AvalonBay Communities Aktie

Good afternoon, ladies and gentlemen, and welcome to AvalonBay Communities' First Quarter 2026 Earnings Conference Call. [Operator Instructions]

Your host for today's conference call is Matthew Grover, Senior Director of Investor Relations. Mr. Grover, you may begin your conference call.

Thank you, operator, and welcome to AvalonBay Communities First Quarter 2026 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-K 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 during today's discussion. The attachment is also available on our website at investors.avalonbay.com, and we encourage you to refer to this information during the review of our operating results and financial performance.

[Operator Instructions]

And with that, I will turn the call over to Ben Schall, CEO and President of AvalonBay Communities for his remarks. Ben?

Thank you, Matt, and thank you, everyone, for joining us today. I'm here with Kevin O'Shea, our Chief Financial Officer; Sean Breslin, our Chief Operating Officer; and Matt Birenbaum, our Chief Investment Officer. As is our custom, we've also posted an earnings presentation, which Sean and I will reference during our prepared remarks before turning to Q&A.

Starting with the key takeaways on Slide 4. Our first quarter results exceeded our expectations, driven by lower expenses, higher development NOI and the benefits of our share buyback activity, which was not included in our original outlook for 2026. Our portfolio is well positioned heading into peak leasing season with very low turnover, solid occupancy and rents tracking as expected through the first 4 months of the year.

We are also benefiting from the ramp in development NOI in 2026, which will further accelerate during the year and into 2027. Leasing velocity at our projects in lease-up has been strong in a typically slower first quarter, which bodes well for the upcoming peak leasing season. And during the quarter, we completed $340 million of dispositions and repurchased $200 million of our shares at an implied cap rate in the low 6% range.

Turning to Slide 5. Same-store residential revenue grew 1.6% year-over-year with occupancy up 10 basis points to 96.1%. During the quarter, we started nearly $190 million of new development with 2 starts in suburban New Jersey and are on track for $800 million of planned 2026 development starts with projected initial stabilized yields of 6.5% to 7%. Our performance in Q1, both operationally and from a capital allocation perspective sets us up well for the balance of the year.

Slide 6 details the components of our favorable first quarter core FFO per share results relative to our initial outlook. Of our $0.02 of NOI outperformance: 20% was revenue driven, and 80% was attributable to lower operating expenses. On the expense side, certain operating costs budgeted for the first quarter are now expected to be incurred over the balance of the year. Other drivers of our outperformance for the quarter were $0.01 of favorable development NOI from our lease-up communities as well as $0.01 from our share repurchases in the quarter.

Looking ahead, Slide 7 highlights several factors that continue to support apartment demand and our operating outlook as we move through 2026. First, market occupancy in our established regions remain solid, supporting near-term fundamentals and allowing us to enter the peak leasing season with relative strength. Second, our customers continue to experience healthy wage growth, which will support rent growth throughout the year.

Third, the supply backdrop remains very constructive in our markets with new market rate apartment deliveries expected to stay at historically low levels for the foreseeable future. And fourth, the economics of renting versus home ownership remain very favorable. During the quarter, the percentage of customers leaving us to purchase a home declined to 8%. Taken together, these factors give us confidence in the resiliency of apartment fundamentals and in the positioning of our portfolio as we move through the balance of the year.

Slide 8 highlights the strength of our operating and development capabilities to drive differentiated internal and external growth in the years ahead. On operations, we continue to leverage our scale and leadership in centralization, technology and AI to deliver superior service for our residents and drive operating efficiencies and incremental NOI. Our forecast has us on track to generate $55 million of annual incremental NOI by year-end, our original Horizon 1 target.

Our next set of priorities include the further deployment of AI solutions and our seamless digital self-service experiences, additional enhancements to our technology and data platforms and further optimization of neighborhood and centralized staffing, all on our way to our Horizon 2 target of $80 million of annual incremental NOI in the coming years.

On development, our sector-leading platform is poised to contribute meaningful earnings and value creation in the coming years with $3.5 billion of development underway with a projected initial stabilized yield of 6.3% at quarter end. These investments were match funded with capital raised over the past 3 years at a weighted average initial cost of 4.9%. This spread is well within our strike zone, targeting yields of 100 to 150 basis points above our cost of capital and underlying market cap rates. These deals were conservatively underwritten on an untrended basis and in many instances, are seeing favorable construction cost buyouts relative to pro forma. These communities will also deliver into an operating environment with meaningfully less new supply.

With this tailwind of activity, we continue to expect a meaningful ramp in development NOI and are projecting $47 million of development NOI this year, increasing to $120 million in 2027.

Turning to Slide 9. We had 3 dispositions closed during the first quarter, and we continue to deploy capital into accretive share repurchases. Beyond crystallizing the significant public-private disconnect in asset values, selling 40-year-old high-rise assets improves our go-forward cash flow growth profile, particularly after factoring in CapEx. Including our repurchases last year, we've now repurchased $690 million of our stock and have $914 million of remaining authorization.

In summary, we have a high-quality portfolio, well positioned heading into the peak leasing season, operating and technology initiatives that continue to drive internal growth, and a development platform that we expect to contribute an accelerating stream of earnings over the next several years.

And with that, I'll turn it over to Sean to walk through the operating environment and leasing trends in more detail.

All right. Thank you, Ben. Turning to Slide 10 to address recent portfolio trends. Year-to-date asking rent growth has been pretty consistent with historical norms and our original expectations for this year. Since January 1, the average asking rent for our same-store portfolio has increased in the high 4% range. And importantly, the growth we've experienced this year is well ahead of what we realized in 2025, setting us up well for better rent change as we look forward.

Turning to Slide 11. Our same-store portfolio is well positioned as we look ahead to the peak leasing season. Occupancy has been north of 96% and trending modestly ahead of our budget. Turnover remains well below historical norms and even ticked down 50 basis points compared to Q1 of last year, supported by a variety of factors, including a historical low 8% of residents moving out to purchase a new home and declining new supply in our established regions. As a result, the number of homes available to lease has been lower than last year and has contributed to the 260 basis point ramp in rent change we've experienced since the beginning of the year.

Looking forward, we expect a continued acceleration in rent change. Renewal offers for May and June were delivered at an average increase in the 5% to 5.5% range, which is about 100 basis points higher than where we sent offers for February and March. In terms of regional color, the stronger performance continued to be the New York Metro area and Northern California, both of which produced revenue growth slightly ahead of our budget through Q1. Within the New York Metro area, the strongest markets were New York City and Northern New Jersey.

In Northern California, San Francisco has been the strongest market, followed by San Jose and then the East Bay. The entire region has benefited from relatively healthy net job growth the last few quarters. So the strengthening we've experienced in San Francisco and San Jose started to spill over into the East Bay this past quarter.

The Mid-Atlantic also outperformed our revenue budget for the quarter, albeit modestly, with slightly higher occupancy across the region and greater other rental revenue. With the hangover from job cuts over the past year starting to fade, we believe the meaningful reduction in new supply will help support the stabilization of the Mid-Atlantic region sometime this year. I wouldn't say it's turned the corner just yet, but it's definitely more stable than mid- to late last year.

In terms of the weaker markets: Boston, L.A. and Seattle modestly underperformed our revenue expectations during the quarter, and the other regions were collectively on plan.

Moving to Slide 12 to address our lease-up portfolio. We generated very strong leasing velocity of 32 per month during Q1, well ahead of our historical velocity of 23 a month. And we generated that velocity at an average effective rent that's slightly above our original pro forma. It's clear our customers value the new differentiated product we're delivering in these various submarkets and selected an average lease term that exceeded 15 months during the quarter. The occupancies that result from our leasing activity will continue to support the meaningful increase in development NOI projected for this year and into 2027, as Ben noted earlier.

So overall, we're off to a good start this year with same-store metrics trending at or slightly ahead of expectations, strong leasing activity in our lease-up communities, and the recycling of capital into buybacks at a compelling value.

So now I'll turn it back to our operator, Chamali, to begin Q&A.

[Operator Instructions] Our first question comes from the line of Jamie Feldman with Wells Fargo.

So I guess just if you could provide an update on your thoughts on hitting your new renewal and blend guidance for the rest of the year, you still have a pretty meaningful ramp. So can you just remind us what you're thinking in terms of, one, kind of the math behind it and what kind of tailwind that gives you?

And then as you think about the markets that are doing better, the markets that are doing worse, and you also didn't mention the expansion markets, but how they fit into the story. But just, what gives you comfort on keeping the guidance where it is and your ability to hit those numbers?

Jamie, it's Sean. Yes, in terms of the outlook, just to remind everybody what we said is we expected rent change to average 2% for the calendar year 2026, which reflected the first half forecast at 1.25% and the second half at 2.5%. And then in terms of breaking it out between move-ins and renewals, we essentially reflected move-ins being about 0 for the year and renewals averaging around 3.5%, blending to that 2%.

As I mentioned in my prepared remarks, asking rent growth is pretty much tracking about where we expected. It's actually slightly ahead, just a little bit. So where we came out in the first quarter was slightly better than we anticipated, and we have pretty good momentum going into the second quarter. Obviously, you can interpolate the math required for Q2 to get to the 1.25%. We feel very confident that we're in the right strike zone, so to speak, in terms of hitting those numbers.

In terms of the various markets, what I would tell you, consistent with my prepared remarks in terms of where the momentum is, it's certainly the New York Metro area, as I mentioned, the Bay Area certainly has good momentum. It's nice to see things start to spill over into the East Bay part of Northern California in the first quarter, which we sort of expected to happen. It typically lags behind San Francisco and San Jose. And then the expansion regions are performing pretty much collectively as expected at this point. Some are slightly ahead, some are slightly behind. But as a basket, they're pretty much on track.

Our next question comes from the line of Eric Wolfe with Citibank.

It looks like the percentage of available homes in April is down year-over-year, and you mentioned the very low turnover in April as well. My question is if that allows you to be a bit more aggressive on asking rents and new leases going forward? Maybe just some thoughts on what the current data is telling you about pricing power in May and some of the early sort of results on new leases in May.

Yes, Eric, happy to take that as it relates to what we've been seeing. I would tell you that based on what we saw in the first quarter, as I mentioned, and Ben also indicated in his prepared remarks, we're slightly ahead of our revenue plan. That's a little bit on rate, a little bit on occupancy. As we look forward in terms of our expectation, again, if you interpolate the math based on what we needed in the second quarter, I think to get to our 1.25% blended for the first half, and we start with April kind of in the high 1% range, almost 2%, I think we're in good shape overall as we look forward.

And in terms of the low turnover, the low availability, all that does continue to support slightly better pricing power, and we're certainly seeing that relative to what we experienced in 2025, where around this time of year, things started to soften. And so you're starting to see those lines continue to spread further, which certainly bodes well for the rest of the leasing season in the second half of the year.

Our next question comes from the line of Steve Sakwa with Evercore ISI.

Just wanted to focus maybe a little bit on the dispositions and the buyback. Can you help us kind of frame out how, I guess, aggressive or how large you'd be willing to pursue, I guess, both sides of that equation given the dislocation we've seen in apartment valuations of late?

Yes. Sure, Steve. This is Kevin. I'll offer a few comments. Others may want to offer their own as well. I guess I'd start off by saying with respect to the buyback question, we are in a very strong position, as you mentioned, to create value through both development and share buyback activity, supported, of course, by our balance sheet and continued access to the asset sale in the debt market.

So in terms of how we're thinking about the buyback activity we've done so far to date and what we might do going forward, I'd probably frame it out with a few points. The first is buybacks and development are both highly attractive to us today. So it's not a binary choice. At current pricing, our stock implies a cap rate in the low 6% range, which makes repurchases attractive and immediately accretive. At the same time, development remains compelling for us with projected initial stabilized yields in the mid-6% range or higher, while also driving longer duration earnings growth and portfolio refreshment. So that's important to us.

Second, our capital plan for the year contemplated that we would be a net seller of about $500 million -- sorry, net seller of $100 million with roughly $500 million of dispositions and $400 million of acquisition activity. Year-to-date, as you could see from the release, we've completed already $340 million of asset sales and $200 million of share repurchases, which has effectively replaced a portion of the acquisition activity that we originally had planned.

The third point is, looking forward, we are already marketing additional communities for sale. So that will give us additional proceeds here. As those sales are completed, if our stock remains attractively priced, we would consider additional repurchases. And to the extent we did so, we would do that instead of acquiring the remaining $200 million of acquisitions that are in our plan, and we do so on a leverage-neutral basis.

How much we might do beyond that? We're certainly open to the idea of doing more. We're prepared to be nimble, while also preserving our balance sheet strength and flexibility, so that we could deploy capital to the incrementally, the highest best use that's available to us. I wouldn't put a single fixed number on how much more we could flex dispositions up to fund buyback activity. We can do a fair bit, quite a bit, I'd say.

But the ultimate level of activity will depend in terms of buybacks, will depend on the timing and amount of future asset sales, the valuation of our shares at the time and the remaining capital gains capacity that we have. As you know from our prior discussions, we typically have in a normal year without engaging any special tax planning efforts about $500 million in disposition capacity where we can keep the proceeds. So that's essentially part of what we were thinking about with our plan this year. So we do have capacity in that regard.

Beyond that, we have a very clean tax position. We could use onetime levers to increase disposition capacity up and have that proceeds available for any purpose, including a buyback activity. But as I said, I wouldn't put any fixed number on how much more we could flex it up beyond what's contemplated in our plan by potentially repurposing proceeds to acquisition activity.

Our next question comes from the line of Jana Galan with Bank of America.

Congrats on the strong start to the year. Just a question on the decision to maintain the midpoint of FFO guidance despite the $0.05 outperformance in the first quarter. And I think you said close to $0.02 is the expenses that may be incurred later in the year, but then you're also benefiting from the share repurchases being maybe a little bit larger and earlier. So if you can kind of walk us through that.

Sure, Jana. This is Kevin. We think affirming guidance is a disciplined and appropriate decision today. To be sure, as you point out, we are off to a strong start with revenue trends on track, our first quarter earnings beat and completed buyback activity that should add a couple more cents of incremental earnings as the year progresses. At the same time, as you know, we're still early in the year with peak leasing still ahead of us. And some of the Q1 beat was expense timing, as we've alluded to, not a full year run rate change.

So while full year earnings are currently tracking modestly ahead of our original plan, we think it's more appropriate to affirm full year guidance today and revisit it on the second quarter call when we'll have a much better read on the peak leasing season in the balance of the year.

Our next question comes from the line of John Pawlowski with Green Street.

Matt, a question for you on the Avalon Sunset Tower sale. Are you able to share the cap rate both on your seller NOI as well as your best guess of the cap rate on the buyer's NOI? I think you owned the property since the mid-'90s. So I'm just curious what type of property tax reset would be felt on that property.

Yes. John, that is a very atypical transaction. You're right, it's a very old asset, early 60s vintage and -- or late 60s vintage, and it's subject to San Francisco rent control. So it really is not representative of where the San Francisco asset sales market would be today. There's also quite a bit of overhang there with some regulatory upgrades that are going to be required, seismic and sprinkler retrofits, which really was part of what drove us to sell it.

The cap rate, kind of what we would talk about as a market cap rate, which would be kind of the buyer's forward T12, we think was probably in the low 5% range. But that does provide an allowance for a certain amount of CapEx that the buyer is going to have to do related to that retrofit work. So it doesn't really map cleanly to anything else. I would say -- there are other assets we own in the city of San Francisco, where I would say, given the loss to lease that are -- that would probably be honestly in the low to mid-4 cap rate today. And so if you think about it just relative to how to value the portfolio, that's probably more typical.

Okay. And then, Sean, a question on two markets where the economies have been kind of stuck in the mud. Maybe a multiple choice question. So D.C. and Los Angeles, do you expect pricing power to either reaccelerate from here in the coming quarters, just muddle along or get worse before it gets better in both D.C. Metro and Los Angeles?

Yes, John, good questions. A little bit of crystal ball questions, I guess. But what I'd say is, as I see it today, based on what we know, things feel a little bit better in the Mid-Atlantic. Things were rough mid- to late last year in the Mid-Atlantic. What we can tell in terms of the feedback from our teams, both on the ground in terms of people coming through the front door in terms of leasing or people contacting our renewals team, definitely not as much angst in the system in terms of prospective renters and/or existing renters executing renewals. We've been able to peel back on concessions a little bit.

The average asking rent year-over-year is about flat right now. We thought it'd be down a little bit. So I'd say it feels a little bit better in the Mid-Atlantic. The job worries have faded. I'd say maybe there's even in certain submarkets, probably more defense sector oriented, maybe a little bit of optimism.

So if I had to pick 1 of the 2 right now, I'd say we're getting a little more anecdotal feedback and on the ground data that supports the Mid-Atlantic probably being a little bit better as we look forward. I wouldn't say that it's overly positive compared to the Bay Area or something, but I think it looks pretty good. And then in L.A., L.A. has been tough, as you well know. And so there's not necessarily a near-term catalyst other than potential investments that relate to World Cup, Olympics, things like that kind of bringing in jobs. They did pass some tax subsidies, as you may know, last year to help promote entertainment content being developed in L.A. broadly across California but mainly L.A. That hasn't really trickled in just yet, but it's still early. So I would say we haven't yet seen a catalyst quite yet in L.A. other than very diminished supply, but we're looking for it on the demand side.

Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

Sean, maybe sticking with you. You had referenced the operating momentum you've seen into the second quarter. I guess, was there any specific pickup in demand into April that drove the acceleration in lease rate growth after what kind of appeared to be a fairly modest improvement from 4Q to 1Q? Or just anything specific, I guess, as we get into the early part of the spring leasing season that drove the improvement?

Yes. I mean I wouldn't necessarily point to significant macro factors, Austin. I think it really is kind of regional drivers for the most part. You probably just heard my commentary on the Mid-Atlantic and why that's feeling a little bit better.

Yes, there's been good momentum in the New York Metro area for obvious reasons there in terms of the employment growth that we've experienced there in other markets. And the softer places are what we would have expected. I mentioned L.A., still last 6 months, basically no job growth in Boston, very little in Seattle. So I think it's more of a regional story in terms of where you're seeing the momentum versus not as opposed to a macro shift one direction or another at this point.

Our next question comes from the line of Adam Kramer with Morgan Stanley.

I wanted to ask, maybe it's a little bit more of a philosophical academic question. But I know in the past, we've sort of focused on job growth. I know you guys have had job growth charts in the deck for some time. Noticed today sort of has a wage growth chart in there. Obviously, 2 different data points can mean different things and sort of work together. But wondering, again, maybe a little bit more philosophically, if you sort of think one is a better indicator of apartment demand, be it wage growth or job growth.

And then I guess maybe a second part to that question is, just with regards to job growth, I think if I remember correctly from the last deck, there was sort of an increase embedded into the assumptions, I think, sort of using the NABE forecast for 2H. Wondering if that's sort of still the assumption that you guys are working under that there's going to be that uptick in job growth in the second half or maybe there's a different forecast out there now?

Adam, this is Ben. I'll start us off there. So in terms of drivers of rental demand, it is both, right? It is both jobs and wage. We very much look to total income growth as the drivers of rent growth over time.

To your second question, our guidance and our reaffirmed outlook for this year is based on sort of an economic environment that we were experiencing in the second half of last year and sort of continuing into the first quarter. So we weren't -- our outlook was not based on any inflections looking forward.

Really the 2 main drivers that we talked about being different in the second half of the year. One was the cumulative benefits of lower levels of supply, which, as we've noted, is now down to 80 basis points in our established regions. And the second is just the dynamic of softer comps in the second half of the year, which you can see on one of the presentation slides. So those are the main drivers.

We naturally do look at job forecasts. Those are tough to peg month-to-month. We've generally looked at NABE. NABE's forecasts are down some. But when we put the pieces together, it doesn't change our outlook for the second half of the year. And given Sean's commentary and our start to the first 4 months are feeling pretty good about our progress so far and the setup for peak leasing season and the remainder of the year.

Our next question comes from the line of Rich Hightower with Barclays.

To ask a question on development. And just given the progress you're seeing year-to-date, I think Matt mentioned that construction costs are maybe a little more attractive here and there versus original underwriting. So how quickly can you possibly ramp up the development pipeline given all of the moving parts and, of course, other potential uses of available capital, maybe to increase the development start number? Or what's the lag on that sort of a process internally?

