
    5.1%
    stabilized

    Underwritten initial stabilized yield for the Texas acquisition.

    Portfolio allocation to established East Coast regions
    47%
    current

    Percentage of portfolio in established East Coast regions.

    Portfolio allocation to established West Coast regions
    41%
    current

    Percentage of portfolio in established West Coast regions.

    Portfolio allocation to expansion regions
    12%increased since start of 2024
    current

    Percentage of portfolio in expansion regions, increased through buying and selling activity.

    Portfolio allocation to suburban submarkets
    73%increased since start of 2024
    current

    Percentage of portfolio in suburban submarkets, increased through buying and selling activity.

    Portfolio allocation to garden communities
    41%
    current

    Percentage of portfolio consisting of garden communities.

    Portfolio allocation to mid-rise buildings
    41%
    current

    Percentage of portfolio consisting of mid-rise buildings.

    Portfolio allocation to high-rise communities
    18%
    current

    Percentage of portfolio consisting of high-rise communities.

    Development projects under budget
    slightly under budget
    current

    Across all development underway, running slightly under budget due to strong buyout savings on recent starts.

    Materials cost percentage of hard costs
    25% to 30%
    typical

    Materials costs generally represent this percentage of overall hard costs for a typical AvalonBay development.

    Materials cost percentage of total project costs
    20%
    typical

    Materials costs generally represent this percentage of total project costs for a typical AvalonBay development.

    Tariff impact on total hard costs
    5%
    potential

    Estimated increase in total hard costs due to recent tariffs, considering the mix of domestic and imported materials.

    Tariff impact on overall total basis
    3% to 4%
    potential

    Estimated increase in overall total project basis due to recent tariffs.

    Texas portfolio average age
    11 years
    current

    Average age of the 8 assets acquired in the Texas portfolio.

    Job growth outlook
    1 milliondown from 1.4 million
    FY25

    Consensus estimate for projected job growth in FY25, moderated due to uncertainty and policy impacts.

    Lease-up velocity
    22 to 23
    Q1 FY25

    Leasing and occupancy velocity for 3 communities in lease-up during Q1.

    Concessions on new lease-up communities
    half a month
    Q1 FY25

    Average concessions for 3 communities in lease-up during Q1.

    Industry KPIs

    9
    MetricValueDetails
    Concessionshalf a monthmonths
    Turnover ratehistorical lows
    Occupancy rate30 bps above last yearbps
    Blended rent changetracking to plan
    New supply backdrop80 bpsbps
    Renewal rent changelow to mid-5% range%
    New lease rent changenice uptick
    Same store revenue growthslightly ahead of plan
    Development starts lease up$1.6 billionUSD

    Orderbook & backlog

    2
    Development pipeline under construction$3 billionQ1 FY25

    Estimated total capital cost for 19 projects under construction and 4 completed last year still in lease-up.

    Undrawn forward equity$890 millionQ1 FY25

    Equity capital raised last year at an average gross price of $226 per share, expected to be deployed into new development starts.

    Deals & partnerships

    1
    Undisclosed sellerAcquisition of an 8-asset portfolio in Texas

    The transaction was funded with a combination of disposition proceeds and $235 million of equity issued at an attractive price of $2.25 a share. Assets have an average age of 11 years.

    Capital programs

    2
    Development projects underwayunderway$3 billion
    Funding: match funded

    Benefit: 19 projects under construction, 4 completed last year in lease-up

    These investments have been entirely match funded, locking in a favorable spread. Costs are generally bought out with hard costs locked in within 90 to 120 days of construction start.

    2025 Development Startsunderway$1.6 billion
    Period spend: $240 million (Q1 FY25)
    Funding: equity forward transaction
    Start: FY25

    Projected start activity is weighted more towards the back half of the year, with $240 million started in Q1. Largely prefunded through the equity forward transaction.

    Risks & headwinds

    3
    Operating softness in expansion regionsuntil deliveries decline and market occupancies rebuild

    Expected to continue

    Mitigation: Selectively increasing allocation to chosen expansion regions provides opportunities for longer-term portfolio optimization.

