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    AVB
    Earnings call· Dec 2024(Q4 FY24)

    AVALONBAY COMMUNITIES INC AVB

    Feb 6, 2025 Source

    Executive summary

    AvalonBay Communities Q4 FY24 — Strategic Initiatives Drive Growth Amidst Capital Market Headwinds

    AvalonBay Communities concluded FY24 with strong financial results, driven by its suburban coastal portfolio and successful operating model transformation. The company is strategically focused on portfolio optimization, expanding into suburban and Sunbelt markets, and leveraging its development capabilities. Despite anticipated capital market headwinds in 2025, a robust balance sheet and favorable market fundamentals in established regions position the company for continued growth.

    Highlights

    5

    • FY24 revenue growth of 3.4% and core FFO growth of 3.6% demonstrated a very successful year.

    • Operating model transformation generated $39 million of incremental NOI in FY24, exceeding plan by $2 million.

    • Increased development starts by almost $200 million to $1.1 billion in FY24, signaling strong investment momentum.

    • Proactively raised $2 billion of new capital at an attractive 5.1% initial cost in 2024.

    • Suburban coastal portfolio continues to outperform with steady demand and limited new supply.

    Concerns

    4

    • Q4 shortfall of approximately $700,000 on $670 million of revenue due to slightly higher vacancy than anticipated.

    • Capital markets activity is expected to increase costs by $0.29 per share in 2025, primarily from lower interest income ($0.13/share) and higher share count ($0.08/share).

    • Expansion regions are projected to deliver sub-2% revenue growth in 2025 due to heavy levels of unleased inventory and new deliveries.

    • Bad debt, while improving, remains elevated at a forecast of 1.4% in 2025, compared to historical levels of 50-70 basis points, due to a tighter regulatory environment.

    Guidance & targets

    24
    CategoryTargetConfidence
    Core FFO per share growth
    3.5%
    high materiality
    High
    Same-store residential portfolio revenue growth
    3%
    medium materiality
    High
    Same-store residential portfolio operating expense growth
    4.1%
    medium materiality
    High
    Same-store residential portfolio NOI growth
    2.4%
    medium materiality
    High
    New development starts
    $1.6 billion
    high materiality
    High
    Residential NOI from development communities
    $30 million
    medium materiality
    High
    Capital uses
    $2.1 billion
    medium materiality
    High
    New capital sources
    $960 million
    medium materiality
    High
    Equity forward contracts sale
    $890 million
    medium materiality
    High
    Total capital sourced
    $1.85 billion
    medium materiality
    High
    Free cash flow after dividends
    $450 million
    medium materiality
    High
    Unrestricted cash at year-end
    $275 million
    low materiality
    High
    Like-term effective rent change
    3%
    high materiality
    High
    Other rental revenue growth
    almost 9%
    medium materiality
    High
    Uncollectible lease revenue
    1.4%
    medium materiality
    High
    Same-store operating expense organic growth
    3%
    medium materiality
    High
    Same-store operating expense growth from operating initiatives
    50 basis points
    low materiality
    High
    Same-store operating expense growth from property tax abatement phase out
    60 basis points
    low materiality
    High
    SIP program goal size
    $400 million
    low materiality
    Medium
    SIP growth
    $75 million
    low materiality
    Medium
    Development starts yields
    low to mid-6%
    medium materiality
    High
    Portfolio trading activity
    $1 billion on both sides
    medium materiality
    Medium
    Renewal rent change
    mid-4s
    medium materiality
    High
    New move-in rent change
    mid-1% range
    medium materiality
    High