Sure. Rich, it's Matt. It's always a bit of a combination of what I'd say is bottom up and top down. So bottom-up is the deals themselves. And at any given point in time, we have a significant pipeline that we're always managing through entitlements, through final design and permitting. At the end of the first quarter, I think our development rights pipeline was about $4 billion, a little more than that, $4.2 billion. And through the normal course of time, those deals would bubble up over the next couple of years to being ready. Then there's the top down, which is how are they underwriting and what is our cost of funds and what are our other alternatives investment uses and what is the capital allocation decision we're going to make.

So we do focus a lot on preserving flexibility, and I think we do a really good job with that. So we would have the ability to dial up development more, whether that's next year or even later this year if conditions are favorable and it's the right capital allocation decision.

The other thing I would say is that in addition to our own pipeline, most of that $4.2 billion is kind of AvalonBay development. We also have our developer funding program where we provide capital to third-party merchant builders. I think maybe 5 of the 30 deals or 25 deals we have under construction today are DFP deals. Those deals we can ramp up even more quickly because in those cases, somebody else is doing all that early prework and it's ready and just looking for capital. And there's a lot of that business out there right now. Most of it doesn't underwrite, which is why you're not seeing start activity pick back up in any meaningful way. And we like that. We are very consciously trying to take a larger share of what is a shrinking pie of development activity, and we think we're well positioned to keep doing that.

Yes, Rich. This is Ben, just to add on to Matt's commentary, at points in the cycle like we're in now where others are pulling back, but we've got a set of competitive advantages and a cost of capital that's differentiated. It also allows us to structure deals more optimally. And so when Matt talks about having $4.2 billion in a development pipeline, we control that at a very low cost. And we do see that shift, and we've seen that in this environment, which we're able to get control of land with much more flexibility in today's environment than in past environments.

And Rich, this is Kevin to add on. We do have the financial flexibility to lean into those opportunities should they manifest. Our access to the loan market is excellent. We priced 10-year debt in the low 5% range. We have access to the transaction market. We just sold $340 million of 40-year-old assets at a 5.4% cap rate. We could sell more representative assets at a lower cap rate. So that would give us an opportunity to fund accretively deals, development projects that might stabilize in the mid-6s if there's more that we want to have as a quick start to lean into.

Our next question comes from the line of Haendel St. Juste with Mizuho Securities.

I was looking earlier at the turnover chart in your report, and it's pretty striking how we've gone from almost 60% back in 2009, 41% a year ago and sitting in the low 30s today. And so understanding some of that is the affordability dynamics you laid out, some maybe demographics, some of the operating platform. But I guess I'm curious, as you think about it and as you look at it, is this level in the low 30s, is it sustainable? Is it a new norm? Curious on perhaps what you feel the more appropriate longer term or intermediate-term way to think about turnover over the next year or 2? And remind us again what's embedded in the guide for this year?

Yes, Haendel. This is Sean. I'll take that one. In terms of the turnover rate, the one thing I would try to parse out a little bit is the seasonal shifts here. So that 31% is really a Q1 number, tends to be one of the lower quarters of the year. If you looked at it on an annual basis, the last couple of years, we were kind of in mid-40s and then low 40s. Our expectation for this year is we remain in the low 40s.

And there's a number of different factors that really drive turnover. Some of it relates to substitutes, which includes the availability of for-sale product. That is one sort of macro factor we don't see changing anytime soon. Even if you see rates come down some, just the available inventory is not there across especially our established regions. So we think that remains certainly a tailwind or at least a neutral impact on the business for the next couple of years, at least the foreseeable future.

The other thing that comes to mind in terms of substitutes is other available supply. That certainly has ticked in our favor over the last couple of years, coming down to historical levels and projected for the next year or 2 to dip down even further. So the substitute factor isn't really there. And then the rest of it really comes down to kind of normal life events. And that's the stuff that you really can't control. So whether it's people getting married, people getting divorced, people having children, taking care of parents, multigenerational things like that come and go. That's typically embedded in that data year in, year out.

So I think the primary things that tend to tick it up or down are the things that I mentioned in terms of other options within a market. The life stuff just continues to happen. And I don't think there's a lot that I would point to that would tell you that we'd see a meaningful uptick in the next couple of years based on what I know today in terms of the -- those particular factors. It takes a while to build new multifamily, takes a long time to build and title single-family in these markets. So we've got a pretty good runway for a couple of years on that point.

Our next question comes from the line of Michael Goldsmith with UBS.

I'm here with Ami Probandt. On the renewals, nice acceleration there. What's driving that? Is that in line with your expectations? And then how have renewal negotiations trended recently?

Yes, Michael, this is Sean. Overall, in terms of renewals, we've seen nice acceleration this year, as we indicated in our earnings release in terms of the movement from the first quarter into April. I also mentioned earlier in response to the question that both occupancy and lease rates are blending to slightly ahead of our original budget. So we're in pretty good shape there overall.

In terms of the various markets, for the most part, we see a seasonal uptick in asking rents. Renewals tend to drift that behind it. The markets that I mentioned earlier that are the stronger markets tend to see a little nicer pickup as compared to some of the ones that have been softer, as I mentioned, like Boston, L.A. and Seattle. But we've seen good movement across most of the regions with a few exceptions, and it's slightly ahead of our original expectation.

Our next question comes from the line of Alexander Goldfarb with Piper Sandler.

Going to the lease-ups, the pace of lease-ups that you had and certainly, we've seen similar from private developers. If new rents overall are still sort of muted, but the pace of leasing is exceeding what normally would be a normal monthly pace. How do we think about this as far as you talked about like sort of only 2 shout-out markets, New York and Northern California, and yet a lot of your development is in other places. So how do we think about the pace of leasing versus still the muted rents overall? Is it just heavy concessions? Or what's the read-through on why lease-ups are so strong yet rent pricing is still soft?

Yes, Alex, it's Sean. I'll make a couple of comments, and then Matt can chime in here. So on those -- on that lease-up basket for the quarter, that's 9 communities in there. Just to give you a little bit of insight what's in that basket. There's 4 in New Jersey, 1 in Charlotte, 2 in the Mid-Atlantic, 1 in South Miami, 1 in Austin, those are 9.

And I think in general, what we've seen is that in these submarkets, people are really compelled by the product that we're offering in many of these cases. I'll let Matt talk about New Jersey. But in terms of the concessions and stuff, I mean, we're talking about people choosing on average, a longer lease term over 15 months, and we're doing like 6 weeks free. So it's around 9% or so. So that's not terribly different from what we would normally do. So I think it's really about the product.

I'll let Matt talk a little bit about what we're doing with some of the products there.

Yes. Alex, as Sean mentioned, it's really a combination of offering a compelling product in many cases, in submarkets that just have not seen much new supply in a long time. So a lot of it is the geographic mix. And where the -- most of the development NOI is coming from is from the 4 New Jersey deals plus South Miami. That's -- those are the ones where the rents are quite a bit higher than the other markets that Sean mentioned. And in most of those cases, that's really what it's about. There's plenty of supply in South Florida, but not in a location like South Miami where that community is over a brand-new Fresh Market on the kind of South/East side of U.S. 1 and all the competition is in kind of other neighborhoods that don't have the same walkability, that don't have the same schools.

Similarly, you think about New Jersey, give you one example, Avalon Wayne, where we have both townhomes and flats. That's the first new product Wayne has seen in probably 35 years. And that's very much a part of our development strategy. When you look at our 2 starts this quarter, one of them is Saddle River. That's another place 7-figure home values up there in Bergen County and another place that hasn't seen any new multifamily and 2 generations. So again, it's part of the same story where we really are getting an outsized share of the demand that's there because of the differentiated and compelling nature of what we're offering.

Our next question comes from the line of Brad Heffern with RBC Capital Markets.

Sean, just to follow on, on that average lease term number that you've given a couple of times over 15 months. Does that come from you just nudging people in that direction to lower expirations in the off-season? Or is there something that's driving a broader shift of tenants away from selecting just a normal 1-year lease term?

It's a little bit of both. So in the season that you're in and the expiration profile that we want in the subsequent year does matter. But it's nice to see in some of these markets where we're leasing townhomes as an example, and some of these assets. Matt mentioned Wayne, South Miami, some townhomes. They're bringing their kids. They want to get through the school year and have some time that on average, I would say we were nudging less in Q1 than normal and people were picking up on the longer lease terms and product like that. So a little bit of a combination of both, but it's nice to see the preference for a slightly longer lease term come through from customers as well.

Our next question comes from the line of Rich Anderson with Cantor Fitzgerald.

So I guess I wanted to sort of dive into a specific metric that being, well 2, new and renewal lease rate growth. You mentioned, I think offers out 5% to 5.5% into the spring leasing season, yet your guidance still has 3.5% renewal for the full year. Understanding you're looking to gather more information before you revisit guidance. But is it fair to say that as you sit here today that the flat new lease rate growth that's embedded in the current guidance would be something greater than that based on the numbers you see today, but you don't know yet what the future holds, so you're sort of holding the line. Is that a reasonable way to think of your mindset as it relates to that specific part of your guidance going forward?

Yes, Rich, it's Sean. In terms of the way we think about it is, one, what we have -- what we put forth in terms of our original guidance. And I would say that we're generally tracking on plan. I mentioned rates are slightly ahead. But the Q1 leasing period, there's fewer expirations in Q2, Q3. We see a nice trajectory as it relates to asking rent growth, and we're basically in a position where things look pretty good, but we're going to have a much better set of data as we get through the second quarter, a lot more leasing to do with the expiration volume in Q2 that we would be able to revisit where we are at midyear and give you an update as to what our thinking is at that point in time. But we've not seen anything yet that says we should be doing anything different other than what we reaffirm what we already said.

Our next question comes from the line of John Kim with BMO Capital Markets.

I wanted to know what you're seeing in terms of the market concessions that your competitors are offering, if there's been any noticeable change as you're entering the peak leasing season? And what you're expecting in terms of offering concessions versus what you provided last year?

Yes. John, it's Sean. The concession story is very much regional. So what I would tell you is the markets that I indicated in my prepared remarks that are either a little bit stronger or a little bit weaker than what we anticipated. That's where you're going to see the concession activity. So our concessions up in Boston and Seattle and L.A. year-over-year, yes. Are they down meaningfully? Yes. In Northern California, New York Metro area? Yes. So it really depends on the market.

And you can go into submarkets where -- in Denver, it's very rough in certain particularly urban submarkets, and you'll see 2.5 to 3 months free. And then you go out to suburbs, it might be 6 weeks. You come here to parts of the Mid-Atlantic, and there are some places that it's down to no concessions and there are some places where it's a month. So it's hard to generalize overall, I would say, it really is a function of the various regions in terms of the specific data points that you're looking for. And as I said earlier, on a net effective basis for rate, things are pretty much tracking in line with what we expected. It's modestly ahead, but not a lot.

And we have reached the end of the question-and-answer session. I would like to turn the floor back over to President and CEO, Ben Schall, for closing remarks.

Great. Well, thanks for your question today. Thanks for joining us, and we look forward to visiting with you soon.

Thank you. And this concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.

The Citi's 2026 Global Property CEO Conference. I'm Nick Joseph here with Eric Wolfe with Citi Research. Pleased to have with us AvalonBay, CEO, Ben Schall. This session is for Citi clients only and disclosures have been made available at the corporate access desk. [Operator Instructions].

Ben, we'll turn it over to you to introduce the company and team, provide any opening remarks, tell the audience the top reasons an investor should buy your stock today, and then we'll get into Q&A.

Thanks, Nick and Eric, for hosting us. Thanks, everybody, for being here. I'm joined today by Kevin O'Shea, our Chief Financial Officer, and Sean Breslin, our Chief Operating Officer. For folks who don't know us, we're AvalonBay. We're the largest of the public multifamily REITs. We own and operate close to 100,000 units across 10 regions in the country. We've been in business for 30-plus years at this point, and over that time period, have delivered an annualized return to shareholders of 11%.

I'm going to start by just emphasizing some of our focus areas as a leadership team and as a business to drive superior growth and also ways that we're differentiating our business in the landscape. I'll start with, on the operating side, we are in the midst now of a multiyear, what we call our operating model transformation, really looking to leverage our scale, tap into technology, including increasingly the use of AI, along with the benefits from centralized services and the benefits from managing clusters of assets to drive more and more cash flow out of our existing communities as well as greater returns from our new investments. To put numbers to it, we've put out a target of $80 million of annual incremental NOI to come from those operating initiatives. We're about 60% of the way there and have targeted another $7 million of incremental NOI this year from those activities. So we're excited where that's headed. A lot more to come, a lot in the lab as we think about future innovation to both better serve the customer as well as drive incremental revenue and more efficiencies for shareholders.

Second category of emphasis is in and around our development capabilities and our development platform. For folks who don't know, in the public sector, we're by far the largest of the developers in the space. We, over a 10-year period, developed more than all of our peers combined, and my call-out today is that we have $3.6 billion under construction, all of which has been paid-for, particularly with a large equity raise that we did in 2024. And that development activity is set to generate meaningful earnings some this year, but particularly as we get into 2027 and 2028. That is a differentiated earnings stream that we traditionally have had over time, but one that will be more accentuated as we look out over the next 12 to 24 months.

And then the third area of emphasis is in and around the strength of our balance sheet. We have one of the strongest balance sheets in the REIT sector. We have an A- rating, and what that balance sheet strength allows us to do in today's environment, gives us a strength and a flexibility to be able to both continue to develop, so we have targeted $800 million of development starts this year. We're looking for initial stabilized yields of 6.5% to 7%, which we consider attractive relative to underlying market cap rates and asset values and also attractive relative to our cost of capital. But it also gives us the strength and flexibility to buy back our stock, which we've been doing in decent size between the end of last year and the stock that we bought so far this year, we've repurchased about $600 million of our stock at an average price of $180 per share. This year's activity is being funded predominantly by asset sales. And so there's the dual benefit of one, it being an accretive capital allocation choice, effectively monetizing slower growth, higher CapEx assets into the private market in the 5 cap rate arena and buying back our stock in the 6, in the low 6 cap rate arena. So there's that immediate accretion. But by pruning the portfolio to facilitate that transformation, we're also setting up our future growth in a more optimized way. And so that's a double benefit from a shareholder perspective.

Transitioning to the emphasized areas on why us? Why our stock today? First one, again, I'd emphasize is the development earnings to come. And just to put some numbers to it. In 2025, our development NOI was about $25 million. We're forecasting in 2026 that development -- incremental development NOI, so above and beyond the $27 million, an incremental $47 million, and then as we get into 2027, there will be an incremental $75 million on top of that. So basic math, if you think about the $3.6 billion of development we have underway at initial stabilized yields in the low 6s, that's the power and the magnitude of earnings that we have coming from our development platform, which brings me to the second point, which is one in and around valuation.

We're at a point in the cycle, and it does happen from time to time, multiples come down, multiples compress across the peer set. And there's just not a lot of value being placed on our development earnings to come. We are acting upon that, obviously, by buying back our stock, but we also think it provides an attractive entry point for shareholders. And then I'll end particularly kind of today's environment just by emphasizing the strength and the stability of our portfolio. We're obviously very much naturally provide a necessity to filling the renter need within housing in this country. We have a very high-quality portfolio that's well diversified across markets, submarkets, product and price point. And that stability and resiliency when it comes to that type of portfolio, along with the strength of our balance sheet positions us to be able to continue to invest accretively on behalf of shareholders as well as take advantage of opportunities as they present themselves.

Sorry about that, I'm losing my voice a little bit. But you mentioned at the end there, your valuation. And I think I've been covering the stock for a long time. And I think if you look at your stock as well as your peers versus REITs, it's about -- on a multiple basis, its about as discounted it's been at least on a relative basis. You mentioned the earnings growth that's coming from the development pipeline. I think the market is now maybe a little bit concerned that demand is going to be structurally lower and thus pricing power is going to be structurally lower. Where does the market have it wrong? Is the market -- where is the market misplaced in that?

Yes. There are demand concerns that are out there. Part of it is we're in the middle of a relatively low demand environment, right? The jobs revisions that were put out last year, obviously, not a lot of net new jobs being created. And in today's world, right, there are the narratives in and around AI and the potential impact of those jobs.

One is, I think it's just important for us to emphasize the stability and strength of our underlying asset base. And so that gets into providing a necessity. I think there are narratives in and around, where things could head that actually I think makes rental housing even more critical in terms of filling a need in this country. I think the diversity of our portfolio, which I mentioned, also a resident base that's 70% of that resident base is over 30 years old. Average household income is approaching $200,000, diversified across a set of industries.

So I think that can -- I think kind of that strength of our ability to deliver for shareholders over a multiple year period, throughout cycles can get lost through time. And then there's just also points in the cycle where the market is going to give you less value for that earnings to come. Now we've funded it. It is, in our minds, very tangible. These are projects that are under construction. Many of them are now in lease-up or approaching lease-up. And so our view is that the market will fairly soon, maybe even this year, sooner than most years, turn to 2027, and we've got a very differentiated earnings growth potential in 2027 than the rest of the sector.

And as part of your forecast, you're thinking that there's going to be a pickup in the second half of the year. I think one concern, I guess, I have is that what we've seen over the last 2 years is that the impact of supply has just taken a lot longer to sort of work its way through. And I think you actually were really correct in saying that the Sunbelt was going to take a lot longer to recover because of that. I guess why won't the same be true in your markets? So the supply that hit last year that is now seeing lower job growth, lower absorption, why won't that take longer to absorb? Why are you going to see that pickup in the second half of this year in terms of rent growth?

Yes. Why don't I take that one? There's a number of factors that, sort of [indiscernible] assumptions around the second half, rent change accelerating. The primary driver of that, frankly, is softer comps from the second half of 2025. If you recall back to -- we go back to maybe June of last year around NAREIT time, most participants in the industry started talking about the peak leasing season coming to a head earlier than anticipated kind of in the May time frame, maybe it was early June and then beginning sort of that downward slope into the second half of the year.

At the time, it seemed unusual to all of us based on the data that we were seeing in terms of the job growth being relatively healthy. We were not feeling that. Obviously, we were a little bit of a leading indicator in that regard with significant revisions to jobs that were made for 2025. But if you think about what happened last year and sort of that trend of the asking rent curve and then you apply sort of normal seasonality this year at an absolute lower level, those look pretty similar for the first half of the year, kind of exceed where we peaked last year, maybe in the June time frame, early July. But in the back half of the year, the spread between those two lines is simply just wider based on the expectation for this year relative to what happened last year. And so harvesting that spread based on people that signed leases in the back half of '25 versus '26 gives you a little more embedded growth in both new move-ins and renewals as we move through 2026.

Now certainly, that will be helped by the continuation of lower levels of supply as we move through 2026. So supply is coming down to pretty historically low levels in our established regions in particular. There was some hangover in terms of supply that was delivered in '25 that's still absorbing in early '26. But when you get to the back half of the year, you take a market like the DNV and the Mid-Atlantic, supply is going to be down 60%. You get 4, 5, 6, 7 months of that accumulating, that does start to impact pricing power. So primary determinant is really the year-over-year comp issue, but it also is supported by significantly lower levels of supply across, in particular, our established regions in 2026 and the cumulative effect of it.

And I know we're early in the year, but as part of your revenue management system, obviously, you have an idea of what's going to happen over the next, call it, 60 days or so. Can you tell us sort of what the leading indicators are telling you as far as the early part of the peak leasing season, what type of demand you're seeing, what type of lease exposure you have, retention ratios? Just anything that kind of tells you where things should trend over the next couple of months?

Yes. Based on what we're seeing right now, I would say that things are trending consistent with our original outlook. Give you a couple of data points. Asking rents since the beginning of the year are up about 2.5% through the end of February in the last couple of days here. That's pretty consistent with what we would have anticipated in our outlook and reflective of the demand environment that I mentioned, which is relatively modest job growth. If you went back to pre-COVID levels when we were producing jobs more than 100,000 a month, that growth from January through the end of February might have been slightly north of 3%. So it's less than that, but it's consistent with what our outlook was.

Turnover is down about 100 basis points year-over-year through the end of February, a little bit below what we anticipated. So retention is slightly better. But availability is in the right place, is in a good spot for this time of year. Occupancy, we noted is up about 20 basis points since December, also about consistent with what we expected. So overall, the picture looks relatively healthy and consistent with what we anticipated. The jobs print in January, 130,000 jobs. We're not feeling an acceleration at this point. We'll see maybe at the end of this week if that number is revised. But it feels like on balance, things are about what we expected at this point in the season, and we feel good about where we are.

And this is probably tough. It's very sort of qualitative, but does it feel different than, say, 3, 4 months ago when you started seeing that drop in demand? Or is it sort of like you're just -- you're still at that lower level, but you're kind of -- you're going through the normal seasonal pattern that you would expect?