    Potential tariff impact on development costs

    Total hard costs might increase by ~5%, overall total basis by ~3-4%

    Mitigation: Currently, these potential headwinds are being more than offset by the larger macro backdrop of declining start activity and increased subcontractor competition.

    Job market uncertaintyFY25

    Consensus job growth outlook for FY25 moderated to 1 million net new jobs (down from 1.4 million). Weak job growth in L.A. (3% YTD asking rent growth).

    Mitigation: Monitoring closely; in uncertain times, people tend to stay in their homes, which can support occupancy. Market-specific tactics are employed.

    What to watch in Q2 FY25

    5

    Development starts volume

    H2 FY25
    Current$240 million started in Q1 FY25
    TargetProgress towards $1.6 billion FY25 target, weighted to H2

    Why it matters

    Development starts are a key driver of future earnings growth and capital allocation strategy.

    Our guidance at the beginning of the year anticipated increasing our start volume to $1.6 billion in 2025. These expectations have not changed, but it is important to note that we continue to maintain flexibility on this book of business, and our projected start activity is weighted more towards the back half of the year with only $240 million started in Q1.

    Q&A highlights

    5

    Why is like-term effective rent growth lower than last year, and will economic/policy changes cause a rethink of the 25% expansion market target?

    Rent growth is tracking to plan, with Q1 performance driven by slightly higher occupancy. The lower year-over-year comparison is due to an earlier acceleration of occupancy and rate last year. The expansion market strategy, primarily driven by asset trading, is somewhat agnostic to capital markets, but activity levels could slow progress if transaction markets dry up.

    “As it relates to last year, really a combination of different things. But as you might remember last year, we had an earlier acceleration of occupancy at the very beginning of the year, January and February. And so we've been hit harder on rate earlier, I would say, in the quarter.”

    asked by Eric Wolfe · answered by Sean Breslin

    2 min read5 chapters

    Detailed Narrative

    01

    Portfolio Reshaping and Diversification

    AvalonBay is proactively reshaping its portfolio, increasing allocation to suburban submarkets to 73% and expansion regions to 12% since the start of 2024. This strategy aims to optimize future returns by rotating capital from older assets in established regions to chosen expansion regions, leveraging a more opportune time for such trades. The company continues to favor suburbs in expansion regions due to longer-term supply dynamics and demographic factors.

    02

    Development Pipeline and Future Earnings Growth

    The company has $3 billion of development projects underway, entirely match-funded with attractively priced capital, and construction costs are substantially locked in. These projects are expected to drive outsized earnings growth as they lease up through 2025 and 2026, with new occupancies projected to rise from 2,300 homes in 2025 to 2,800 homes in 2026. The company maintains flexibility on its $1.6 billion planned 2025 starts, which are weighted towards the back half⚖️ of the year.

    03

    Operating Environment and Regional Performance

    Q1 FY25 saw healthy operating metrics, with same-store revenue slightly ahead of plan due to higher occupancy. Resident turnover is at historical lows, and April occupancy was 30 basis points above last year. Seattle and Northern California (San Jose, San Francisco) showed strong performance, with San Francisco's asking rents up ~7% year-to-date. Conversely, Los Angeles experienced weak job growth, leading to only 3% year-to-date asking rent growth, below historical norms.

    04

    Balance Sheet Strength and Capital Allocation

    AvalonBay maintains a strong financial position with $2.8 billion in liquidity, including $890 million in undrawn forward equity raised at an average gross price of $226 per share. Recent financing activities include renewing and increasing its unsecured credit facility to $2.5 billion and expanding its commercial paper program to $1 billion. This financial strength supports planned development starts and provides capacity for future attractive investments.

    05

    Impact of Tariffs on Development Costs

    The company provided a conceptual illustration of how tariffs could impact development costs. Materials typically represent 25-30% of hard costs and 20% of total project costs. Management estimates that recent tariffs might increase total hard costs by about 5%, leading to a roughly 3-4% increase in overall total basis. However, this is currently being offset by declining start activity and increased subcontractor competition.

    AI-generated summary of the company’s earnings call. Not investment advice.