    Segment performance

    11
    SegmentRevenueYoYQoQMargin
    Established Regions
    Expected to produce rental revenue growth north of 3% in 2025.
    		—north of 3%——
    Mid-Atlantic
    Projected to lead established regions in revenue growth for 2025.
    		—mid-4%——
    Seattle
    Projected revenue growth for 2025.
    		—low 3s——
    Northern California
    Projected revenue growth for 2025.
    		—roughly 3%——
    Southern California
    Projected revenue growth for 2025.
    		—roughly 3%——
    New York, New Jersey and Boston
    Projected revenue growth for 2025.
    		—mid-2% range——
    Expansion Regions
    Projected to deliver sub-2% growth in 2025 due to heavy levels of unleased inventory and new deliveries.
    		—sub-2%——
    Charlotte (urban)
    Expected performance in 2025.
    		—flat to negative——
    Dallas
    Expected performance in 2025, following a rough 2024.
    		—2% to 3% positive——
    Florida
    Expected performance in 2025.
    		—flat to +50 basis points——
    Denver
    Expected performance in 2025, impacted by market supply.
    		—below established region average——

    Operational metrics

    34
    Core FFO per share
    $11.01
    FY24

    Reported for 2024.

    Core FFO per share
    $11.39
    FY25

    Projected midpoint for 2025.

    Total rent revenue growth
    3.42%
    FY24

    Reported for 2024.

    Other rental revenue growth
    15%
    FY24

    Resulted from implementation of ancillary services for residents.

    Same-store payroll expense growth
    0%declined in 2023
    FY24

    Reflects labor efficiencies from operating initiatives.

    Incremental NOI from operating initiatives
    $39 million$2 million ahead of plan
    FY24

    Generated as of year-end 2024.

    Additional NOI from operating initiatives
    $9 million
    FY25

    Expected to be generated in 2025.

    Suburban portfolio allocation
    73%up from 70% a year ago
    FY24

    Progress towards 80% target allocation.

    Expansion market presence
    10%up from 8% in 2024
    FY24

    Progress towards 25% target allocation.

    Development starts
    $1.1 billionup almost $200 million
    FY24

    Increased in 2024.

    New capital sourced
    $2 billion
    FY24

    Proactively raised in 2024.

    Equity forwards sourced
    $890 million
    FY24

    Sourced in 2024.

    Spread to development yields
    100+ basis points
    FY24

    Spread of equity forward cost to expected development yields on new projects.

    Core FFO per share growth from same-store and redevelopment NOI
    $0.31
    FY25

    Component of total Core FFO per share growth.

    Core FFO per share growth from new investment NOI
    $0.33
    FY25

    Primarily from development, component of total Core FFO per share growth.

    Core FFO per share impact from capital markets activity
    -$0.29
    FY25

    Offsetting source of growth.

    Core FFO per share impact from lower interest income
    -$0.13
    FY25

    Due to projected lower cash positions.

    Core FFO per share impact from higher share count
    -$0.08
    FY25

    From selling equity forward contracts.

    Core FFO per share impact from other capital markets activity
    -$0.08
    FY25

    Consists of modest headwinds from refinancing existing debt and net disposition activities, partially offset by modestly higher capitalized interest and earnings growth from SIP activity.

    Job growth
    moderating, but healthy
    FY25

    Third-party forecasts.

    Wage growth
    high 3%
    FY25

    Third-party forecasts.

    Rent-to-income ratios
    below pre-COVID levels
    Current

    Indicates rental affordability.

    Cost increase to trade to median-priced home
    >$2,000
    Current

    Per month, relative to median-priced apartment.

    Development under construction
    $2.2 billion
    Current

    As of current date.

    Development completions
    $350 million
    FY25

    Expected for 2025.

    Development accretion
    $0.15140 basis points of growth
    FY25

    Total earnings growth from investment platforms, primarily development.

    SIP balance
    $190 million
    Current

    Current balance of the Structured Investment Program.

    LA wildfires displacement leases
    ~6015% of total leases
    Last 3 weeks

    From people displaced by the fires, concentrated in specific submarkets.

    Development hard cost as percentage of total budget
    60-65%
    Current

    Typical for a new apartment community.