Yes. I mean I'd say it feels maybe a little more in balance. I mean the back half of last year, you go back 3 or 4 months to your point, I mean, the Mid-Atlantic did feel pretty rough. The DOGE impact really wasn't felt until kind of late Q3, Q4. At the end of the day, we lost 50,000 jobs in the Mid-Atlantic. It feels a little more stable right now.

Obviously, globally, things are getting a lot more attention besides just reducing the size of the Federal Government in terms of the focus areas. So, and then you have a market like the Mid-Atlantic with supply coming down 60%, as I mentioned. So it wouldn't take much of an uptick in jobs, which we might get out of the defense sector, frankly, just given what we've seen popping on the defense talks to have a better year in the Mid-Atlantic. We're not expecting that at this point. But there are certain things that are starting to pop up that might give you that indication that things could look a little bit better in that region in the back half of the year. But I would say it's kind of market dependent in terms of any significant shifts. Things feel like they're seasonally appropriate.

We had an investor question effectively asking if there's any geographies that are standing out on the upside or downside so far this year?

And I know it's still relatively early, but any sort of -- maybe again on those sort of forward indicators that we talked about, are there any markets that are looking like particularly like they might get more incremental pricing power than you thought and then vice versa?

I wouldn't say anything significantly different from the guidance we just provided for the full calendar year. The ones that are leading are still healthy. New York City, San Francisco as an example. Nothing's changed in Denver. Denver is still a very difficult operating environment, lots of concessions, lots of supply, anemic demand. But again, nothing materially different from what's reflected in our outlook.

Yes. And then on the turnover front, one of the, I think, things that is a little bit of a fear for some investors is that the whole industry has seen this lower turnover, higher retention. Some of it seems to be associated with the housing market. And so you have President Trump out there trying to stimulate demand. Is there anything that you've seen thus far or any reason for you to believe that, that turnover is going to change for you? Are there any policies out there that you, I guess, hope don't get implemented that you think could actually really stimulate the housing market at your detriment?

Yes, nothing at this point in terms of our dashboards that are indicating any kind of increase in turnover as a result of the housing market. I think one thing to keep in mind here is, in our established regions, which is the majority of our portfolio, it costs more than $2,000 per month more to acquire the medium-priced home as compared to medium price rent. So you need to have more than just a modest adjustment in interest rates or a modest correction in values or a meaningful shift in policy to fuel lower spreads on mortgage rates, whatever it might be. So we don't see that.

And frankly, our view is that, a fundamentally healthy housing market is good for the macro economy and good for all the various jobs associated with it and creates a little more activity in terms of people, in terms of mobility and things of that sort that we think is actually good for our industry that a good solid housing market can coexist well with a good rental market, and we have seen that in the past. And that probably has more incrementally positive benefits for our business than negative benefits if there's some modest activity that spurs a little more demand.

You mentioned supply is coming down. I think you said what the lowest in how many years, like 10, 15 years, something...

Yes, just post the GFC, it's down to 80 basis points, which is really consistent with what we saw in the decade of the '90s.

And so I guess some of your peers, and I think you talked about some savings on the construction side as well. But are you seeing any sort of incremental signs that activity on the construction side is picking up, especially with some of those construction savings? I guess my question is, over the next year, are we going to see more incremental starts such that like 2028, you start seeing more supply again? Or do you think we are sort of in this low supply environment for the foreseeable future?

Well, it definitely depends on which markets we're talking about. And we've used the term about lower for longer supply in our established regions, primarily because just how long and how challenging it is to get new entitlements. So just the life cycle of a project is longer. That is less so in some of the Sunbelt and some of our expansion markets. To your broader question, Eric, I mean new starts are not coming down to 0, right? So there is activity out there. That said, I do think we're continue to be in an environment where starts are going to be low.

We at AvalonBay can get our outsized share of that start activity goes back to our balance sheet strength, our cost of capital. And we are, for sure, seeing right now, and this is one of the benefits of being an active developer, we self-perform on the construction side. We are seeing meaningful buyout savings in the projects that we're underway with. There's not very often where we talk about as a book of business, we're actually buying out and having our construction costs come in below budget. And so that is on the margin, having us lean in, had us lean in last year in terms of starts. It has us thinking about sort of an attractive cohort this year. In our business, you live with your basis forever, right? Rents you'll -- we'll get mark-to-market every year, but we'll live with that basis forever. And so an opportunity to tap into one of our core capabilities and deliver product that's $10,000 a unit, $20,000 a unit lower than it otherwise would be, we think will play out to the benefits of shareholders over time.

And then I guess switching to capital allocation. You mentioned the big ramp that you're going to see in earnings. And so thank you for giving us the specific numbers. It makes it easier to calculate. But I think if you think about the last sort of 2 years, the contribution that you've got from earnings from development has been a little bit lower than history given some things that you discussed on your call. I guess my question is, are those same things going to impact those numbers next year, even though you're seeing this ramp in NOI as things get leased up, are you also going to be suffering from some of those things such that the contribution stays lower than its history?

Yes. I'll start at a high level and Kevin can add on. As sort of the most simplistic terms, sort of Layman's terms for the group to understand what's happening this year. We do have a lot of contributions coming this year from development.

But given that we started $1.7 billion of attractive accretive projects this year, the balance of what we have under construction versus what is income producing, is more heavily weighted towards what's under construction. As we get into next year, there will be a greater set of projects that are on the income-producing side, and so that naturally will provide a switchover.

The second component, and this gets a little bit nuanced, is just the level of construction activity that we have going on, what's happening with our construction in progress. This year, we are going through a ramp of that activity as we forecast and we provided some details in our presentation around this. We generally expect construction in progress to remain relatively flat this year going into 2027. So you won't have some of those impacts in terms of how it flows through earnings. Kevin, if you want to...

Sure. Thanks, Ben. I'd say just to frame the discussion a little bit, as you referenced, Eric, this year, if you look at the underneath external components of growth, we anticipate development will provide about 100 basis points of earnings growth this year. And then last year, it was about -- with the [ SAP ] activity, about 100 basis points as well. Throughout much of this decade, given the variability in funding costs and economic environments that we've had since the pandemic, we have had a more volatile level of starts. But generally speaking, for much of this decade, we've had a start volume of about $1 billion a year. We're set up to do about $1.5 billion, which is what we started last year, that will start to flow through in our earnings profile in 2027 and beyond.

So I would expect a higher level, and we've messaged this in our materials, a higher level of occupancies next year than this year and occupancies are really the foundational element to generating NOI growth. So as Ben mentioned in his opening remarks, we had $25 million of NOI last year. That's a fairly subpar level. This year, $47 million, which is a more normal level. We do have some unique offsets this year with transaction activity timing suppressing the contribution of development earnings growth in 2026. But we don't necessarily anticipate unusual dynamics next year, and we expect to have above level contribution of development earnings growth in and of itself in 2027, just by virtue of having an incremental $75 million of NOI anticipated, plus or minus for next year. So next year is set up to be a stronger year of underlying contribution from development earnings growth, just by virtue of the impact of a higher level of start activity started last year, starting to flow through into our earnings profile of '27 and beyond. So to the extent we can kind of stay at that more elevated level of development starts, we'll be able to have a more durable level of earnings contribution from development. That's more in the 150 basis points or more that you're accustomed to seeing from us.

And we had an investor ask if there's any sort of market rent growth embedded into your NOI to get to that? And I guess I'd just maybe say like more qualitatively, like you just assuming sort of like a normal lease-up cycle to get to those NOI targets? Maybe just talk about the assumptions that you're using to get to those NOIs?

Let me handle it just from a development perspective, and then Sean can talk more broadly, given we're just covering development. So one thing I want to be clear with investors on is, we do not trend rents. So when we're underwriting rents, we're doing it on those rents at that period in time. And we don't then mark-to-market the rents until we're much further along in terms of the leasing activity. So we feel pretty good about the development NOI activity.

A lot of these are projects that are starting to be in lease-up, so we have real data points. This set of lease-ups this year are actually in some -- are more heavily weighted to our established regions, so a little bit more stability there. So, I'd say, good line of sight delivering at the development NOI numbers that we communicated. I'll turn it to Sean to talk more broadly about our guidance.

Yes. I think just to reinforce that point, so we really underwrite on a spot basis, both costs and rents, NOI overall. What we've benefited from recently is that costs have come down. So we're booking some pretty good cost savings and would expect that trend to continue here for a little while. And then typically, inflationary levels are going to come through on the rent roll side in terms of rents growing during the construction period.

But again, we don't underwrite that. But in terms of leasing velocity, things have been pretty healthy. We were averaging around 20%, 21% a month during the fourth quarter. That ticked up in January to mid-20s. We've seen pretty good velocity across the lease-ups that we have. We manage that very tightly. So we feel pretty good about what the projected NOI is for this year based on our original assumptions and the philosophy has been good so far. And we try to lease up those communities just so people know we're not aware, typically within 12 to 13 months of when we open for first deliveries.

And then at the beginning, you mentioned that you've been a buyer of size of your stock, you see good value there. Can you talk about how you're looking at that program? There's sort of two pieces to it. There's one piece where I guess you're effectively hedging yourself by sort of selling assets and you can sort of arbitrage those cap rates versus where you're trading. And then there's another piece where you could theoretically increase your leverage. That's sort of a different sort of decision. So can you talk about those two, sort of the max potential around them and whether you'd be willing to let leverage drift higher or not?

I'll start with -- let me just sort of parse through what was in our guidance versus what potentially could play out with buyback activity, and then Kevin can talk about the potential capacity and how we think about executing this in a leverage-neutral way.

So we have not assumed any benefit from share buyback activity in 2026 into our 2026 guidance. What we had in our baseline guidance was to be a small net seller this year. Roughly, we're assuming we were going to monetize about $500 million of assets and then buy $400 million of individual assets. So that's what's in our baseline budget. As you've seen, we started the year by buying back some of our stock. We have now between either what's sold and closed and/or under agreement, about $400 million of assets teed up for disposition. And looking at the current landscape, from a capital allocation standpoint, it makes a lot more sense for us to be using disposition proceeds, particularly if we're pruning the portfolio of slower growth assets to buyback our remaining portfolio in the low 6s than it would be to be buying back individual assets in the high 4s or the low 5s. And so that's our orientation as capital allocators. And Kevin, I'll turn it to you to add more.

Sure. Thanks, Ben. The short answer is we intend to execute any additional buyback activity and the activity we've already done this year, the $113 million on a leverage-neutral basis so that we end the year with the same leverage that we otherwise plan to end the year with when we put forth our initial guidance.

So background behind that, as you know, when we reported Q4, our fourth quarter leverage was 4.7x on a net debt-to-EBITDA basis using the last quarter annualized. That calculation does not give ourselves credit for the undrawn equity $400 million to $800 million, which we expect to pull down this year. Had we done so, that 4.7x leverage would have been probably more like 4.2x or 4.3x leveraged. Our financial plan contemplates that we will end up this year in the fourth quarter, somewhere around the same level of 4.7x net debt to EBITDA.

So as Ben pointed out, we didn't have any additional buyback activity in this year's financial plan. We anticipated simply selling $500 million of assets and buying $400 million of assets. So we'll see how the year paces out if instead what we end up doing is continuing to sell a similar amount of assets, but rather buying back stock, up to around $400 million, we'll execute that plan on a more or less leverage-neutral basis, consistent with what we initially guided to.

For the assets that you've sold, it sounds like $400 million. Is there like a general like cap rate around that, like 5%? And I guess one question I have is, are you seeing private market participants talk about AI and job losses or any of the sort of things that seem to be very topical among public investors? Or is the change in pricing really more of a public market phenomenon. It's not really impacting the private market yet?

Yes. So to your first question, the $500 million of planned dispositions, we're targeting generally sort of in the low 5% cap type of range. To your broader question, I'd say for the last 18 months or so, the transaction market within multifamily has remained relatively steady and cap rates have remained for sort of institutional quality assets in the high 4s, call it, 4.75% to 5.25%. And it really does speak to our asset class, right?

These are -- the stability of the asset class, continued desire for lots of different forms of capital to have exposure to the asset class. These are assets that are relatively bite size, right? You think about an average multifamily asset being kind of $75 million to $150 million worth of value, right. So that provides a deeper pool that exists in some of the other real estate asset classes.

And then to your kind of your last question there, I think that -- I was going to kind of describe one difference in the market kind of 18 months ago to today is, the financing markets are more conducive today. And so what you have is buyers underwriting less upfront negative leverage. Now they may be underwriting a little bit softer top line given just what the fundamentals are. But I think those have sort of remained relatively in balance. And so it has remained a very attractive asset class with strong values. And hence, our ability at this point to be able to monetize assets that we don't see as go forward in our portfolio at some pretty attractive values and then buy back the remainder of our portfolio at an attractive yield.

We had a question come in about the impact of AI on job growth. I think it probably goes to a broader conversation. I think in the past, you've been thoughtful of repositioning your portfolio through expansion markets of where different knowledge workers and where different opportunities are kind of medium and longer term. How does the potential impact of AI on white-collar job growth impact your thought of where the portfolio should be in the medium and longer term?

Yes. Obviously, getting a lot of attention and rightfully so, we need to acknowledge that AI is a transformative technology. We are very much looking to utilize it to be able to deliver enhanced value to our customers and do it at a lower cost. And I think we also need to acknowledge, it is going to have impacts and shifts on the makeup of the job workforce. Obviously, very challenging to know how all of that will play out. And so my emphasis is we need to acknowledge that there are going to be changes, but we're also starting off with a significant amount of stability and strength.

And the areas that I emphasize, I hit on some of these before. One, just like we provide a necessity, right? We provide a necessity of rental housing in this country. That will continue. And there are scenarios where that we have a greater place in that housing ecosystem. Two, gets into the diversity of the portfolio across markets, price points, product, industries, it doesn't mean we won't shift over time, right, to better position the portfolio based on where future job and wage growth is going, but it does provide a diversification and the stability that exists there.

And then the third point is, to the extent that there is dislocation or changes that do occur, large-scale players like ourselves, you think about our size, our scale, ability to tap into our operating capabilities to drive cash flow, our access to capital, our cost of capital, we will be well positioned to take advantage of opportunities that come down the road.

We have our rapid fire questions. Any other questions in the room?

All right. Same-store NOI growth for the apartment sector overall next year in 2027?

2%.

And then will there be more, fewer, or the same number of public apartment companies a year from now?

Same.

Terrific. Thank you very much.

Good to see you guys. Thanks, everybody, for joining us.

Good afternoon, ladies and gentlemen, and welcome to AvalonBay Communities Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions]. Your host for today's conference call is Matthew Grover, Senior Director of Investor Relations.

Mr. Grover, you may begin your conference call.

Thank you, operator, and welcome to AvalonBay Communities Fourth Quarter 2025 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-K 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 investor.avalonbay.com, 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 Schall, CEO and President of AvalonBay Communities for his remarks. Ben?

Thank you, Matt, and good afternoon, everyone. I'm joined today by Kevin O'Shea, our Chief Financial Officer; Sean Breslin, our Chief Operating Officer; and Matt Birenbaum, our Chief Investment Officer. Looking back on 2025, I want to begin by thanking our nearly 3,000 associates across Avalon Bay for their dedication and commitment. It was a year that required us to be nimble, disciplined and highly focused on execution.

Our teams rose to that challenge, consistently demonstrating our core values of integrity, continuous improvement and a genuine spirit of caring. As summarized on Slide 4, our operating results in 2025 reflect the quality of our portfolio, the proactive steps we've taken to optimize our portfolio's growth and the strength of our operating teams.

Keeping existing residents satisfied and engaged was a clear priority, and that focus showed up in our results. with high levels of retention and strong renewal exempted rates serving as a balance to overall revenue growth of 2.1% during the year. In fact, our turnover rate of 41% in 2025 and was the lowest in our company's history. My particular thanks to our operating teams for delivering a near all-time high mid-lease Net Promoter Score of 34. One of the metrics we utilize to measure customer engagement and with clear connections to retention and renewal outcomes.

Our regional development, construction and operating teams were also successful last year in sourcing attractive development opportunities. using our strategic capabilities and balance sheet strength when many competitors were on the sidelines.

All in, we started $1.65 billion of projects with a projected initial stabilized yield of 6.2%. Funded with capital that we previously raised at a cost of roughly 5%, this investment activity sets the foundation for strong earnings and value creation in the years ahead. We have one of the strongest balance sheets in the industry and also pride ourselves in remaining nimble and capital sourcing and capital allocation.

Among our peer set, we are the only one to raise equity capital in size in 2024, having raised almost $900 million of equity on a forward basis at an implied initial cost of 5%. And at the end of 2025, we are one of the only to repurchase shares in size, having acquired almost $490 million at an average price of $182 per share and an implied yield north of 6%. These repurchases were funded with incremental debt and the sale of lower growth assets, which in turn improves our long-term growth profile.

In total, during 2025, we raised $2.4 billion of capital at an initial cost of 5%, positioning us to continue investing in our existing portfolio and in new development in 2026, which transitions us to this year with our key themes for 2026 summarized on Slide 5.

First, on the operating side, while we expect fundamentals to improve as the year progresses, we are forecasting modest revenue growth of 1.4%, given the current job and demand backdrop. Given the supply backdrop, particularly in our established regions, we will not need much incremental demand to facilitate stronger revenue growth than assumed in our budget. And irrespective of the macro environment, we will continue to utilize our scale, particularly our investments in technology and centralized services to drive incremental growth from our existing portfolio.

We're now 60% of our way towards a target of $80 million of annual incremental NOI from our operating initiatives with an incremental $7 million in NOI slated for this year. In terms of development earnings, we will have a meaningful uplift in development NOI as projects lease up during 2026, with earnings partially offset by the funding costs from the $1.65 billion of profitable developments we started in 2025. Kevin and Matt will further detail this dynamic.

In terms of new starts, we are restraining activity to $800 million, consisting of 7 projects with an average development yield of between 6.5% and 7% and providing a strong spread to both underlying cap rates and our cost of funding. And finally, our Board approved an increase of our quarterly dividend to $1.78 per share, which after the 1.7% increase continues to position us with one of the more conservative payout ratios in the industry.

Delving a little deeper into the setup for 2026. Our outlook assumes a job growth environment that is slightly stronger than 2025, but still relatively modest. As shown on Slide 6, NAV is currently forecasting 750,000 net new jobs in 2026. As the year progresses, enhance economic and policy certainty, the benefits from recent tax legislation and the potential for further Fed easing are among the catalysts that could translate into higher levels of business investment, improve consumer confidence and stronger hiring in our key resident industries.

Turning to Slide 7. Demand for apartments will also be supported by rent to income ratios, which are now below 2020 levels in our established regions, given that incomes have grown faster than apartment rents over the past few years. Demand will also continue to benefit from the relative attractiveness of renting versus home ownership, which is particularly acute in our established regions, where it's over $2,000 per month more expensive to own a home, given home price levels, mortgage rates, and the increases in other cost of homeownership, such as insurance and property taxes.

And then there's the supply outlook with supply in our established regions expected at only 80 basis points of stock this year, levels we have not seen since the period coming out of the GFC. And given the challenges of getting entitlements and how lengthy the process is in our established regions, we expect this supply backdrop to serve as a tailwind for us for the foreseeable future.

Balancing these series of dynamics, Slides 9 and 10 provide our outlook for 2026. We entered the year with a high quality portfolio concentrated in suburban coasts with historically low levels of supply, a differentiated development platform and one of the strongest balance sheets in the REIT sector. And our guidance assumes modest growth in 2026, we are well positioned to generate meaningful earnings and value creation as operating fundamentals improve and development earnings ramp into 2027.

Sean will now walk through our operating outlook in more detail.

All right. Thanks, Ben. Moving to Slide 11. The primary driver of our expected 1.4% same-store revenue growth is an increase in lease rates with incremental contributions from other rental revenue and underlying bad debt. We're expecting year-over-year revenue growth in the second half of the year to exceed what we produced in the first half with slightly better job growth and improved mix of jobs the cumulative effect of lower supply and softer comps supporting better rates and revenue growth.

Our forecast reflects like-term effective rent change of 2% for the full year 2026, with the first half expected to average in the low 1% range and the second half improving into the mid-2s. In terms of recent leasing spreads, while Q4 performance was modestly below our expectations, it improved in January compared to both November and December.

We expect continued sequential improvement in February and March and renewal offers for those months were delivered in the 4% to 4.5% range. For other rental revenue, we're continuing to drive incremental growth from our various operating initiatives, but it will be partially offset by lower income due to select legislative actions in 2025. Excluding those headwinds, other rental revenue growth would have been closer to 5% versus roughly 3.5% reflected in our outlook.