    Development labor cost as percentage of hard cost
    ~2/3
    Current

    Typical for a new apartment community.

    Development land cost as percentage of total budget
    10% to 25%average 15%
    Current

    Typical for a new apartment community.

    Development soft costs, interest, A&E, permits, fees, overhead as percentage of total budget
    30% to 35%
    Current

    Typical for a new apartment community.

    Suburban portfolio outperformance in rent change
    40 basis points
    Q4 FY24

    Suburban portfolio outperformed overall portfolio.

    Q4 shortfall
    $700,000
    Q4 FY24

    On $670 million of revenue, due to slightly higher vacancy.

    Industry KPIs

    8
    MetricValueDetails
    Occupancy rate—
    Blended rent change3%%
    New supply backdrop1.4%% of stock
    Renewal rent changemid-4s%
    New lease rent changemid-1% range%
    Same store revenue growth3%%
    Development starts lease up$1.6 billionUSD
    Bad debt uncollectible revenue1.4%%

    Orderbook & backlog

    2
    Development under construction$3.5 billionYear-end 2025

    50% higher than today's $2.2 billion

    Expected to set the stage for further earnings uplift in 2026 and 2027.

    SIP program goal$400 millionLong-term

    Target total size for the Structured Investment Program.

    Deals & partnerships

    1
    Austin (unnamed seller)Acquisition of a Build-to-Rent (BTR) asset consisting of 100% 3- and 4-bedroom townhomes.

    Acquired in Q3 or Q4 2024. This asset aligns with strategic priorities for BTR product.

    Capital programs

    2
    Operating Model Transformationunderway$80 million
    Period spend: $9 million
    Spent to date: $39 million

    Benefit: Annual incremental NOI

    Generated $39 million of incremental NOI as of year-end 2024, $2 million ahead of plan. Expected to generate an additional $9 million in 2025, working towards an updated goal of $80 million annual incremental NOI.

    Development Pipelineunderway
    Period spend: $1.6 billion
    Funding: Equity capital from 2024 equity forwards, free cash flow
    Start: FY25

    Benefit: New apartment communities at low to mid-6% yields

    Planning to increase development starts to $1.6 billion in 2025. These developments will face less competition during lease-up. Funding primarily from equity forwards secured in 2024.

    Risks & headwinds

    10
    Capital markets costsFY25

    $0.29 per share impact on Core FFO in FY25

    Lower interest incomeFY25

    $0.13 per share impact on Core FFO in FY25

    Higher share countFY25

    $0.08 per share impact on Core FFO in FY25

    Mitigation: Result of selling equity forward contracts.

    Refinancing existing debt and net disposition activitiesFY25

    $0.08 per share impact on Core FFO in FY25

    Mitigation: Modest headwinds, partially offset by higher capitalized interest and SIP earnings growth.

    Expansion regions revenue growthFY25

    sub-2% growth

    Mitigation: Due to heavy levels of unleased inventory from 2024 and new deliveries in 2025.

    Operating expense growth seasonalityH1 FY25

    Higher in H1 2025

    Mitigation: Compared to H2 2025, due to year-over-year comp issues (AvalonConnect deployment, insurance renewal, merit adjustments).

    Regulatory risk (eviction moratorium/rent freezes)Ongoing

    Discussed, not quantified

    Mitigation: Chatter in Los Angeles, currently in review by city council and housing committee. Not contemplated in guidance.

    Regulatory risk (rent control)Longer-term

    Impacts portfolio allocation decisions

    Mitigation: Company will continue to sell assets out of jurisdictions with elevated regulatory risk, such as Montgomery County, MD, and urban areas like Seattle, LA, and Boston.

    Tariffs on development costsFuture (beyond FY25)

    Potential 'couple of percent' increase to total budget, or $5,000-$7,000 per unit

    Mitigation: Trying to get ahead by securing supply channels and locking in pricing. Labor costs are a more significant factor than material tariffs.

    Elevated bad debtFY25

    Forecast 1.4% in FY25

    Mitigation: Tighter regulatory environment for evictions slows return to historical 50-70 bps levels. Industry has better tools to screen out fraud.

    What to watch in Q1 FY25

    5

    Expansion regions revenue growth

    Next quarter
    CurrentSub-2% growth projected for FY25
    TargetImprovement towards established region average

    Why it matters

    Performance in expansion markets is a key strategic focus for portfolio optimization and diversification.

    Turning to Slide 16. Our established coastal regions are expected to produce rental revenue growth north of 3%, while the expansion regions are projected to deliver sub-2% growth its heavy levels of unleased inventory from 2024 and new deliveries in 2025, continue to weigh on near-term performance.

    Q&A highlights

    5

    How should we think about development accretion in earnings this year versus last, considering capitalized costs and other factors? Also, are there additional challenges or opportunities with BTR products, and would AVB consider acquiring existing BTR portfolios?

    Development accretion is expected to be about $0.15 per share (140 bps growth) in 2025, slightly lower than a normal year due to heavier capital costs and less development NOI. For BTR, AVB is open to acquiring aligned portfolios but notes most existing BTR is in tertiary markets. They are growing BTR through DFP and self-development of townhome components within communities. Operating BTR is aligned with their mobile-enabled workforce strategy.

    “What we think we get from our investment platforms in terms of earnings growth this year is about $0.15, which equates to about 140 basis points of growth. That's probably a little lower than a normal year, which is probably more like 150 to 200 basis points of contribution from our investment activities.”

    asked by Eric Wolfe · answered by Kevin O'Shea

    2 min read5 chapters

    Detailed Narrative

    01

    Operating Model Transformation Progress

    AvalonBay's operating model transformation generated $39 million of incremental NOI in 2024, surpassing its plan by $2 million. The company is on track to achieve an updated goal of $80 million in annual incremental NOI over the next few years, driven by continued expansion of centralized services, including centralized leasing support, and advanced utilization of AI in the customer journey. These initiatives are enhancing revenue, operating efficiencies, and providing meaningful scale benefits, making new assets more valuable on the platform.

    02

    Portfolio Optimization and Strategic Allocation

    The company is actively optimizing its portfolio, increasing its suburban allocation to 73% from 70% in 2023, with a target of 80%. Exposure to expansion markets grew to 10% from 8% in 2024, progressing towards a 25% target. This shift aims to capitalize on steady demand and limited new supply in suburban coastal areas, diversify away from regulatory risks, and leverage an attractive window for acquisitions and development in expansion markets at lower cost bases.

    03

    Leveraging Development Capabilities for Growth

    AvalonBay plans to increase development starts to $1.6 billion in 2025, at a time when overall industry starts are declining, which is expected to secure stronger deals and returns. By the end of 2025, the company anticipates having $3.5 billion under construction, a 50% increase from current levels, setting the stage for significant earnings growth in 2026 and 2027. This development is primarily funded by equity capital proactively secured in 2024.

    04

    Favorable Market Fundamentals and Supply Dynamics

    The outlook for apartment demand in 2025 reflects moderating but healthy job and wage growth, with wage growth specifically in the high 3% range, supporting stable effective rent growth. Demand in established regions is further supported by stable rent-to-income ratios and the unaffordable nature of for-sale housing. New supply in established regions is expected to be low, representing just 1.4% of stock, and even lower in suburban submarkets at 1.2%.

    05

    Capital Allocation and Investment Opportunities

    With a strong balance sheet, AvalonBay is well-positioned for active external investment. Beyond development, the company seeks to increase portfolio trading activity, targeting $1 billion in both acquisitions and dispositions in 2025, particularly rotating into expansion regions. The Structured Investment Program (SIP) is expected to grow by $75 million in 2025 towards a $400 million goal, and value-add investments like resident solar, renovations, and ADUs continue to be pursued.

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