Turning to Slide 12 to address regional trends. revenue growth of roughly 2% in New York, New Jersey is primarily driven by healthy contributions from New York City and Westchester, which are projected to be in the mid- to high 3% range. Demand in Boston has been impacted by job losses in the back half of 2025. Our outlook reflects a projected year-over-year decline in occupancy of approximately 40 basis points, the majority of which is expected to occur in the first half of 2026, given our very strong occupancy level in the first half of 2022, and another 40 basis points from a projected year-over-year decline in rent relief payments.

New apartment deliveries are projected to decline by about 30% to 4,000 units in the market, which will support better revenue growth when demand picks up. In the Mid-Atlantic, job losses in the back half of 2025 were the highest of our established regions. Our outlook reflects just under 1% revenue growth for the year with negative net effective lease rate growth during 2026, offset by a roughly 20 basis point improvement in occupancy, approximately 30 basis point reduction in underlying bad debt and 30 basis point contribution from other rental revenue growth.

New apartment deliveries in the market are projected to decline by roughly 60% to 5,000 units, so the outlook has turned more positive in the second half of 2026 if we see an improvement in job growth.

Moving to the West. Northern California is projected to produce mid-3% revenue growth supported by built-in lease rate growth of 1%, relatively stable occupancy at approximately 96% and continued healthy rate growth throughout 2026. New apartment deliveries are also projected to decline by about 60% to 3,000 units in that region.

In Seattle, total employment was flat for the last 6 months of 2025. Our outlook reflects modest net effective rate growth throughout 2026, an approximately 20 basis point reduction in occupancy and a 40 basis point contribution from growth in other rental revenue. New unit deliveries are projected to decline by about 50% to 5,000 units, which will support improved performance as we move through the year.

And in Southern California, our outlook reflects revenue growth in the mid-1% range, driven by stable occupancy and approximately 20 basis point contribution from lower bad debt, driven primarily by L.A. and incremental effective rate growth projected primarily in Orange County and San Diego.

Unit deliveries in the region are projected to decline by about 40% to 11,000 units with the most meaningful declines projected to occur in the L.A. market.

And lastly, in our expansion region, Southeast Florida will remain the strongest region with revenue growth of roughly 1.5%. Denver suffered from the combination of 0 net job growth during 2025 and the delivery of approximately 16,000 new apartments.

The outlook for '26 reflects a challenging environment with modest job growth and another 9,000 new units being delivered into the market. Built-in lease rate growth is minus 1%, and rents are projected to continue to decline throughout the year.

And then moving to the outlook for operating expense growth on Slide 13, we expect same-store operating expense growth of 3.8% and 10 basis points above our organic growth rate of 2.5%. In terms of the items projected to drive growth higher in 2026, the phaseout of property tax abatement programs will add roughly 70 basis points.

In addition, we settled a very favorable property tax appeal in Q4 2025, which established a much lower assessment and led to a meaningful refund, but is creating a 50 basis point headwind for 2026. In addition, the net impact of operating initiatives is contributing about 10 basis points as the added costs from our Avalon Connect offering is mostly offset by incremental labor efficiencies.

And then in terms of the quarterly cadence of OpEx growth, we're expecting heavier growth in the first half of the year before it moderates in the second half, driven primarily by utilities, including the impact of credits received in the first half of 2025 benefits costs and maintenance-related costs given our lighter spend in the first half of 2025.

Now I'll turn it to Kevin to go deeper into our earnings outlook for the year.

Thanks, John. Turning to Slide 14. We show the building blocks of our 2026 core FFO per share. For internal growth, our guidance reflects a projected $0.04 increase from same-store NOI, partially offset by a $0.03 decrease from overhead, management fees and JV income.

For external growth, there are a few components. We expect a $0.10 increase in net development earnings, which I'll discuss further on the next slide as well as a $0.07 increase from our structured investment program and 2025 share repurchases, which consists of $0.02 from our SIP program and $0.05 from our recent buyback activity in 2025.

These sources of external earnings growth are offset by a $0.07 decrease from refinancing activity across 2025 and 2026 and a $0.10 decrease from transaction activity. Here, I've emphasized that our recent elevated transaction activity and associated impact on earnings reflects our having acted on some unique opportunities last year, including the timely sale of a portfolio of assets in a challenged submarket in Washington, D.C., and acquisition of a tailored portfolio of communities at a very attractive cost basis in Texas.

We don't execute meaningful trade of that nature very frequently, but we do take advantage of them when opportunities arise. Of this $0.10 in earnings headwinds for transaction activity, $0.06 is timing related, driven primarily by the impact of selling assets in late 2025 and in early 2026. And the remaining $0.04 is the result of selling slightly higher cap rate assets, including in D.C., in order to better position the portfolio for stronger growth over time.

Turning to Slide 15. Development is expected to contribute $0.10 or 90 basis points to earnings growth this year. This is lower than is typical for us and is driven by 2 factors. First, due to lower completion and ramping starts last year, the proportion of communities generating development NOI as a percentage of the total development underway is lower than normal. This is reflected in $0.33 of expected earnings growth from our 2026 development communities as well as a handful of other communities that stabilized in 2025 and are now in our other stabilized bucket.

And it compares to incremental funding costs of $0.33, attributable to the 26 communities that are under construction today as shown on Attachment 9 of our earnings release, any communities that are expected to start construction in 2026.

The second factor relates to a projected $340 million increase in construction in progress or CIP, for 2025 to 2026. This temporarily dampened earnings growth in 2026 because our 5% initial funding cost exceeds our required capitalized interest rate under GAAP during construction, which is currently 3.7%.

Therefore, we project a capitalized interest benefit of only $0.10 this year, which is a few cents lower than if our capitalized interest rate equaled our initial funding cost of 5%.

Nevertheless, our decision to lean into accretive development does set the stage for further outsized earnings growth in 2027 and beyond as current development projects are completed and stabilized at yields in excess of 6% and accretion steps up, which Matt will discuss more fully.

Exactly. Thanks, Kevin. As shown in the chart on the left on Slide 16, we started $2.7 billion in new development over the past 2 years and yields 110 to 130 basis points higher and the cost of capital source to fund those new projects, and we expect an even wider spread on the $800 million in starts we're planning for 2026.

Because our development activity can vary substantially from year-to-year in response to market opportunities and capital market conditions, the flow-through of this activity to earnings can also vary in any given year. The majority of the earnings benefit is realized once all those new apartments are occupied. And as shown in the middle chart on this slide, we are still early in this ramp-up in 2026 with occupancies growing from 1,812 homes in '25 to roughly 3,175 homes this year. We expect that to grow further still to over 4,100 occupancies in 2027, as you can see on the chart on the right, this translates into $47 million of development NOI this year and an incremental $75 million of additional NOI next year.

Slide 17 takes a closer look at the expected 2026 lease-up activity, over 90% of which is coming from 11 communities including 8 where we have already achieved first occupancy and have active leasing underway and another 3 set to open in Q1 or Q2. All of these assets are in suburban submarkets and more than half of the occupancies are coming from the New York, New Jersey region and South Florida, 2 of our most stable regions with above-average expected same-store performance for the year.

In addition to the earnings boost we expect from these communities in '26 and '27, we're excited about their long-term positioning for future cash flow growth as brand-new assets built and designed by us to respond to future demographic trends. We are including more larger format homes designed for working from home in our unit mix, including 8 communities with the VTR component and many feature excellent infill locations walkable to nearby retail.

And with that, we're ready to open up the line for questions.

[Operator Instructions]. Our first question comes from the line of Eric Wolfe with Citi.

You mentioned that renewals are going out in the 4% to 4.5% range. I guess, first, could you talk about whether you expect to achieve 4% to 4.5% on these renewals or the take rate will be lower? And then second, what changed between now and the 2.5% you achieved on renewals in January? It just feels like there's been a bit of a jump over the last month or 2. I'm just wondering what caused that.

Yes, Eric, I want to talk a little bit about how we see the rent change forecast playing out throughout the year. But to your specific question, what I indicated in my prepared remarks is that the renewal offers for February and March were out in the 4% to 4.5% range. As you probably know, they always settle it's something less than that, the historical range the settlement is probably 100 to 125 basis points of dilution or something like that, depending on the market environment. But that's what's happening with the renewal offers and where you think they might settle.

In terms of the overall forecast, just to provide some commentary for '26, we're expecting it to come in around 2%, which is only about 30 basis points above what we actually realized in 2025. Our assumption is that the renewals will basically average about the same as 2025 sort of in the mid-3% range, and we're expecting move-ins to improve by roughly 70 to 80 basis points in 2026 as compared to 2025 so that it comes in instead of being modestly negative, it comes in around flat for the year.

And for context, and Ben referred to this as well, we are expecting a relatively similar economic environment as 25%, but about 40% less supply, so we are forecasting sequential improvement quarterly until we get to Q4. So that kind of gives you the broad picture of the full year. And then as it relates to the first half versus the second half outlook, we are expecting the first half performance to be pretty similar to what we experienced in the second half of 2025, which was roughly basically 1.2%, we're basically about the same level as we come into the first half of 2026.

And then in terms of the expected improvement in the second half versus the first half, it's really driven by 4 factors. First is as Ben noted, a slight uptick in job growth, which is expected to occur in the second half of the year and a slightly better mix of jobs, but also importantly, sort of the cumulative effect of 40% less supply and the absorption of some of the standing inventory from the end of 2025 carrying through the first half of '26.

And then lastly, it's just some softer comps as we get into the back half of 2026, given what we actually achieved in the back half of 2025. So to provide a little bit of an overview as to how we're thinking about it overall. And hopefully, that's helpful in terms of the trends we're expecting.

Yes, that's very helpful. I guess the question really is sort of how predictable do you think that sort of ramp is because it's just a bigger ramp right in the first half to the second half. And so we've seen supply, I think, linger a bit longer than people expected, especially in some of these Sunbelt markets, which you're not in. But I guess the question is how predictable do you think the sort of this impact from supply is going into the second half of the year? And how much the supply or the impact of supply really drop off in the back half?

Yes. No, I mean that's what our forecast reflects in part why we're expecting the first half to be a little bit weaker, is some of that lingering spending inventory in some markets that's carried over from the back half of '25 through the first half of '26, even though deliveries will be down meaningfully in both the first half and the second half, there is some standing inventory to absorb. And once that occurs, then there are just much fewer options for people to choose from.

And as I noted, particularly on the move-in side, which is where we expect 60, 70 basis points of improvement relative to 2025, that's where you're going to see it the most. We expect renewals to be relatively flat, if you think about it for '26 relative to '25So I think that's -- in terms of our confidence in that, that's what our models reflect at this point in time. And certainly, we'll be able to update you as we go through the year. But that's part of the reason why we -- part of the reason why we look at it that way in terms of first half versus second half.

And Eric, on the demand side, just to give you some more color there. We're not assuming a huge pickup in terms of job growth this year. If you look at the name figures, ended the year at roughly 20,000 jobs per month. That is a similar place as we come into 2026 and then builds into the range of 70,000 to 75,000 jobs as we get into the back half of 2026.

Our next question comes from the line of Steve Sakwa with Evercore ISI.

Look, I know in '25, you guys had to take a couple of bites at the guidance and make some reduction. So as you thought about setting guidance for this year, maybe what lessons did you learn in '25 that you carried over this year? And when you kind of look at Page 14, I guess, is the building blocks. Are there some of those figures that you have more confidence in their upside? And I guess, which ones are you a little bit more worried about having downside risk?

Sure, Steve. I'll start on the kind of guidance approach question and then others can weigh in on the upside, downside scenarios.

Our approach to guidance remains as it has been -- we go through a very detailed process, particularly at the beginning of each year, and it's also as part of our midyear reforecast. And we're looking at the best data that we have available at that point in time. we naturally think through upside scenarios, downside scenarios, but we use all that to come up with our best estimate looking forward out over the next 12 months.

And then importantly, provide that transparency to investors so that you understand what's underneath those assumptions, and we can discuss those as the year unfolds.

Yes. In terms of looking at Slide 14, the development earnings, I put that very much in the concrete category. These are -- and Matt talked about this in his commentary. -- the earnings coming online this year. Those are projects that are under construction. A lot of them are already in their initial phases of lease-up. We've got pretty good clarity about how that income will roll in over time. we've prefunded that activity. So I put that in the category of fairly baked in earnings to attribute to investors as the year progresses.

Steve, the only thing I would add is, for the most part, as it relates to sort of the core same-store portfolio. I think the main question is, you have the demand question -- and depending on how you look at the outlook from an economic standpoint, the upside, the downside is really tied to demand there. And so we saw job growth accelerate more quickly. with the reductions in supply, like I mentioned, in the Mid-Atlantic with supply come down 60%, that could give you a little bit of a springboard to better performance sooner than the second half. if that were the case, then you start to see more of that benefit accrue into 2026 as opposed to 2027.

And obviously, the downside scenarios where we saw a significant weakening in the environment from where we are today, then that would be sort of your downside case.

Okay. And then I guess a follow-up on the development, maybe just for Matt. I know you guys kind of cut the starts number in half this year. and you sort of raised the hurdle rate a bit. Is the reduction more a function of enough deals don't pencil at that 6.5% to 7%? Or was it more of a conscious decision to just say given the choppy environment, we just don't want to start $1.5 billion of projects even if they make the hurdle, just given the uncertainty in the environment today here.

Steve, it's Matt. It's a little bit of both. I mean we look at it very much -- it starts bottom up, where the deals, what's going on in our pipeline and kind of how big is that opportunity set.

And then there is a top-down piece as well, which is that aligned with kind of our funding capacity and cost. So usually, particularly now that we have this DFP, the developer funding program, we can see our Avalon base starts coming a year or 2 in advance or 3 years -- 4 years in advance in some cases because of the entitlement process. But then -- we also have the ability to fund other developers through our developer funding program. Those deals come more quickly.

And so the last couple of years, our starch list has included both deals we know about in our pipeline and kind of an allowance for quick start business, which could be DFP or it could be in this environment, deals that other developers just can't get capitalized and have given up on and are now willing to sell, sometimes selling the land at a loss. We've done a few of those deals, too. So a lot of it is just -- we're going to the year expecting less of that quick start business to underwrite.

And then some of it is -- yes, I mean, we are looking at demanding higher yields, and we are seeing that. So some of that's in the geographic mix as well. The starts we plan this year are much more heavily weighted to our established East Coast regions.

Last year, it was maybe 40% West Coast, 40% expansion, 20% established. This year, it's like 80% established is and a little bit of expansion and really nothing on the West Coast. So -- and those regions tend to have higher yields.

The next question comes from John Pawlowski with Green Street.

Matt, I want to continue that conversation. The $800 million in starts this year, how much have you had to lower pro forma rents just given the softness in market rents over the last 6 to 12 months, even in those established East Coast regions?

Yes. It's interesting, John. There are a couple of deals. Some are pretty much even -- what we've seen in a couple of cases, actually, we just started a deal in Q4 in Northern New Jersey ConsoParsippany. -- and that deal is a high 6s yield -- and when we underwrote it kind of in due diligence 1.5 years ago, 2 years ago, the rents were higher and the costs were higher. And what we saw is when we went to our final , what we call Class II budgets, the hard cost came in and the rents are down a little bit. And those 2 more or less washed out so that the yield kind of stayed the same.

So that's that's what we're seeing for the most part with that particular mix of business is a little bit less rent and a little bit less cost. And in some cases, the cost reduction is more than the NOI reduction and in some cases, not.

Okay. Just what I'm getting at is I'm very surprised about how high the yields are. And I know you guys are very good at what you do. But if there's high 7% yields versus, I don't know, maybe low to mid-5 cap rates in these markets. If that's true economics, we should expect to see development start to reaccelerate across your markets. So is there anything idiosyncratic in this $800 million pipeline that's not representative of market yields? Or do you think that it's a representative sample size?

It is more select. I mean, it's hard -- there aren't as many deals that we're finding that can achieve that spread, but I'll say we're finding more than our share and it's been our view for a while that we can get an expanding share of a shrinking pie here.

A lot of these genre deals we've been working on in the entitlement process for years. And there are kind of unique factors there there may be an affordable component. There may be a pilot, not a New York City pilot, but a long-term pilot. There there may be other things there that are difficult for folks that haven't been in this business and in these markets on the ground for years and years to kind of reconstruct.

So I do think we're seeing a little more supply in some of these more supply-constrained, East Coast jurisdictions, but we're getting a bigger share of it. And our volume is dropping, too. So I'm not overly worried that we're going to suddenly see a flood of supply that a lot of people can recreate it.

And John, just for the broader listening audience out there, I just want to correct, we're targeting for those $800 million of projects, yields in the 6.5% to 7% arena relative to cap rates in and around sort of circa 5% today.

Okay. Last question for me. Should we expect additional pressure from property tax abatements in 2027 or any other pressure from utility costs and Avalon Connect? Or is 2026 the peak of the pressures, if you will.

Yes, John, this is Sean. In terms of the abatements, yes, we do expect some level of headwind from abatements to continue, but it does move around from year to year, but we do expect that for the next few years here in terms of that element.

In terms of Avalon Connect, there's 2 components there. This bulk Internet piece, there's a smart access piece. The bulk Internet piece were pretty much stabilized. There's a little bit of lingering cost there for 2026, and that pretty much phases out. The smart access component, which is far less impactful, we'll continue for probably another 18 to 24 months, but it's relatively modest as compared to the bulk side of it.

Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

When you guys think about the remaining gains capacity, are share buybacks or paired trades from the established regions into your expansion regions more attractive today? And does the pullback in development funding needs provide any additional capacity for you for share buybacks without either levering up or evaluating paying a special dividend?

Austin, this is Kevin. I'll start. Others may want to jump in here. What I'd say is this year, our capital plan contemplates only modestly sourcing capital from disposition activity. So that does leave us with a healthy level of asset sales capacity to fund incremental investment activity, whether it's for a share buyback or incremental development activity before we have to worry about a distribution obligation. So we do have capacity to sell a very healthy level of additional assets and retain the capital for future investment purposes.

I'll add it, Kevin, just to clarify, in our baseline budget, we're not assuming any share buyback activity. We do still very much see it on the menu of potential opportunities for this year. And to your question and comment, the potential opportunity of selling slower growth, higher CapEx assets out of our existing portfolio and then redeploying that capital into share buybacks in today's range in sort of the low 6s, one, not only accretive, but also helps position the go-forward portfolio for stronger growth.

And then can you share what the cap rate was on the asset sale in San Francisco in January and then provide an update. I think you had another $235 million or so of pending sales that were previously under agreement as of late last year.

Yes. Austin, it's Matt. So the asset we sold in San Francisco last week, actually, that's a low fares cap. There's a bigger spread there between the cap rate and the yield given that we've done that for a while. So there's a prop 13 overhang there. But that's also an asset that had some pretty heavy CapEx needs in front of it.

So you kind of have to factor all that into kind of what I'd say is the economic cap rate, so to speak, kind of in the -- the one -- we have a couple of others either in the market are working that are -- some are a little bit higher than that in terms of the economic cap rates, some are a little bit lower. We'll see where they clear the market.

We have at least one more that we expect to close here this month, it's probably around the same kind of low 5s cap rate, a little bit less of a spread there. So the yield is probably not as high as that sunset towers.

And then we have a couple of others in the market working where we'll see there. It really is -- varies a lot based on what market you're selling into and I will say this, everything we have either planned for sale this year or currently in the market are all older high-rise assets and most of them are in early jurisdictions. So they are very much aligned with our longer-term portfolio goals.

So 1 thing I'd add on that San Francisco assets specifically, is that's a 50-plus year old high-rise asset with some heavy CapEx subject to rent control. So it's a little bit of an outlier for our portfolio, not necessarily representative of the rest of the assets that we own in the city.

Our next question comes from the line of Jana Galan with Bank of America.

Following up on the renewal rates in the fourth quarter in January, Were there any specific markets that kind of drove the decline versus the third quarter? I know you mentioned layoffs in Boston. I'm just curious if there's any markets where you're willing to maybe negotiate a little bit more to protect occupancy?

Yes. Good question. It's Sean. I would say, in general, what we see is a little bit of moderation in Q4 because seasonally, you're seeing the asking rents for move-ins come down, and there is a correlation between the renewal rates you can achieve and what -- think about it, what people see on the website for the the deal down the street.

So as you had softer move-ins, been usually a little bit softer in Q4 this past year. You see it trend down. So it was more broad-based than individual, I would say the markets where we probably negotiated more some of the softer markets that I mentioned earlier in terms of the Mid-Atlantic, as an example, Boston and then Denver private outliers to the weaker side as compared to the average.

The next question comes from the line of Jamie Feldman with Wells Fargo.

Can you talk more about the other income drag from the legislative activity last year? And then also, I guess, along those lines, I mean, it's a midterm election year, affordability is a hot topic. Any other initiatives you guys are watching closely? I know there's a Massachusetts potential ball initiative. Just what should we keep our eyes on this year from the political front?

Jamie, it's Sean. First, on the other rental revenue side, there's really 2 or 3 drivers to it are probably the ones that are most meaningful to call out legislation passed in Colorado that is impacting the ability to charge certain fees or cap certain fees that's flowing through other rental revenue.

In addition to that, by the way, we didn't call this out on the OpEx side, but it also limits our ability to recover some utility components as well, which is about a 15 basis point drag in terms of OpEx growth that it wasn't something, again, we called out on the slide.

And then the other one is new legislation in California, AB 1414 that provides residents with the option to opt out of a bulk Internet program to the extent there is another offering available at the community. We don't know exactly how many people will opt out, but we have looked at other programs for residents who have an opt-out right like print control program, et cetera, and modeled it to reflect that type of outcome. Those are the 2 primary ones that are dragging. There's a couple of other small things, but those are the 2 big ones.

And then as it relates to kind of the forward -- looking in terms of the election. What I'd say is, yes, we're keeping an eye on Massachusetts. I think I mentioned on the last call, the way that ballot initiative was drafted is pretty onerous. And so onerous enough that already various political leaders in Massachusetts have already come out and said that they are opposed to it, completely opposed to it. So we will have to go through a process here to potentially defeat it, but we do believe that relative to other initiatives we fought like in California, this one probably is set up to be a little bit easier to defeat.

And then other things we're keeping an eye on are things that are similar to what happened in Colorado or California, where people are being thoughtful about not going directly at things like rent control, but wanting to make sure there is increased transparency and disclosure around the fees that you're charging for different things, how do you recover utilities, et cetera. Those are the ones that we're keeping an eye on and the [ National Multihesin ] council as well as a lot of the various associations around the country. are very engaged in those types of activities to make sure people are aware of what's good legislation versus not.

Okay. And then I guess just going back to the comments on New Jersey, I think you had mentioned rents are lower, but costs are lower on new developments. You've got a decent amount of lease-up in those markets. And I think in your latest start is also in New Jersey and then your stats over the year on the weaker side of your markets. Can you just give more color on your expectations both on the lease-up side, timing of getting those projects done and even the new start, what gives you confidence to start there given there is so much supply coming in that market?

I guess I can start and then maybe Sean can talk as well about the stabilized portfolio. On the -- there's not necessarily that much supply coming there, maybe a little more than what we've seen in the past. But it is still one of our strongest markets. And it's not as strong this year as New York City, but it tends to be within New York City as a core bit, obviously, particularly Northern New Jersey. So our lease-ups there are doing fine. They're generally tracking on plan.

And in general, our lease-ups actually picked up a little bit here. We saw in Q4 across our whole lease-up book, which includes 3 or 4 in New Jersey, average leases in Q4, which is a slow quarter, was about 20%. And in January, we actually did 2 million across the 9 deals or deals -- 7 deals, whatever we have in lease-up.

So we're continuing to get good traction. We basically will price to get the communities full before we have our first renewal. So typically within a year to 15 months. And we'll kind of adjust the pricing of needed to meet the pace that we're looking to meet. What we are seeing is, like last year, we had a completion in New Jersey that finished, I think, 20 or 30 basis points above pro forma. That's what we've seen in general over the last couple of years.

I'd say where we are today, the deals that we have currently in lease-up they're tracking on pro forma. So not necessarily beating pro forma anymore, but we still feel good that the initial spread that we underwrote is holding.

Jim, just in terms of the specific deals, we had 3 deals with lease-up activity through Q4 into January. So through Q4, kind of average monthly pace was around $20 a month. When you get into January, the 3 deals, Avalon [ Parsippany ] did 32, West Windsor did 20, Avalon Wayne did 24, which are pretty good numbers in January, where it was also pretty darn cold. So those are pretty good numbers in our view, above what we would have expected in January, frankly.

Okay. That's good to hear. Better to be indoors in out there, I guess, leasing space.

Very true.

The next question comes from the line of Rich Hightower with Barclays.

Curious if you can give us an update on your views around the D.C. market and surrounding markets. the Dosepak, I think maybe it was a little bit understated as of a quarter ago. So where do we sit today with that?

Yes, Rich, it's Sean. I can start and then others can add it, Peter. I mean the fundamental issue has been a lots of jobs. If you look at the last 6 months actual, the data trued up and everything. We lost about 60,000 jobs across the Mid-Atlantic. Yes, that's the primary driver of the softness. So I think the question that people have asked, and there's not a 100% clear answer is, is there more to come or not? -- when we were talking about this earlier in 2025 back in Q2 and even Q3, the data was certainly lagging and it takes time for it to filter through.

So we think we got '25 in relatively captured, but there could be another revision here soon, but we'll have a good feel for that. I think the way to think about the Mid-Atlantic is, obviously, the impact of that has been meaningful in terms of demand in the market. What we feel a little bit better about is, one, as I mentioned earlier, about a 60% reduction in deliveries in 2026 as compared to 2025. That is a very large number. So if we start to see at least some stabilization from the federal government and other major employers or even some modest growth, without that kind of supply, particularly as we go to the back half of the year, things should start to look better.

And if we see an uptick in job growth beyond what we've already forecasted that it's potentially a market that could have some upside to it. I think what Ben noted is there needs to be a little more business confidence as it relates to making investments in a stable environment. And consumer confidence as well, just so they feel comfortable making those commitments. But I think it's a little bit of a TBD, but we're expecting basically the first half of this year to look a lot like the second half of last year.

Okay. That's helpful, Sean. And then I guess the second question is just maybe more general about the transaction environment. When we hear on your call and some of your peers calls that market cap rates, in many cases, are or even in the 4s in certain markets. Just curious what is driving that if we sort of segment it between capital flows, debt availability or underlying optimism around fundamentals. What do you think is sort of driving that cap rate compression where we sit today?

Yes. This is Matt. I guess I can take that one. It is a little bit surprising, but we've been saying that really for the last couple of years. So I think you've got a couple of different crosscurrents here. I know a bunch of folks were just out at NMHC last week.

So probably the biggest recent shift in favor of supporting cap rates where they are is the debt markets, which has become very competitive, very deep and liquid. And so spreads have come in quite a bit. And so for buyers out there, they're levered buyers, they definitely have access to lower cost and larger check size debt that may be a year or 2 ago. That is, to some extent, counteracted by a little bit of headwinds in the numerator, which is obviously the NOI being capped with relatively flattish NOI growth positive in some markets, negative than others.

And then the third piece of it is just investor sentiment and equity, and there is a lot of equity that's on the sidelines that's anxious to get in. And we've seen that really growing for the last couple of years. There's dry powder out there. It's looking to be deployed. There's a lot of people whose livelihood depend on it.

So what we continue to see is this bifurcated market where for the assets that check the boxes, the bid is deep, the bid is robust and buyers are optimistic enough that they will underwrite through another year or so of operating softness to what they expect to be a pretty robust recovery 2 or 3 years from now. But then there are another subset of assets where they're only going to transact if there is a wider spread between the debt rate and the going in yield or cap rate and a lot of those are the deals that are not transacting.

I want addition to it, just to give you a little bit more market color. I mean we're not overly active on the buying front right now, but obviously, we're attuned and do selectively look at deals and the types of assets that we would focus on, people are still stepping up and paying cap rates that are in the 4.7, 4.8 type of range.

The next question comes from the line of John Kim with BMO Capital Markets.

I know it's not your biggest market, but when you look at your expectations for same-store revenue in Denver, it's noticeably lower than other expansion markets and what you have delivered last year. And what's driving that for you?

Yes, John, this is Sean. As I mentioned in my prepared remarks, I think 2025 was a tough year for the Denver market. Essentially 0 job growth and significant deliveries. This year, what we're expecting is very modest job growth consistent with the outlook that Ben provided earlier but there's still another 9,000 units to come. So you've got some hangover inventory from 2025 that was delivered but not absorbed.

And then you add another 9,000 units to that with very modest job growth that's a simple story of just too much supply given the relatively anemic demand and that's the near-term outlook for that market.

And is this market more vulnerable to tech layoff than others?

I'm not sure on a relative basis, it would be given the concentration of tech jobs in Denver is below some other regions we're in like Seattle and Northern California per se. It would have exposure, but I'm not sure that it punches above its white class in terms of exposure to the tech.

Our next question comes from Nick Yulico with Scotiabank.

I just wanted to go back to the decision to have lower development starts this year. How much of that was driven by a focus on improving your FFO growth given some of the sort of near-term dilutive aspects of development? And I guess, specifically, I think, Kevin, you're kind of saying that there was some benefit then to 2027 from doing that. So if you could just flesh that out.

Sure, Nick, it's Kevin. I'll offer a few comments. Others may want to add some additional color. I'd say really, really wasn't a factor at all in our decision about the development start volume for this year. Our decision in that regard, as we discussed earlier, was really no outlined driven by our own sense about the opportunity set that we have within our own portfolio, what we think we might be able to achieve through our DFP program and the related funding costs in terms of the economic value add that, that activity will provide for our shareholders over time.

I think in terms of the dynamics that I referenced in my scripted remarks in regard to kind of Slide 14 and 15, I think what we're trying to provide there is a little bit more transparency to investors on the -- really the several dynamics that determine development earnings, which is not merely the NOI yield and development NOI that we received from development activity as it stabilizes and the associated funding costs but also the impact of capitalized interest as it flows through. That seems to be a dynamic that based on our own discussions with investors hasn't always been uniformly well understood.

And so we thought we'd use this as an opportunity to provide a little bit more clarity on that for investors. But in terms of informing our capital allocation decisions, that's not really a factor at all. It's been a dynamic that we've had to reflect in our GAAP financials really over our 30-year history. And it's kind of sometimes it's been a plus and sometimes it's been a negative, but at the margin, it all washes out and really what drives our core FFO growth over time is not only what happens to the same-store book, but importantly in this regard, the underlying profitability of our development activity, which continues to be quite attractive.

And so for us, I think it's really just looking at the incremental yields versus the incremental funding costs and the opportunity that's driving our sizing of the opportunity for development starts this year.

Okay. And then I guess my second question is if we stay in this higher interest rate world where you're having that impact from capitalized interest versus borrowing cost, harder to raise maybe common equity where you want to raise it. Is there an approach perhaps of going towards, I don't know if the company has considered doing a fund, doing more JVs as a way to source capital also minimize some of this earnings dilution that is coming from the development on the balance sheet.

Nick, it's Ben. Less your last point there about dealing with the earnings dynamic, but in terms of your broader question is private capital is something that we think about. Yes, we -- I do think about private capital as being a tool in our toolbox. We actually have a a large joint venture via Invesco with a state pension fund for a number of our New York City assets. People remember back long enough in Avalon base history, we did have at that point.

Nothing we're actively working on at this point, sort of the channels that we've generally thought about One would be in and around a portfolio allocation objective where there could be a pool of assets where we want to monetize a portion of those assets, but importantly, retain the operating density in the market. Those could be a pool that we look to put into a joint venture or a private capital vehicle.

And the second bucket would be in and around external growth. right, as we think about funding potentially a larger pie of activity with capital that's in addition to our mothership capital.

And maybe, Nick, just to kind of add a little bit more color on what we can do year in, year out from an investment standpoint without accessing the equity markets or levering up. The way we tend to think about our capacity is in in terms of what we describe as the leverage to fund capacity through the sum of free cash flow, leveraged EBITDA growth and asset sales before we hit our distribution obligation that typically averages around $1.5 billion a year.

So if you think about what we can do on the investment front each year typically is around $1.5 billion of development starts, more give or take that we can do year in or out of the opportunity set there. So by starting $800 million this year, we are quite deliberately allowing ourselves room and capacity to do more makes sense either in the form of our buyback activity or development activity. So we do have that flexibility.

Our next question comes from the line of Anthony Paolone with JPMorgan.

Great. First question relates to just the series of initiatives and announcements coming out of the White House to to prompt more for-sale housing activity at SIMs. Any of those that you think might have teeth or that you're watching more closely in terms of it impacting your portfolio potentially prompting move-outs or kind of implications back on rents?

Something we're monitoring, watching. But the short answer to your question is no. Really, our focus at the national and federal level, working with trade associations like NMHC to support supply-based solutions.

We very much see ourselves as a creator of housing, most of our developments, we provide 20% to 30% affordable housing as part of that, that typically comes with the approval requirements. So finding ways that we both individually at Avalon Bay and as an industry can help support further supply is where we've been focusing our efforts.

Okay. And just second one. Can you give us bad debts in 4Q and '25 and then also the -- what's in your guidance for '26.

Yes, I'm happy to do that. Essentially, where we ended up is right -- you said fourth quarter specifically?

Yes, 4Q and then the full year in order to get some sense as to what 26 is and whether that's a headwind tailwind?

Okay. Got you. Yes. So at a high level, so basically, for 2025, we ended at 1.6%. Our forecast is 1.4% for 2026. And as it relates to the fourth quarter, which is only a slightly higher quarter than average, that came in like 1.63.

Our next question comes from the line of Haendel St. Juste with Mizuho Securities.

Two quick ones here. So first, I wanted to little bit color on San Francisco, Seattle. Maybe you could talk a bit more about your expectation of tech employment growth there near term, lots of layup announcements of late, AI headlines, software clingers in the market. It seems like the situation is still evolving. Maybe it gets better, maybe not, but curious how you factor that into your employment outlook and rent expectations for those markets?

Yes, it's Sean. What I would say is the pace that we saw in the back half of 2025 is sort of what we expect to continue, particularly through the first half of 2016. And then as Ben noted, a slight uptick in job growth for the forecast from Mabe in the back half of the year, Seattle lost jobs in the back half of 2025. And then across the Bay Area is relatively flat. San Francisco was ahead, but San Jose and the East Bay were a little bit behind. So that's sort of what's embedded in the forecast right now. What's important to note, in addition to actual job growth is wage growth, though, and wage growth continues to be pretty good.

It's moderating a bit, it's still pretty healthy, certainly healthier than what you might expect that's implied by our move-in rent change. But is probably more consistent with what you would expect on the renewal side. So that's a key component that we monitor to make sure that existing resident capacity is there to pay higher rents.

That's good color. I appreciate that. One more, if I would. It sounds like 1 of the messages from this call is this year is a bit of a transition year. The setup for next year looks more exciting, at least at this at this point, you mentioned inflection in your rent into the back half of the year more development contribution.

So I guess, overall, their assessment, is that a fair assessment? And would you say or how excited are you about the earnings election potential for the portfolio into 2017? And then maybe some comments on the Sunbelt expansion market, how do you expect those to play out in the course of this year and next year.

There's a lot in there. I'll comment on part of it and just given time. We can circle back with you, Haendel. In terms of the year, I really would bifurcate it in terms of sort of the internal growth aspects of it, the operating fundamentals are softer than we expected 6 months ago, supply is, for sure, going to be a tailwind and a soft uncertain demand environment, our view is in markets that are going to be the relative winners are going to be those with the lowest levels of supply and we feel well positioned there both in the near term and for the foreseeable future, particularly given our suburban coastal concentrations.

And then on the external growth side, yes, I mean you -- we consciously did provide more visibility to investors in our presentation about the ramping of activity, both development NOI and development earnings as we progress through 2026 and 2027, and that was intentional.

[Operator Instructions] Our next question comes from the line of Michael Goldsmith with UBS.

Can you kind of provide a breakdown of the performance between urban and suburban. And does that vary by the East Coast, West Coast and developed markets?

And Michael, just so I understand what you're referring to. You're talking about revenue growth? Are you talking about rent change. Kind of what are you exactly thinking there.

Yes. Just the rent change, I guess, just trying to understand the kind of the performance in these markets.

Yes. What I can tell you in terms of, call it, submarket type for rent change, for the last couple of quarters, the urban portfolio has outperformed our suburban portfolio. One thing gets keep in mind in that regard is it doesn't mean in absolute sense that those markets are healthier. You have to look at each one because in some cases, what's inflating that rent change in some of the urban submarkets is that they are less bad than they were a year ago. Concessions for 3 months, another 2 months, that's an 8% effective rent change right there. So I would just keep that in mind as you think about it. So some markets are pretty healthy.

San Francisco is looking very healthy. Some of that is commission driven, but it's also good lease rate growth. New York City is quite positive, but in their places probably like Seattle. -- we're still pretty soft, but concessions aren't as bad as they used to be. So just keep that in mind.

Got it. And my follow-up question is starts in the fourth quarter included a CAMSO and a townhome community. So could there be more opportunities in these types that may be a competitive advantage Avalon Bay over other builders?

Yes, Matt, I would say, yes. I appreciate the call out there. We do in our 26 starts, we do have another townhome BTR community plan and we give another conso plan. So we are -- we have a wider variety of product offering to the market and what a typical merchant builder would provide. And as I mentioned in my opening remarks, we are trying to build to where we think future demand is headed and also access some of those maybe underappreciated niches, which also gets a little bit of an earlier question about kind of are we able to generate yields higher than maybe others. And that's all part of it.

Our next question comes from the line of Alex Kim with Zelman & Associates.

Just digging up piggybacking quickly off of that last one. You've highlighted BTR as a strategic growth channel. Just curious if you could provide more color on some of the yield differentials between colon product versus traditional multifamily? And then how the operating metrics like rent growth, turnover occupancy compare?

Yes. It's Matt. I can speak to that a little bit, and Sean may want to as well. It's really too early to tell kind of longer term. I don't think the product's been around there long enough. We have a subset of our portfolio of its rental townhomes that we've had for quite a while, and those have generally tended to perform as well as or maybe slightly better then and the communities to which they're attached. We have a number of communities where we might have 20, 30, 40 count homes and 200, 300 flats, we have a few there 100% townhome. But -- but it does open up additional sites.

And it also, we believe, is aligned for future growth better. One of the things we've said going all the way back to our Investor Day is, in some ways, we feel like our portfolio is better positioned for the next decade's worth of demand in the last decade's worth of demand. So there's not a whole lot of long-term history yet. The yields are kind of similar. The expense profile is different. It's less at the community level, more at the home -- individual home level, if you've got an actual dedicated BTR community.

But -- we do think that it is a niche, which is kind of where the puck is headed in terms of future demand. And so we are very consciously trying to increase the proportion of our portfolio that will access that demand -- they do tend to be older residents that do tend to stay longer. And over time, that should drive greater profitability.

Our next question comes from Alexander Goldfarb with Piper Sandler.

Kevin, just a question for you on your commercial paper program. Traditionally, you guys have kept your credit line balance at 0. You've done prefunding for the development program. But since you launched the CP program a year ago, it's really definitely you've taken advantage of it, and it was -- it sort of jumped about $500 million from third quarter to fourth quarter.

So -- is this sort of what you're using to help fund the development program? Or is this more like a warehousing for future bond deals? I know you guys just did a bond deal, but just trying to understand the CP program, which you're actively using versus traditionally the line of credit, which was almost always 0 at quarter close.

Sure. Thanks, Alex. So it's Kevin. Yes, we -- in terms of our commercial paper program, we've had it for a little while. As you may recall, we increased the size of it when we renewed our line about 9 months ago. And we did so very consciously because not only because of the relative attractive of short-term debt costs today, but importantly, because we felt there was room in our debt capital structure, particularly at this point in the cycle for more floating rate debt.

And our other floating rate debt in our capital structure has slowly winnowed down to about $400 million to where it is today. and we'd like to have more in commercial paper just happens to represent the most attractive form of floating rate debt. So our view was that we wanted to make more room in our capital structure for a little more than $400 million of floating rate debt and the commercial paper was the most efficacious way of getting that.

And so we upsized their commercial paper. And so you're seeing us probably run with a slightly higher level of persistent commercial paper balances as a consequence of that. So it's probably going to run at least in the $400 million to $500 million range, most every time flex up a little bit more or less depending on what's going on in our -- in fronting the business.

Okay. And then the second question is on stock buybacks versus development. I think in our numbers, we have you trading at sort of a high 5 supply cap, and you spoke about sort of low 6s on a development yield basis, it would almost seem like right now, the stock buyback is the more accretive use of capital. But as you mentioned in the guidance, there is nothing planned for stock buybacks. So can you just talk a little bit more about that, especially given your liquidity, would just seem like stock buybacks would be more advantageous in the near term given the current math, the spread between the 2.

Sure. So Alex, I'll say a couple of things, and Ben may want to chime in. Just from our point of view, our shares are terrifically attractively priced right now, probably in it puts a cap rate in the low 6% range. If you look at our development start activity that we planned for 2026, the expected yields on that are higher at 6.5% to 7%.

So for us, the opportunity to developing or buyback activity isn't necessarily binary for us. We can do both. And as you saw last year, we did exactly that. So we do believe that the $800 million that we programmed in for this year starts are attractive. We also recognize that potentially doing additional buyback activity may make sense for us.

But we've not woven into our plan for this year. It's something we'll look at as we proceed further into the year. But it's hard to sort of estimate what exactly you're going to get in terms of volume, price and so forth. And so our approach to that is likely to be more opportunistic, but we have the flexibility in the capital capacity to do both here.

Our next question comes from the line of Omotayo Okusanya with Deutsche Bank.

Just a quick one. I wanted to go back to Handel's question about the expansion market. And again, just given your outlook for those markets, how quickly you still think you might be growing over the next kind of 1 to 3 years in regards to export to those markets.

Yes, it's a multiyear journey for us. As you know, we've been growing in our expansion markets now for 7 or 8 years. We're about halfway towards our target of 25% and then there are certain years where either because of deal opportunities or more importantly, the relative trade as we think about redeploying capital from our established regions into our expansion regions that has looked more attractive. So last year, we're pretty active on that front in terms of repositioning part of the portfolio.

For this year, as you've heard, we're planning generally less transaction activity. On the buying side, it would be very selective, particularly given the opportunities of using dispo proceeds to buy back our stock. And then from a development perspective, as Matt mentioned earlier, this year, we have a heavier weighting towards our established East Coast region.

So not expecting this year to be sort of a meaningful movement, but we'll continue over a multiyear period headed in that direction towards our targets.

As there are no further questions at this time, this now concludes our question-and-answer session. I would like to turn the floor back over to Ben for closing comments.

Thanks, everyone, for joining us today. We appreciate the questions and look forward to seeing you soon.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. Please disconnect your lines, and have a wonderful day.

Good afternoon, ladies and gentlemen, and welcome to AvalonBay Communities Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Your host for today's conference call is Matthew Grover, Senior Director of Investor Relations. Mr. Grover, you may begin your conference call.

Thank you, Bahn, and welcome to AvalonBay Communities Third Quarter 2025 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-K 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 investors.avalonbay.com, 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 Schall, CEO and President of AvalonBay Communities, for his remarks. Ben?

Thank you, Matt. I'm joined today by Kevin O'Shea, our Chief Financial Officer; Sean Breslin, our Chief Operating Officer; and Matt Birenbaum, our Chief Investment Officer. Before discussing our Q3 results, which were below our prior expectations and our updated outlook for 2025, I want to start by emphasizing a series of AvalonBay tailwinds and strengths that keep us confident in our ability to drive superior earnings and value for shareholders.

First, our portfolio with its heavy concentration of communities in suburban coastal markets continues to be well positioned. With a more uncertain demand backdrop, we believe that those markets and submarkets with lower levels of new supply will continue to be the relative winners. Our established regions are particularly well situated with deliveries as a percentage of stock projected at only 80 basis points next year. And given how challenging it is to get new development approvals and the amount of time it takes to get those approvals, we expect our markets to continue to benefit from below-average levels of supply for a number of years.

A second differentiator for us is the $3 billion of projects we currently have under construction, which will generate a meaningful uplift in earnings and value creation in 2026 and 2027. These projects are tracking ahead of our initial underwriting and importantly, are benefiting from reduced construction costs, which translates into a lower long-term basis for shareholders. These projects are 95% match funded with capital that we previously raised through a mix of equity and unsecured debt with an initial cost of capital of below 5% providing an attractive spread to our development yields on these projects.

Third, our balance sheet is in terrific shape with low leverage and over $3 billion of available liquidity. As we look ahead, this balance sheet strength provides us with the flexibility to continue to redeploy free cash flow, disposition proceeds and low-cost debt into our next set of accretive development projects as well as to buy back our stock when appropriate, as we did in Q3, having repurchased $150 million of our stock at an average price of $193 per share.

Finally, we continue to advance on our set of strategic focus areas, which are generating incremental earnings and cash flow from our existing portfolio as well as on new developments and acquisitions. This year, we've made strong progress in advancing toward our longer-term portfolio allocation targets with a continual eye towards enhancing the cash flow growth of our portfolio. And we remain very excited about our progress on our operating model initiatives, including the expanded set of uses for technology, AI and centralized services. By year-end 2025, we expect to be roughly 60% of our way toward our target of generating $80 million of annual incremental NOI from these operating initiatives.

Turning to the third quarter. Slide 5 in our earnings presentation summarizes our Q3 and year-to-date results. We are on track to start $1.7 billion of development projects this year with a projected yield in the low 6s on an untrended basis. We've also completed our planned capital sourcing activity for the year, having raised $2 billion of capital at an average initial cost of 5%, generating a spread north of 100 basis points relative to development yields.

Slide 6 provides the breakdown of third quarter core FFO relative to our prior expectations. Of the $0.05 underperformance relative to our outlook, $0.03 was attributable to same-store portfolio results, of which $0.01 related to lower revenue and $0.02 related to higher operating expenses, including in repairs and maintenance, utilities, insurance and benefits. Turning to Slide 7. Apartment demand has been softer than anticipated this year, which we attribute mainly to the reduced job growth backdrop with related factors, including higher macroeconomic uncertainty, lower consumer confidence and a reduction in government hiring and funding.

As shown on the left side of Slide 6, the National Association of Business Economics, or NABE, is now projecting growth of 725,000 jobs in 2025, down from the over 1 million jobs in their prior forecast. And for Q4, NABE is projecting growth of just 29,000 jobs per month. We revised our revenue expectations as part of our midyear forecast with results for July and August generally tracking to those expectations, as shown on the right-hand side of Slide 7. As Sean will discuss further, softness on rental rates in August continued in September, along with a slight occupancy dip. With further softness continuing into October, trends that are now incorporated into our updated outlook for the remainder of the year.

As shown on Slide 8, we've also updated our expense outlook for the year to 3.8%. After benefiting from meaningful operating expense savings in the first half of 2025, we've had trends run against us across a set of expense categories without any offsetting savings. For example, in repairs and maintenance, we knew that certain savings from the first half of the year would be incurred in the second half, but have incurred more and higher cost repairs and non-repeat projects than anticipated. Other unfavorable variances include insurance, utilities and associate benefit costs. Given our Q3 results and these revenue and operating expense trends, we've updated our outlook for the full year, which Kevin will now discuss in more detail.

Thanks, Ben. Turning to Slide 9. We present our updated operating and financial outlook for full year 2025 as compared to our prior outlook on our second quarter call and on our initial outlook for the year that we provided in February. We are lowering our full year core FFO per share guidance by $0.14 to $11.25 per share, which reflects an updated expectation for year-over-year earnings growth of 2.2%. Our updated full year outlook reflects same-store residential revenue growth of 2.5%, same-store residential operating expense growth of 3.8% and same-store residential NOI growth of 2%.

Turning to Slide 10. We highlight the components of our updated outlook for full year core FFO per share in the second half of the year for key parts of our business as compared to our prior outlook on our second quarter earnings call. Specifically, as Ben previously mentioned and as detailed on this slide, our third quarter core FFO per share results were $0.05 below our prior outlook. And for our fourth quarter core FFO per share, we provide a comparison between our prior outlook and our current outlook. The expected $0.09 decrease is primarily driven by $0.06 of lower NOI from the same-store portfolio, consisting of a $0.04 decrease in same-store residential revenue and a $0.02 increase in same-store residential operating expenses.

The remaining $0.03 reflect lower expected earnings contributions from lease-up NOI, commercial NOI, joint ventures and other stabilized NOI. Taken together, our 3Q results and revised fourth quarter outlook resulted in an updated outlook for the full year core FFO of $11.25 per share. And with that overview of our updated outlook, I'll turn it over to Sean to discuss operations.

All right. Thanks, Kevin. Moving to Slide 11. As Ben noted, we started to experience some softening in key revenue drivers during the quarter. In Chart 1, economic occupancy was generally consistent with our expectations in July and August, but fell below our previous outlook in September and has continued to be below our previous expectation for October. Similarly, rent change started to trend below our midyear outlook in August, driven primarily by weaker move-in rents, which are depicted in Chart 3.

While move-in rents softened across most regions, the deceleration was most pronounced in the Mid-Atlantic, Southern California, which was driven by L.A. and Denver. In terms of underlying bad debt, while we ended the quarter close to our original estimate, we experienced an uptick in August, which contributed to the unfavorable revenue variance for the quarter.

Turning to Slide 12. We now expect same-store revenue growth of 2.5% for the full year 2025, down 30 basis points from our midyear outlook. The primary drivers of the reduction are average lease rate, which is estimated to account for 20 basis points, along with economic occupancy and underlying bad debt, which are projected to be about 5 basis points each. Our established regions are projected to produce 2.7% revenue growth, while the expansion regions are forecast to be modestly positive.

As I mentioned on the previous slide, while the softness we've experienced has been somewhat broad-based, it has been most pronounced in the Mid-Atlantic and L.A. The Mid-Atlantic has been choppy since the second quarter, and it softened further during Q3 as the probability of a government shutdown increased. Given the shutdown has become a reality and is heading into a second month in a couple of days, we expect continued weakness in the region through year-end.

And in L.A., job growth in the film and television industry has continued to be weak. It's been estimated that the number of film and television jobs in L.A. has declined by roughly 35% as compared to just 3 years ago. And stage occupancy, which reflects the percentage of time sound stages are being used by production companies in the region, has been trending in the mid-60% range recently, down from 90%-plus levels just a few years ago. While new tax incentives were passed in July this year to support film and television production in California, any employment benefit from them won't likely be realized until sometime in 2026 or beyond.

Moving to Slide 13. As we start thinking ahead to 2026, while job growth has been below expectations recently, our portfolio is positioned to perform relatively well given 2 important factors: First, the very low level of new supply expected in our regions; and second, a lack of affordable for-sale alternatives. New supply in our established regions is expected to decline to roughly 80 basis points of existing stock in 2026, which is not only less than half the trailing 10-year average, but also a level we haven't experienced since 2012. It's also roughly consistent with what occurred during the '90s decade, which was a terrific time period for us.

On the right side of Slide 13, although mortgage rates have been trending down recently and home values have flattened out or declined in many regions, for-sale housing remains very unaffordable in our established regions. It still costs almost $2,500 per month more to own the median-priced home relative to the median apartment rent in these markets. Overall, while we don't have a crystal ball regarding job and wage growth for 2026, again, our portfolio is relatively well positioned for any demand environment given the supply picture and the lack of affordable alternatives.

And as it relates to our portfolio and the setup for 2026 revenue growth, we're currently projecting our earn-in to be roughly 70 basis points. Additionally, we continue to expect improvement in underlying bad debt as we work through the backlog of cases in several established regions and our various screening tools further constrain new entrants to the bad debt pool. Forecasted benefit for the calendar year 2025 is approximately 15 basis points. For 2026, I would expect at least 15 basis points and likely more given some of the underlying activity we're seeing across the portfolio. And third, while it won't likely be as strong as the last couple of years as we begin to stabilize our AvalonConnect offering for residents, we still expect another well above average year of growth in other rental revenue in 2026. Now I'll turn it to Matt to address our development activity.

Thanks, Sean. Turning to our development activity. As shown on Slide 14, our current lease-ups continue to perform better than our initial expectations, reflecting the conservative underwriting approach we take, where we do not trend rents and analyze every new start primarily on its current economics. Our development underway reached $3.2 billion by the end of the third quarter, was 95% match funded and underwritten to an untrended yield on cost of 6.2%.

We opened several new lease-ups over the summer and now have 6 communities where there is enough leasing activity for us to update the rents and yields to current market. This $950 million in development activity is running 10 basis points above the initial projections, thanks to $10 million in cost savings and rents that are $50 per month higher than pro forma, generating a further lift to the value creation and earnings accretion these communities will deliver once they are complete and stabilized.

We have another 3 communities, all in New Jersey that are just starting their lease-ups and rents at those assets are currently set at 2% above pro forma. So the trend of development outperformance is likely to continue as all 9 of these communities look to complete their lease-ups next year. And the 13 communities that won't start lease-up until 2026 or '27 should open at a time when there will be much less competitive new supply, as Sean detailed earlier.

Turning to Slide 15. We are strategically increasing our development underway when the industry as a whole is retrenching, taking advantage of the benefits of our integrated platform to build at a time when costs are lower and competition is more subdued. As we look to 2026, many of these favorable tailwinds should persist, although we are also mindful of the softening revenue environment and the associated impact on our cost of capital to fund new starts going forward. And with that, I'll turn it back to the operator for Q&A.

[Operator Instructions] Our first question comes from Jana Galan with Bank of America.

Maybe following up on Matt's development comments. Just curious kind of how you're looking at the next crop of projects and properties, kind of how you're thinking about those? And maybe also comparing that with you guys were active on share repurchases in the quarter. If you could kind of talk to those capital allocation decisions.

Sure, Jana. Thanks for the question. Let me start by just reemphasizing the strength of our balance sheet. It's in a terrific shape today and really does provide us with a ton of flexibility as we think about our capital allocation choices going forward. I do think about a fairly rich menu of opportunities today. I'll start with reinvestment opportunities back into the existing portfolio. We're active this year on revenue-enhancing investments, see a similar set of opportunities as we look to next year.

On the development side, as a baseline, we're thinking right now in terms of 2026 development starts in the range of $1 billion of starts. And that's based on looking out on our pipeline and the set of opportunities. They tend to be -- that $1 billion tend to be in our established regions where operating fundamentals are a little bit more stable today. We are seeing strong construction buyout savings in those markets as well. And based on today's rents and today's costs -- those projects aren't starting today, but based on today's rents and those costs, yields on that $1 billion are in the 6.5% to high 6% range. So a meaningful spread to where we can raise incremental capital.

And then as we always do, we will flex and adjust as we need to. As folks know, we approve every development project, project by project. We have, for sure, raised the target returns that we're looking from our developers next year, but expected, and we're hopeful that we'll be able to have another year of fulsome development activity. And then given our balance sheet strength, we also have the opportunity to buy back our stock as we did in the third quarter and the extent that, that continues to present an opportunity for us to invest accretively into our existing portfolio. So that's the general setup where we sit today as we think about capital allocation choices.

Our next question comes from Steve Sakwa from Evercore ISI.

I appreciate all the comments on the markets. Maybe for Ben. Just as you talked about SoCal and then obviously, the government shutdown won't go forever, but I mean, do you kind of look at those markets maybe differently just on a long-term basis? And would your, I guess, preference to have lower exposure in both of those markets kind of on a go-forward basis?

Yes. I'll start at a high level and then turn it to Sean to talk about what we're seeing on the ground, Steve. On a high level, we continue to advance on our portfolio allocation targets, which do have us -- this goes back to a couple of years ago, looking to reduce our exposure in the overall Mid-Atlantic as well as in California. The other emphasis point that I would give to you is we've not only set targets at a market level, but we've also set targets within our regions.

And I'll use the Mid-Atlantic as an example here, on the heels of our D.C. disposition, our recent DC sales, we've been looking to increase our exposure in the Mid-Atlantic heavier to Northern Virginia based on a number of factors. And so on the heels of that transaction, we now have close to 50% of our portfolio in Northern Virginia. So that's how we kind of continue to -- it's a combination of looking longer term, but then also making shorter-term transaction activities. And then, Sean, if you want to speak to what you're seeing on the ground more in both of those markets?

Yes, Steve. I think probably the right way to think about this, obviously, the government shutdown was looming in Q3. It's become a reality. We've seen this story play through before. It's not a long-term sort of secular shift for the most part, tends to be cyclical in nature. As Ben noted, we're happy that we have kind of half our portfolio currently in Northern Virginia and also, as he noted, tilting it more towards Northern Virginia, which is holding up better than the district or some of the markets in Maryland.

The big thing with the Mid-Atlantic that I think we have to all look at also is, we delivered about -- projected to deliver about 15,000 units of new supply in 2025. That's projected to decline to just 5,000 units across the entire DMV for 2026. So to the extent we get to the other side of this and we get into a more stable and even modestly growing job environment, that's a pretty good setup for revenue growth when we get there.

And then Southern California, obviously, has gone through cycles in the past, broadly diversified economy. Certainly, the entertainment sector has taken a hit. Some of the tax incentives and other activities will likely bring it back at some point in the future. And that is a market that, again, broadly diversified economically, which is generally good in terms of that diversification benefit, but tends to run at one of the lowest levels of new supply relative to stock of any of our regions in the country. And that is likely going to be the case as we look forward over the next couple of years for such a massive market to see a pretty meaningful reduction in supply.

So I do think we're thinking about these both the short-term decisions, but not thinking too differently in terms of the long term other than the rotation within the region as opposed to outside the region is the way I'd probably think about it.

Our next question comes from Eric Wolfe from Citi.

It's Nick Joseph on for Eric. Maybe just going back to the capital allocation answer earlier. You mentioned development starts maybe in the mid-6s to high 6s. I think buybacks would be somewhere around the mid-6s now. How does that compare to what you're seeing kind of real time in the transaction market? Have kind of going-in yields changed at all given some of the weaker rent growth assumptions? And as you think about that, is there also a difference within some of the different markets that you're looking at today?

It's Matt. I guess I'll take that one. The short answer is we haven't really seen any change in where the market is pricing stabilized asset sales. It's still kind of anywhere from the mid- to high 4% cap rate range to low to mid-5% cap rate range depending on the geography. And even our own activity is kind of a good example of that. I put D.C., the district on the higher end of that range. But suburban Seattle might be on the lower end of that range where we just sold an asset this quarter at a 4.6% cap on our numbers.

So it has not -- it's been pretty sticky. And if anything, as kind of long rates have come down a little bit, that's given buyers more confidence. So I think transaction velocity, multifamily trades in Q3 were up pretty materially over Q3 of '24. It is still selective in terms of the assets that are getting that bid are assets where there is reasonably good momentum in the rent roll or at least they're not backsliding. But so far, cap rates are holding firm and values.

Our next question comes from John Pawlowski with Green Street.

Matt, just a quick follow-up and if I could fit 2 in. Did I interpret your comments on the D.C. cap rates accurate that those sold before dispositions were right around a low-5 cap? And then Kevin or -- Kevin, can you provide more details on the -- really what drove the repair and maintenance surprise? Are we running into labor availability issues? Or what else went wrong in the R&M functions?

Yes. John, it's Matt. The cap rate on the DC sales was probably mid-5s. There was a little bit of retail in the portfolio. So the residential cap rate was probably kind of low to mid-5s, but I'd say the overall transaction was right around 5.5%, and then...

John, it's Sean. On the R&M side specifically, it's kind of a smattering of different things. What I'd say at a high level is we had a pretty good experience going through Q2, as Ben mentioned in his opening remarks in terms of the benefit, we expect a little bit of that to come back. But unfortunately, just kind of hit a bad streak in Q3 in terms of various accounts that came through on the repairs and maintenance side, slightly higher cost per turn in terms of the way the units came to us. Some of them are skips and a VIX, the higher cost. So I wouldn't say there's one particular pattern there other than we just probably underestimated a little bit kind of where we land in Q3 relative to what happened in Q2.

Our next question comes from Adam Kramer with Morgan Stanley.

I think last quarter, there was a discussion around lease-up at an asset or 2 in Denver development assets. Just wondering if there was any update there for those assets. And then I guess just more broadly, if you sort of think about the performance of development assets and lease-up, how are they doing? And as sort of some of them maybe from a year ago or 9 months ago, as you get closer to sort of that annualizing the initial leases, what is sort of the performance in terms of people at renewal given sort of the pace of lease-up?

Adam, it's Matt. I'll start on that one, and then I think Sean can also provide some other detail specifically around our Denver lease-ups. But in general, as I mentioned at the opening, our lease-ups continue to perform well, and we're getting a little bit of outperformance on rent. And importantly, we are also seeing pretty significant cost savings. And the good part about that is that stays with you forever. That reduced basis, the NOI will move around over time, obviously grow over time, but it will have its ups and downs. But the basis is forever.

And just between the deal that we completed in the first half of this year and Annapolis, which we completed this quarter, and we have another completion coming next quarter in Maryland, just those 3 deals alone, there's probably $12 million worth of cost savings on 1,000 units, that's $12,000 a unit in lower basis. So that's pretty compelling. And that -- so I would expect more of our yield outperformance on what we're leasing up now and into next year to come from the denominator and the numerator, but we're still getting a little juice on the numerator in general.

And in generally, we lease at a pace so that we can have the assets full within 12 months. So essentially, we don't wind up competing against ourselves on renewals. We are very mindful of that. And in general, we've been able to achieve that. There are a couple of exceptions and the one in Denver is a good example of that, where that submarket in Governor's Park there south of downtown is just littered with supply. So Sean, I don't know if you want to share a little more on that and contrast that to some of the others.

Yes. Just to give you some insights on Denver, we really had 2 lease-ups. One just finished and stabilized at the end of the third quarter, which is in Westminster. And then the other one is Governor's Park, which Matt has referenced. So on average, they did about 20 leases a month during the third quarter, which is a little bit below where we typically would like. But again, Westminster was heading right to stabilized mode. So a little bit softer pace there.

And then concessions on the Westminster deal averaged about 150% of a month's rent, and it was more than 2 months rent at the Governor's Park deal. So certainly a soft environment in Denver. I think that's pretty apparent to pretty much everybody nowadays. But fortunately, we have one that's stabilized and the Governor's Park deal is approaching 90% leased at this point. So we're getting pretty close.

The other piece of good news I'd add, and I think I mentioned this last quarter, too, it just so happens a lot of our lease-up activity now and as you look to next year is in the suburban Northeast, which is still pretty strong. I think we -- as I mentioned, we have 3 lease-ups that are opening -- that are leasing now in New Jersey and a fourth one that's just finishing its lease-up, and that market has been very solid.

Our next question is from Austin Wurschmidt with KeyBanc Capital Markets.

Just thinking through potential share repurchase activity from here, I guess, do you have capital lined up to fund that today? Or would you need to source additional capital to fund future purchases? And just wondering if dispositions are the best -- still the best avenue for that today?

Sure. Austin, this is Kevin. So a few points for you to consider here. I guess, first of all, from a balance sheet point of view, as Ben outlined, we're in terrific shape right now. As you can see from our earnings release, our leverage is 4.5x net debt to EBITDA. If you give us credit for the forward equity of nearly $900 million we have in place, that's essentially another half turn lower. So we're kind of at around 4 turns. We have nearly full availability on our line of credit. It's only $200-plus million in commercial paper. So we have plenty of access to liquidity, and we have leverage capacity to the extent we wish to use it.

From a share repurchase authorization standpoint, as you probably noticed in our earnings release, we essentially reloaded or reauthorized our share repurchase program. So we now have $500 million of additional authority to be able to tap into here going forward. So we have that set up as well. And I think as kind of outlined by Ben, we're prepared to be nimble. We do currently plan on having, call it, roughly $1 billion in starts next year, but it's -- the decision of whether to engage in a buyback or development is not necessarily a binary one, as you even saw from us in the third quarter, where we continue to be constructive on development and also bought back $150 million in shares.

So not in a position to tell you today what we're going to do tomorrow, but we are in a position to act on a buyback if it makes sense. And we recognize that our shares are attractive. But we also recognize that development is attractive and a point of indifference also gives us fresh assets with a low CapEx profile and a strong growth profile. So there are certainly strong merits to continuing to do development, significant amount of what's in our development book, but we have the capacity to engage in a buyback if appropriate.

From a standpoint of how much -- how we think about funding it longer term, certainly, we would likely tap available liquidity in the form of commercial paper to do so, which prices in the low 4% range today. But ultimately, as we think about framing how much we would do, we are limited by our gains capacity, which is in the normal year, about $500 million of asset sales and an intention to essentially term out whatever we buy in terms of the buyback on a leverage-neutral basis with its proportionate share of recycled asset sales, if that's the case and incremental longer-term debt. So we feel like we have plenty of room to be constructive in, there, but -- so -- but it's not necessarily a binary choice, and we're prepared to be nimble and react to the appropriate market singles.

Our next question comes from Jamie Feldman with Wells Fargo.

As we've been listening to the calls throughout the day, the #1 incoming question is just how do these residential companies have visibility on where the market is going, first for guidance through year-end, but also just to kind of get through the spring leasing next year. So I know there's only 2 months left in the year, so that's probably an easier part of the question.

But just as you think about your crystal ball setting guidance and even thinking about where this cycle could go before it gets better, can you point to some of the things that are giving you confidence or that people should be thinking about or that you're thinking about and watching because every company is certainly taking numbers down or their outlook is down given September and October.

Jamie, I can start. The -- emphasize a couple of different elements. One, sort of our portfolio positioning, for sure, emphasizing the level of low levels of supply that we're seeing now and particularly as we get into next year, and Sean mentioned it, but just to reiterate, we don't need a ton of incremental demand given that supply backdrop to see some strong results as we get into next year.

As you think about the overall job environment, the hope is that we're headed towards a period where there's increased certainty on the macroeconomic side, increased certainty around where tariffs are going to land, the end of the government shutdown. So increased certainty, increased confidence. The rate dynamic potentially also leads to further investment, but we can kind of shift out of our current environment to there and you lead to businesses further investing and also investing in their workforces, that's sort of the other side of this dynamic for us as we think about the job picture.

Our next question comes from John Kim with BMO Capital Markets.

I wanted to talk about bad debt, which came in a little bit higher than you were expecting. And I wonder -- I just wanted to know what the potential source of that was and if you have a disproportionate amount of bad debt that came from recent development lease-ups.

Yes, John, it's Sean. Yes, the miss in bad debt we referenced is in the same-store pool. So the development assets wouldn't be in that book. And it's really a relatively modest number. It's about 5 basis points different in terms of what accounted for the variance. And in a book like that, when you're dealing with court times and dockets and when the share is going to show up and all that kind of good stuff, 5 basis points is a pretty tight margin of error. But obviously, it was a negative variance. So overall, we feel good about where we're headed with bad debt.

I can tell you that as you look at where we are now in terms of the number of accounts that we need to work our way through compared to the end of 2024, we're down 20%, 25%. So it's moving in the right direction. It's just a matter of kind of processing people through. So I would expect, as I mentioned in my prepared remarks, as we look forward to 2026, if we're getting about a 15 basis point benefit this year, I would expect at least, if not likely, more than that benefit in 2026 just based on what we're seeing as different cases work their way through the system and our screening tools get more and more sophisticated in terms of limiting the number of new entrants to the pool.

But in general, I know it's not part of the figure with the same store. Do you tend to get higher bad debt on lease up communities?

Not necessarily. No. If it is, it can be an outlier community here or there. It's really kind of market specific in terms of the type of customers you're dealing with and tools you use. But in general, it's not necessarily an outlier across the development book as compared to the same-store pool.

[Operator Instructions] Our next question comes from Rich Hightower with Barclays.

But just to follow up on the jobs discussion. I guess, as you're having conversations with tenants in the D.C. market specifically, I guess, what are the chances that there's another shoe to drop with respect to sort of delayed impacts from DOGE. And if someone's laid off, there's usually sort of a lag before they think about vacating the unit or stop paying rent or things like that. And then secondarily, there's been a lot of headlines around weakness in the entry-level job market specifically. And that's not a D.C. comment, that's broad-based. But how does that affect your portfolio more broadly? So I guess kind of a 2-parter.

Yes, Rich, it's Sean. I'll start and others can add as needed. As it relates to the districts or the D.C. region specifically, what I'd say is likely any impact that came through related to DOGE specifically and some of the activities that happened earlier this year, we probably would be feeling that about now just given normal sort of severance periods, notice periods, things like that. So there's probably an element of that embedded in the current environment. Of course, some of those people may have left 3, 4, 5 months ago.

But I think the question now is as we turn to 2026, as I mentioned earlier, the supply picture looks drastically better in terms of the reduction in supply, getting down to like 5,000 units is not a number we've seen in D.C. in a very, very long time. So on the demand side then, if we can clear through the shutdown and get back to kind of normal business, I think we'll be in much better shape. I think the question really is what happens with some of the furloughs? Do they turn into permanent reductions, et cetera. We have not heard that, but certainly, that's a possibility. So I think we just need better visibility coming out of the shutdown in terms of the potential impact. And then if there is one, then we would lag that for whatever time period is appropriate 6, 7, 9 months.

As it relates to your second question on the AI side, we feel pretty good about our overall position. I mean we're not necessarily -- I mean, the average age of our residents is in the kind of mid-30 range. It's not fresh out of college or even in the young 20s or mid-20s, which is where a lot of the focus is lately in terms of kind of new entrants into the employment base and the types of jobs that they perform being likely more automated.

The other thing I would say is, particularly in some of the markets that we're in, in the coastal regions, they're pretty high value-add jobs. So when you think of the people that are coming into San Francisco or Seattle, as an example, more and more of the demand for that activity is people with the skills to help propel AI forward. I'll give you an example, I mean, I was in San Francisco not too long ago in Seattle. And when you talk to our teams on the ground, people coming in looking for new apartments propelling the momentum you see in that market, is people coming in heavily in the AI sector and other sectors, highly educated coming potentially from somewhere else or within the region.

So we feel good about the high value-add nature of the jobs in those regions still likely being the winning formula as opposed to maybe the lower value-add jobs that might go away in some of the service industries, back-office operations, customer service operations, things of that sort.

Our next question comes from Alexander Goldfarb with Piper Sandler.

Two questions. The first is on the asset sales, the $585 million in the quarter, I think all of those were developments and it was a slight economic loss. Just curious, you guys speak about the value creation. So the economic loss definitely jumps out. So is there anything specific, was it 1 or 2 of these projects that drove that? Or in aggregate, just want to better understand why there was a loss on the sale?

Yes. Alex, it's Matt. So those particular sales actually 2 of the 6 were acquisitions were Archstone assets, and 4 of the 6 were assets we developed. So it was a mix. And those particular communities, it was really driven by 2 where there was a material loss relative to our economic basis. One was an asset we developed was Brooklyn Bay, which was kind of an unusual submarket pocket in South Brooklyn, not a very large asset, less than $100 million investment, but that one was one that wasn't one of our better investment decisions.

And the other one was one of the assets in NoMa that we got from Archstone. And NoMa has just been one of the uniquely difficult submarkets in the district and really anywhere in our footprint, really ever since we bought it. And we bought 60-plus assets from Archstone, and most of them have been pretty good investments. And obviously, that whole platform investment was very favorable for us. But once in a while, in a portfolio of that size, you're going to get 1 or 2 that don't do so well. So that was kind of what happened there.

But I'll tell you, even -- I was looking at it today, even on the $800 million in dispos that we have for the entire year this year, which includes this $600 million, the unlevered IRR on that whole basket of 2025 dispos is in the mid-8s. So it's still pretty good investment returns given that. There are years when certainly, I think on average, we're probably in the low double digits, but that's still a pretty good investment return. And I think, as you know, our long-term track record has really been second to none, I think, in the REIT space, at least in the multifamily space for an awful lot of years.

Okay. And then -- yes.

Yes. Alex, the other element I'd just add on to Matt's commentary is these are a set of assets that have been on our target list for a while now. And we're waiting for asset values to recover to a certain degree to be able to execute. And so in any portfolio, you're going to have some low performers, but we really think about this as pruning those assets out, redeploying that capital into higher growth opportunities.

Okay. And then the second question is, it definitely seems like in REIT land, people are discovering nuancing the markets more, right? Like you want very Westside L.A. or east side in Seattle or different -- more Northern Virginia. So as you look at your development pipeline and your land options, have you like done -- has there been a big culling where you're like, hey, some of those sites that we originally picked they're not in submarkets we want anymore. Just trying to understand better how the -- as you start the next round of projects, how that has evolved versus what your land bank or land options were a few years ago?

Yes. Alex, I would say we've been pretty mindful of that really for the last several years. So if you look at our dev rights book today, it's almost all -- I mean, it's both bottom up and top down, right? We're looking for the best risk-adjusted returns, and we are looking to generate value creation on every deal we do, but we are also looking to develop assets that we think are going to be good long-term performers in our portfolio.

And so we do actually incentivize that. We will demand a higher target yield if it's in a submarket we think is a little bit weaker. But we've been kind of tacking that way for a while now. And just to give you another example, Ben mentioned kind of within the Mid-Atlantic, more focused on Northern Virginia. Within Southern California, we've been really focused on San Diego, which is almost an expansion region for us. And this quarter, we just started a very big project in San Diego.

We have 2 deals under construction in San Diego now, 2 more development rights. And we haven't started a development in L.A. County for 5 or 6 years. So our focus is completely on San Diego, Orange County and then Ventura in SoCal as an example. And again, in Seattle, same thing. Our portfolio is heavily east side. Our development focus has been entirely on the East side really for the last 7 or 8 years.

Alex, I'd flip your question, which is in an environment where others are pulling back and don't have our capabilities, these are the windows we actually can move on our best real estate, structure them the best way. Think about the amount of land that we actually have investment in today, very, very low. And these also -- and this is the environment also this cohort of projects tend to be some of our most profitable, both for the sort of the upfront deal striking that we do as well as for those projects opening a couple of years from now, facing less new supply.

Our next question comes from Haendel St. Juste from Mizuho Securities.

This is Mike on with Haendel at Mizuho. My question is, does the D.C. DOGE job cuts multiplier effect on the D&B region give you less confidence in market rent growth going into 2026? And how does that potentially impact the acquisition property and your portfolio in that region?

Mike, this is Sean. Two things. One is in terms of the ripple effect, as I mentioned earlier, the DOGE impact, if anything, is probably being felt around now given the lag effect between the time people were noticed and when they actually departed. If there was a ripple effect, we probably would be seeing more of that now. I think it's a little uncertain at this point that we've actually seen that. And then on your second question, we have not acquired anything in this region in quite a long time in terms of assets. Is there another question there, Mike?

Our next question comes from Michael Goldsmith with UBS.

This is Ami. Are the remaining deliveries and lease-ups from the supply cycle more concentrated in urban or suburban areas? And then if we do see interest rates continue to tick lower and development activity pick back up, do you think [indiscernible] will be more likely to be concentrated in urban or suburban locations?

Ami, it's Matt. So as you look out over the next year or so, there's still more deliveries coming next year as a percentage of stock across our footprint in urban submarkets than suburban submarkets. There are a couple of regions where that's not true, I think specifically Northern Cal and maybe New York. But in general, in almost all of our other regions, we're still seeing -- we still expect a bit more supply, urban and suburban. The gap between the 2 is narrowing. It was wider 2 years ago. It was a little bit wider this year. But actually, I'm a little surprised there's still urban supply coming.

As you look out beyond that, where the next slug of starts might be, the economics on development certainly work better in suburban submarkets today. That's what we're finding. I think that's what the market is finding. However, entitlements are more difficult, at least in our established region in the suburbs. And so you have to have been at it for a while if you're going to have a deal ready to go.

And the other thing that we have half an eye on, I'd say, is in many of the urban cores, the cities are now trying to encourage conversion, adaptive reuse of outdated office to multifamily, and they're actually providing incentives to do that. So it is possible that if that starts to make sense, that supply could materialize fairly quickly because those are existing buildings that would be converted with a shorter build cycle time.

Our next question comes from Alex Kim with Zelman & Associates.

Just a quick one for me. We saw the spread between renewals and new move-ins widen again this quarter, and part of that's due to the seasonal trend this time of year. But curious if you have any thoughts on that dynamic and what that means for rent growth for both front-end pricing and renewals moving into '26?

Yes, Alex, it's Sean. Yes, fair point. I mean, typically, you would start to see a seasonal shift between the rent change for renewals versus move-ins at this time of the year. And nothing new on that front. Other than on the move-in side, as I indicated in my prepared remarks, it has been weaker on the move-in side in terms of rent change than we would have anticipated, reflecting some of the deceleration that we've talked about in some of the markets that I identified earlier like the Mid-Atlantic and L.A. and Denver.

So certainly a little more meaningful than seasonal in those particular markets, but you would expect that to continue likely through year-end. And you don't start to see any kind of shift in that in a material way until you get to the spring leasing season and asking rents really start to move up through that period of time typically. So that's what would normally occur. At this point, we haven't provided a forecast for 2026, but that would follow the historical norm.

This now concludes our question-and-answer session. I would like to turn the floor back over to Ben Schall for closing comments.

Thank you, everyone, for joining us today, and we look forward to connecting with you soon and at NAREIT in early December.

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. Please disconnect your lines, and have a wonderful day.

Good morning, everyone. Welcome to BofA's Global Real Estate Conference. I'm Jana Galan, and I cover the residential REITs. We're very pleased to have with us today AvalonBay's President and CEO, Ben Schall; CFO, Kevin O'Shea; and COO, Sean Breslin. Ben will start with a few opening remarks, and then we'll jump into Q&A. Thanks, Ben.

Yes. Great. Thanks for having us, Jana. Thanks, everybody, for joining us. I'll start off just quickly on some of the highlights from Q2 and our press release from last week and then talk about some of our themes for the back half of this year and headed into 2026.

So Q2 highlights, we increased our same-store NOI guidance for the year, up 40 basis points, which now sits at 2.7%. We also reaffirmed our earnings guidance for the year -- our core FFO earnings guidance for the year of 3.5%, which continues to be at the top of the sector. And then our press release last week, we reaffirmed that our revenue expectations quarter-to-date are tracking as planned. As we look ahead to the second half of this year and into 2026, I feel like we're relatively well positioned for a number of factors. So I'll tick through those now.

Starting with our portfolio positioning. We believe our -- particularly our suburban coastal footprint continue to display relatively steady demand. Occupancy is in a strong place and supply is definitely coming down in our established regions. It's coming down in the back half of this year. And as we head into 2026, we expect deliveries as a percentage of stock to drop to 80 basis points, which is levels that we haven't seen in 10-plus years, think about it kind of on the backside of the GFC.

The other theme as it relates to supply is given how challenging it is to get development entitlements in our established regions and how long it takes to get development entitlements in our established regions, we expect in those regions to stay at low levels of supply for an extended period of time. So lower for longer type of dynamics as it relates to supply. So you put together generally over a multiyear period, sort of steady demand in those established regions plus low levels of supply should line up for relatively strong operating fundamentals looking ahead. So that's first.

Second is you've seen us continue to proactively reposition the portfolio over the last couple of years, and that continues going forward. We're headed towards the 2 targets that we set out for our portfolio. One is to increase our allocation to the suburbs to get that from 70% of the portfolio to 80%. And the second is to increase our exposure to a select set of expansion markets towards our 25% target. So we've been making good progress there.

It's generally involved a decent amount of trading activity, which has been us selling some slower growth, older, high CapEx assets in our established regions and then redeploying that into our expansion regions. This year, we're both buying and selling $900 million of assets generally along that trade. But you've also seen us make the shifts that we've been targeting within regions. And we recently -- we talked about on the Q2 call, the D.C. portfolio that was under contract, which is now closed.

And in the Mid-Atlantic, this goes back to our Investor Day a couple of years ago, we identified we wanted to reduce our exposure to the Mid-Atlantic from 15% of the portfolio to 11%. We also wanted to shift what we held in the Mid-Atlantic heavier to Northern Virginia. And so the trade in D.C. was about $450 million of assets at a 5.5% cap was in that direction. And we'll now have on the other side of that transaction, 50% of our portfolio in Northern Virginia, where we prefer the longer-term growth dynamics and particularly prefer the regulatory dynamics in Northern Virginia relative to the District of Columbia.

So it's a good example of sort of the within region types of shifts we continue to make. All of this is sort of the category of looking to optimize the portfolio to deliver superior earnings growth and superior cash flow for shareholders in the years ahead.

Third area of emphasis is development continues to be a differentiator for us. We feel very good about the state of our current development book. Generally, that book is trending above pro forma today, a combination of both rents being up in some projects. And we are also seeing construction costs come down fairly meaningfully and across most of the regions at this point. So that's helping that book of business.

In terms of looking ahead, development NOI this year is going to be about $25 million. And then as you look to 2026 and 2027, just based on our known under construction activity, pretty much all of which we prefunded, we are set up for a decent step-up as we get into '26 and '27, both in terms of earnings creation and value creation for shareholders coming out of our development expertise.

And then the last theme I'll highlight upfront is our balance sheet. It's in a terrific place. Kevin and team have completed our capital plan for the year at this point. We've raised $1.3 billion of capital at an initial cost of 5% which lines up well relative to our investment uses, particularly development projects where we're redeploying that capital in the mid-6s and generally have a balance sheet that provides us with a tremendous amount of flexibility and position us to be able to continue to step into opportunities as they present themselves.

So I feel good and optimistic as we head into the back half of this year and into 2026. And with that, Jana, I'll turn it over to you to help facilitate questions.

Great. So obviously, anyone if you'd like to ask a question, feel free to speak up. Maybe first, I'd just start with your points on supply, clearly very favorable looking into next year and 2027. I guess maybe if you could kind of touch on the demand out there, the fits and starts during the spring and summer leasing season, disappointing job numbers, but offset by really strong renewal activity. And then maybe if you could just frame that for us between East Coast, West Coast and the expansion regions?

Yes. Sean, do you want to take that?

Yes. So in terms of this year's performance, and I think you heard this theme from most of our peers this year as well, the leasing season peaked a little bit earlier than we all would have expected and a growth rate relative to the beginning of the year that was slightly lower.

So to be specific, typically, what you would see is seasonally rents start to climb at the beginning of the year in January. They peak somewhere in the late June, early July time frame, maybe up somewhere in the 6% to 7% range and then level off and then trail down through the back half of the year. This year, rents peaked at roughly 4.5% growth from the beginning of the year, and that really occurred in sort of the mid- to late May time frame before leveling off and then seeing that downward slope in the back half of the year.

At the time, as you're going through it, when demand begins to soften, it's not always readily apparent in the data in terms of what's driving that given the lagged effect of data that comes out from a job and wage growth perspective. But after our Q2 call, in fact, the next day after our Q2 call, there was a pretty significant revision in terms of the absolute number of jobs being created, but certainly aligned with what we were experiencing on the ground in terms of net demand.

And then the other factor that I would point to that's impacted this year is the composition of that job growth has also been less favorable to, I would say, us and many of our peers' customers where it's been more in health care, education, hospitality, those types of categories as opposed to professional services, financial services, tech, those occupations that fit more, particularly with our established regions and those customers. So as it relates to this year, that's what we've seen.

In terms of sort of the mix on markets, what we indicated on the Q2 call in terms of relative outperformers or underperformers, that sort of remained the same so far in Q3, where the underperformers tend to be the Mid-Atlantic first, which we mentioned early on in our Q1 call, we talked about sort of the qualitative elements that we were seeing from resident behavior that indicated a level of uncertainty related to their financial conditions. That certainly manifested itself in terms of softness in Q2 with increased concession activity, lower occupancy, increased resident behavior that indicated some stress in the system. That's continued into Q3.

The one thing I would say is positive about the Mid-Atlantic some of the rhetoric and the media hype around DOGE and other things has certainly -- has begun to sort of settle. And so that should play out with some level of confidence as we get more into 2026.

Now the headwind may be people that were laid off in late Q1 or early Q2, if they run out of severance and not reemployed, let's say, late this year or early next year, that could be a headwind. So maybe it's cross currents for the Mid-Atlantic. Across the rest of the East Coast, New York City, Northern New Jersey has been quite healthy. There have been questions about Boston. For the most part, while there are a couple of pockets of weakness, there's nothing broad-based in Boston that we're experiencing that would say there's a fundamental issue. There's questions around research and funding for biotech, foreign students, et cetera.

We have not seen that in our portfolio. Most of our portfolio, however, is in suburban submarkets, high-quality towns, good schools, differentiated product. We have certainly an urban exposure, mainly at the Prudential Center and then North Station, but we've not seen a material impact in terms of demand from foreign students or anything else to give us a significant concern in Boston.

On the West Coast, Seattle started its run last year. Sort of Q1 has continued to perform well through this year. San Francisco sort of caught the same train, I'll call it, maybe late last year coming into this year. Acceleration has been meaningful and consistent throughout 2025 thus far. I was in San Francisco a couple of weeks ago. Healthy demand in the city of San Francisco, people coming in from out of the area for tech jobs, sort of the on-the-ground feedback from our management team, a lot in the AI sector, as you might imagine, and move-in rent changes low to mid sort of double-digit range. People getting healthy renewal increases, but taking them.

And San Jose is following San Francisco, just not quite as robust at this point in time. And then the East Bay is lagging. And then in Southern California, Orange County and San Diego are healthy. L.A. sort of continuing with the theme that we talked about in the second quarter, which is the entertainment sector, just not producing the kind of jobs that we would have expected. And so it remains soft there.

Fortunately, the state did double the incentive program that it has for film production in the state, which should have -- it's a pretty big number. It should impact the production of content in California, most likely in the L.A. region over the next year or so. But it takes some time for those dollars to kind of work their way through the pipeline given the planning processes there. So that's some color on the various markets.

And maybe just following up on kind of like the renewal trends. And I guess this would be just how to think about potentially like the move-outs to home purchase if we do start to see rates coming down?

Yes, good question. I mean on the -- first, what I'd say on the homebuilding side is to the extent we see a little bit of a rebound in the homebuilding business, that's generally good for overall macroeconomic activity impacting a lot of different types of occupation. So net-net, we are a believer that improved economics and business activity in the homebuilding arena would be good for us and the industry overall.

In terms of current choices and what we're seeing, I'd say, for the foreseeable future is it's still particularly for our established regions, relatively unaffordable to consider moving to some type of for-sale product. I mean when we provided data on the last call, it's more than an incremental $2,000 per month to move from the median-price apartment to the median-price home across our established regions. A little bit of interest rate movement, a little bit of home price movement isn't going to change that equation dramatically.

So we're still seeing move-outs to home purchases in the 8% to 9% range, historically low levels. And while there is -- there are certainly efforts to produce more affordable housing across our various regions, it is a slow, cumbersome process. So I think for the foreseeable future, the level of unaffordability is probably not going to impact us materially at the margin just given the -- absent some huge shock here, I would say. We feel good about the level of substitutes being not a headwind for us in the near -- the next several -- probably next 2, 3 years.

If you think about the production in our coastal markets, in particular, it is a long cycle. I mean it takes 2 to 3 years, sometimes longer to get the entitlements. And then given we're building either high-density woodframe product with some type of structured garage or in some cases, selectively high rises, the production cycle is much longer than going to Dallas, Texas and building a 3-story walk-up garden deal that you can get first deliveries in 10 months, right? It's much different type of cycle.

So on the supply side, I think the lower for longer is helpful for us from a multifamily standpoint, but we would like to see a little bit of uptick in activity on the for sale side to help them. And so the interest rate movement certainly will be helpful in that regard.

And maybe just last one kind of on operations, but anything incremental to any changes in what you're seeing, whether it be like the top of funnel web traffic demand, tour demand, bad debt, roommate situations, anything like to call out from kind of all the different metrics you guys are tracking?

Yes. I wouldn't say there's anything terribly notable in terms of like household mix. It remains relatively constant. We'd be concerned if we saw a significant uptick in the number of roommate situations as an example, in terms of financial stress in the system, but we're not really seeing that.

In terms of renewals, retention remains strong. And I think just given the unaffordability that I mentioned in our -- particularly our established regions, I think there's some segment of the population that sort of resigned themselves to -- they're probably going to be a renter for an extended period of time. And in some markets like take Southeast Florida, the cost of homes has gone up 50%, 60% over the last several years.

And you compound that with the cost of insurance, if you're considering an HOA situation with a condo, I think there is a segment in markets like that, that also has decided they're going to be a renter for a longer period of time. So that's all good for the business. I wouldn't say there's anything else material as it relates to the renewal side of the equation, mix or anything at this point that's terribly notable.

Maybe just turning over to the kind of transaction market given the recent D.C. portfolio sale and just comments on kind of the amount of product out there, what you're seeing? Is it attractive in terms of the geographies and quality that Avalon looks for?

Yes. So overall, the transaction market from a cap rate standpoint, generally still feels like it's in sort of the 4.75% to 5.25% type of range. Institutional players have generally returned to the market, which has allowed some larger transactions to occur, everything from multi -- our multi-asset deal in D.C., but also just larger transactions. So I think things are generally a little bit more back, not back to sort of the height of the prior cycle, but there are transactions out there that are happening. And it's allowing us to, as I said before, this year, both buy and sell $900 million towards sort of our longer-term portfolio allocation targets.

There are on both ends of the spectrum, deals sort of outside of that range. So D.C., priced at a 5.5%, some asset specific, but also a little bit of a reflection of the D.C. market. And then on the other side of the spectrum, there are some deals that we are losing, deals we want to buy where people are stepping in and leaning further in and paying 4.5%, 4.6%, 4.7% types of cap rates in today's environment.

Broad picture, rates have been higher, right? Buyers have seemed comfortable underwriting at least some upfront negative leverage. Now borrowing costs may be coming down a little bit, but maybe also some questions around growth may be a little bit more questionable. So sort of seeing how that balances out. But kind of today's point in time, it seems like the market sort of solidified itself in that circa 5% type of range.

And maybe just kind of geographically, are you seeing much more competition in kind of the expansion markets? Or has some capital kind of been chasing some of the San Francisco or kind of AI thematic markets?

I'd say there are set of assets that they kind of check all of the boxes. I think one of those dynamics today is sort of what's going on with rent rolls. And people are still somewhat shy of kind of fully leaning into acquisitions if there's still questions about kind of where rent rolls are potentially going or potentially rents are happening.

So some of those high supply submarkets, I think there's still -- there's not, as an example, a lot trading in Austin today, given that deliveries are still making their way through the system. Beyond that, we're seeing activity and obviously found a credible buyer in D.C. We're finding activity in the urban market. So they -- San Francisco, given now that values have returned and rents have returned, we could see some more transaction activity. I think us and others potentially want to lighten the load in some other urban markets, but values haven't necessarily returned to the place. And so given some urban return there, there could be some incremental transaction activity that then happens in the marketplace.

And then maybe kind of turning over to development and just kind of the size of the pipeline now and how you may take advantage of this opportunity where others are not building in the next kind of couple of years?

Yes. We do feel like we are consciously making a countercyclical movement here to lean into development at a point in time when others are pulling back. Some of that is others don't have our cost of capital. Another component is we're able to take a multiyear look. And so we think about sort of what's happening with construction cost trends, those coming down. We like our longer-term basis activity. We are -- there are certain markets that have been tough to make development economics work over the last couple of years, West Coast being one of those.

We're targeting $1.7 billion of starts this year. 40% of that is going to be out West. And that is a function of construction costs coming down and then rents improving. So we feel like that's a good opportunity. And then as a cohort of projects, if we're able to get an outsized share of activity as start volume comes down, when these projects open a couple of years, they inherently will be facing less competition. So that also has us leaning in from a development perspective.

And can you talk a little bit about like what you're seeing on construction costs? I think everyone was very concerned tariffs would be impacting costs, some of the kind of immigration policies would be increasing costs, and it's very surprising to hear you guys are experiencing the opposite?

Yes. What's played out is the tailwind associated with start volume coming down. And underneath that, what we're seeing is that subcontractors, as they want to make sure they continue to keep their people employed, subcontractors are somewhat meaningfully reducing their margins. That has allowed us, particularly somebody of our size and scale where we self-perform construction, where we have a project ready to go, we have subcontractors that are really leaning in for us.

And so we're seeing it in -- we're seeing construction costs come down in most markets today. I was going to pick a number, it's probably circa in the 5% arena relative to a year ago. But there are some markets, including some of the West Coast submarkets where that number is more like 10% down. And so again, to reemphasize my point, as a long-term investor to be able to step in at a more attractive longer-term basis is leading us to allocate some more capital there.

In terms of -- and Kevin can get into this in terms of the funding side of the business. As you think about the $1.7 billion, most of that we are associating with the equity forward that we still have outstanding. We raised $890 million of equity on a forward basis at an initial cost of 5%. So that's what we're lining up with this year's development starts. As we get into next year's development starts, particularly given our cost of capital and our equity cost of capital is higher today, we have raised our required target returns for our developers in the regions.

And so this year, we're targeting low to mid-6s. The target right now, as we think about 2026 deals is more in the kind of mid-6% to 7% range. And as you've heard us emphasize, what we focus on is making sure we're maintaining 100 to 150 basis points of spread between our development yields and both our cost of capital and underlying market cap rates, which is how we're sort of in that mid-6% type of range today.

And I guess, where are we -- where would you feel kind of between those projects and kind of the cap rates in the markets probably on the wider end of the...

Yes. I mean the market is -- to my comments today, market is probably for most of our institutional quality assets that we'd be buying and selling in the 5% range. So 150 basis points would get you to the mid-6s. Kevin, why don't I turn it to you and talk about sort of potential funding plans for next year and potential cost of capital associated with that?

Sure. So a couple of points upfront and I'll kind of add a little more color. Our balance sheet, as Ben pointed out, is in terrific shape right now. And we do have capacity to the extent it makes sense to do so relative to our investment uses and the return profile to lean into that balance sheet capacity to -- through the use of incremental debt, if that makes sense to be part of the equation to help support activity in '26 and beyond.

In terms of where the balance sheet is today, as you saw from the second quarter, net debt to EBITDA was 4.4x on a last quarter annualized basis. That -- when you look towards the end of the year and give us credit for the equity forward, you're kind of looking at a 4 turns type of leverage level. So that does speak to the incremental leverage capacity. That doesn't mean we'll necessarily use it. We're fine where we are. But we have often operated above 5 turns. And for the right investment opportunity, we're willing to do so.

Using debt in that regard hasn't made a lot of sense, as we all know, in the last couple of years, given where debt rates have been relative to investment returns. But if you're looking at investment uses in the form of development in the mid-6 range, right now, debt for us on a fresh basis, if we were to do 10-year unsecured debt, would be somewhere around 4.9% to 5%. We did a 4.9% to 5% today, so high 4s.

We did do a 10-year unsecured debt deal, as many of you know, priced it on June 30, closed it a couple of days later, $400 million at a 5.05% yield to maturity, sub-5% with the hedges. The spread on that was 85 basis points. So that's where if you apply that more or less to where the 10-year treasury is, you get to a high 4% 10-year debt number.

If you look at the 5-year end of the curve, we'd probably be able to price fresh 5-year debt somewhere in the low 4% range, 4.2%, 4.3%. And we certainly have capacity to layer in 5-year debt into our debt maturity schedule given how low our leverage is overall. So that's -- that really gives us financial flexibility to lean into development to support what Ben is articulating in the form of taking a differentiated capability and driving incremental earnings growth in the coming years through that set of activities.

Great. And you mentioned you would be willing to go a little bit shorter. So I've heard more REITs kind of looking at 5 and 7 years?

Yes, absolutely. So we have a very level and modest debt maturity schedule with maturities typically averaging around $700 million or so a year, which is less than 2% of our capitalization. And we typically look at having our debt maturities be at around where we think our dividends might be with a reasonable growth CAGR, 10 years hence. And so that implies sort of capacity in the low kind of $1.2 billion, $1.3 billion range for debt -- annual future debt issuances in the 10-year variety.

So from our standpoint, if you look at our debt maturity schedule, over the next handful of years, we've got capacity to issue 5-year debt in the $300 million to $500 million range each year to support growth in addition to doing 10-year debt at a pretty elevated level if that made sense to do so. Typically, we issue about $1 billion to $1.3 billion in debt a year. This year, we've issued $950 million. If you look at what we issued in addition to the $400 million of 10-year debt, we did complete a 4-year term loan that we swapped out to fixed $550 million at 4.4%.

So we've already taken advantage of the shorter end of the curve to layer in some more cost-effective debt capital into the equation. We're willing to do so if it makes sense as we look into the next couple of years.

Great. And maybe kind of switching gears, just kind of curious, anything kind of new that you're watching on the regulatory front, anything coming up with just kind of the discussions with -- whether it be the ROADS Act or anything in D.C. or locally in any of your markets?

I'll start at a high level, and then Sean may want to call out a couple of markets. We think about themes that are going to influence our business over the next 5 to 10 years, the regulatory environment is naturally on that radar. And we do feel like we're in a sort of heightened regulatory environment and one that maybe has shifted some from being more of just sort of a blue state dynamic to being a little bit more of a kind of populous dynamic.

So it does have us thinking about regulatory and how we can exert our influence appropriately across a broader set of markets. We focus on and really do believe the solutions here are supply-based solutions. Most people may not know this, but you know we do a lot of development, but most of our developments do incorporate 20% to 25% affordable housing that usually comes with the approvals that we get. So for us, sort of those market-based types of solutions are the places that can get new production actually created.

The other call out I'd make on the regulatory front is the bar is definitely higher in certain markets -- in certain urban markets, in particular, both based on known factors and based on just some of the uncertainty. And so that's been part of our shift to -- that dynamic has been part of the lead to our shift to sort of being more suburban and also to diversify some of our regulatory risk into some of the expansion regions. Sean, do you want to call out any particular markets?

Yes. In terms of themes, what I'd say is maybe a couple of things. One is I think our concern about rent control in general, particularly more draconian rent control has probably subsided over the last 2 or 3 years, mainly because sort of the political bodies, particularly on the left side, realize that supply, whether they like it or not, is the right answer to these issues.

And so if they tend to adopt something that is more draconian, it's going to be a problem. And so even when you have someone who feels like or a political group that feels like they need to help sort of suppress the rhetoric from different types of groups that are organizing around rent control, they are doing it with a very delicate hand. I would say a good representation of that is what passed in Washington State not too long ago or 1482 in California, where you have CPI plus 5, CPI plus 7 and things of that sort that are very manageable framework. So I think we're less concerned about that.

I think what's more topical nowadays is probably fee transparency and making sure the customers understand the total cost of renting a home since there's been a lot of chatter about that. But again, the engagement with the various sort of regulatory bodies, legislatures across the country has been more reasonable about it in terms of, "Look, we just want people to know what they're going to pay, and there's all these questions around what extra fees for what?"

And so I think that's something that we engage with the various regulatory bodies, people in the industry do. And so I don't think that's anything that's draconian in terms of the impact on the industry. So we keep a very close eye on what's happening. Most of the action for us is state and local in terms of any material impact. Federal is very, very insignificant at the margin typically. But the industry does a good job of engaging. And I think the dialogue back and forth has been productive about the right solutions.

Thank you. Any questions in the room?

[Technical Difficulty]

Yes. The question was from Jeff Spector from Bank of America as it related to consumer behavior. So Sean, do you want to...

Yes, I wouldn't say anything material. Someone asked that question in a previous meeting in terms of consumer confidence and uncertainty. The only place where we've really seen that for now, probably a couple of quarters is the Mid-Atlantic, as I mentioned earlier, where people are just -- have more uncertainty related to their financial position, their job, et cetera. Other than that, I wouldn't say we're seeing any unusual behavior at this point.

What sort of green lights would you want to be seeing in terms of the leasing cadence and also some of the lease-up assets that were flagged in Q2 that would sort of trend you guys to the high end of the guide for the back half of the year?

So the question was around -- Dan, the question is around sort of development NOI in 2025?

Yes, and broader leasing, I guess, trends that would, I guess, give you guys confidence sort of towards the middle or the high end of the range for the back half?

Yes. So I'll handle the development NOI side, and Sean can talk more broadly to kind of leasing trends. Generally, in our development book, things are tracking well. From time to time, we do run into some development delays, just a town where we're having an issue getting a COO. And so we think we're going to start delivering and occupying units this state, but it winds up taking another month or so. So we had a little bit of that.

On the lease-up activity, it really was isolated to a couple of projects in Denver and then one project in Maryland. Overall, our development book, if you look at lease-up pace, we're tracking 30 leases a month, which we consider sort of normal pace there. So development NOI, I really think about it, a little bit less captured in 2025, but the economics are there. And so that will lead to just naturally more of that NOI flowing through to 2026.

What about pricing in those development assets in the expansion markets? Are you seeing it [indiscernible] versus your underwriting [Technical Difficulty]?

Yes. So the question was around lease-up activity in our expansion region. So it is -- so the one project that we highlighted was in urban Denver, sort of infill market, high supply, a lot of activity, and there are challenges there, sort of, I think, a poster child for sort of that level of activity. Our other lease-up activity in the expansion markets, particularly given our focus on sort of the suburban nature of it and the lower density of it, has generally been tracking according to plan.

I've got 3 rapid-fire questions that we'll be asking all the companies at the conference. When the Fed starts to cut, do you expect rates for long-term debt to decline, stay flat or increase?

Decline.

Last year, the majority of companies stated they're ramping up spending on AI initiatives. How would you characterize your plans for next year, higher, flat or lower?

Higher.

And then do you believe same-store NOI for your sector will be higher, lower or the same next year?

The same. Thanks, everybody, joining us.