AvalonBay's Q3 2025 Earnings Call: Contradictions Emerge in Development Yields, Job Growth, and Capital Allocation Strategies

Guidance:

• Updated full-year core FFO per share to $11.25, lowered $0.14 (implies ~2.2% YOY growth).
• Same-store residential: revenue growth 2.5%, operating expense growth 3.8%, NOI growth 2% for 2025.
• Q4 core FFO per share reduced $0.09 vs prior outlook (driven by $0.06 lower same-store NOI: $0.04 revenue, $0.02 operating expense; plus $0.03 from lower lease-up/commercial/JV/stabilized NOI).
• Development activity: ~$1.7B of starts this year; targeting roughly $1B of starts for 2026 with untrended yields in the low–to–mid 6% range (development yield on cost ~6.2%).
• Capital allocation: $500M repurchase reauthorization; repurchased $150M in Q3; ample liquidity and funding capacity.

Business Commentary:

* Earnings and Outlook Adjustment: - AvalonBay Communities reported a $0.05 underperformance in Q3 core FFO relative to expectations, with a revised full-year 2025 core FFO guidance lowered by $0.14 to $11.25 per share. - The adjustment was primarily due to lower revenue and higher operating expenses, including in repairs, maintenance, utilities, insurance, and benefits, driven by a reduced job growth backdrop and government shutdown impacts.

• Development Activity and Cost Savings:
• The company is on track to start $1.7 billion of development projects in 2025, with a projected untrended yield in the low 6s.

• Despite challenging market conditions, development projects are benefiting from reduced construction costs, which translates into a lower long-term basis for shareholders.

• Regional Focus and Supply Dynamics:

• AvalonBay has a strong focus on suburban coastal markets with low levels of new supply, particularly with established regions projected to see only 80 basis points of supply as a percentage of stock next year.

• This favorable supply outlook is expected to continue for several years, positioning AvalonBay well for strong performance amid uncertain demand dynamics.

• Operating Efficiencies and Strategic Initiatives:

• AvalonBay continues to advance on strategic focus areas, expecting to generate approximately $80 million of annual incremental NOI from operating initiatives by year-end 2025.
• These initiatives, which include enhanced use of technology and centralized services, are aimed at improving the cash flow growth of the portfolio.

Sentiment Analysis:

Overall Tone: Neutral

• Management said Q3 results were below prior expectations and lowered full-year core FFO to $11.25 (down $0.14). They emphasized a 'terrific' balance sheet with >$3B liquidity, $3.2B development underway 95% match funded, and execution tailwinds (cost savings, higher-than-pro forma rents), supporting confidence despite near-term softness.

Q&A:

• Question from Jana Galan (BofA Securities): How are you thinking about the next crop of development projects vs. being active in buybacks and capital allocation decisions?
  Response: Balance sheet flexibility allows both: targeting ~ $1B of 2026 development starts in established regions with yields in the mid-6% range while remaining opportunistic on buybacks (reauthorized $500M); will approve projects case-by-case.

• Question from Steve Sakwa (Evercore ISI): Given weakness in SoCal and the government shutdown, do you view those markets differently long term and prefer lower exposure going forward?
  Response: No wholesale exit—strategy is rotational within regions (e.g., shift to Northern Virginia in Mid-Atlantic); markets are cyclical, supply is set to decline meaningfully, and long-term positioning remains intact.

• Question from Nicholas Joseph (Citigroup): Have going-in yields or transaction pricing shifted given weaker rent growth, and are there market differences?
  Response: Transaction cap rates remain largely sticky—mid- to high-4% to low- to mid-5% depending on geography—and values have held with selective buyer demand improving as long rates eased.

• Question from John Pawlowski (Green Street Advisors): Were DC dispositions around low-5 caps and what drove the repair & maintenance surprise?
  Response: DC sales averaged ~5.5% overall (residential low–mid-5s); R&M variance was idiosyncratic—a mix of higher-cost unit turns and non-repeat projects, meaning Q3 underestimated per-turn costs rather than a systemic labor issue.

• Question from Adam Kramer (Morgan Stanley): Any update on Denver lease-ups and overall development lease-up performance and renewals?
  Response: Lease-ups generally outperform with cost savings and rents above pro forma; Denver showed softness with higher concessions but one community stabilized and Governor's Park is nearing ~90% leased.

• Question from Austin Wurschmidt (KeyBanc): Do you have capital lined up for buybacks or would you need to source additional capital; are dispositions the best avenue?
  Response: Balance sheet is strong (net debt/EBITDA ~4.5x, effectively ~4x adjusted), nearly full revolver availability, $500M buyback authority in place; can fund repurchases with commercial paper and recycled asset sales while maintaining development activity.

• Question from James Feldman (Wells Fargo): How do you get visibility for guidance near-term and into spring leasing next year?
  Response: Visibility is anchored in portfolio positioning and low future supply; management is watching macro/job clarity and confidence indicators—recovery dependent on improved macro certainty and demand.

• Question from John Kim (BMO Capital Markets): What caused the higher bad debt and was it concentrated in lease-ups?
  Response: The bad-debt miss (~5 basis points) was in the same-store pool, not lease-ups; accounts are down ~20–25% vs end-2024 and management expects further improvement into 2026.

• Question from Richard Hightower (Barclays): Could there be additional lagged impacts from DOGE job cuts in D.C., and how does entry-level job weakness affect the portfolio?
  Response: Some DOGE-related impacts are likely embedded now given lagged departures; further risk exists but 2026 supply decline should help recovery; portfolio skews toward mid-30s resident age and higher value-add job markets, reducing exposure to entry-level automation risk.

• Question from Alexander Goldfarb (Piper Sandler): Why was there an economic loss on certain disposals and have you culled weaker land/sites from the pipeline?
  Response: Losses driven by 1–2 isolated underperformers (e.g., Brooklyn Bay, one NoMa asset); overall 2025 dispos basket still shows mid‑8% unlevered IRR, and the development pipeline has been deliberately focused toward stronger submarkets (e.g., San Diego, Eastside Seattle) over time.

• Question from Michael Stefany (Mizuho): Does the D.C. DOGE job-cut ripple reduce confidence in 2026 market rent growth and acquisition activity there?
  Response: Any DOGE ripple is likely being felt now; visibility remains uncertain, but management has not been acquiring in the region recently and expects supply improvement in 2026 to aid recovery.

• Question from Ami Probandt (UBS): Are remaining deliveries more urban or suburban, and if rates fall will new development concentrate urban or suburban?
  Response: Near-term deliveries are more concentrated in urban submarkets across the footprint; future starts economics currently favor suburban submarkets, though entitlements and potential office‑to‑residential conversions could alter supply dynamics.

• Question from Alex Kim (Zelman & Associates): Thoughts on the widening spread between renewals and move-in rents and implications for 2026?
  Response: Seasonality explains part of the spread, but move-in rents have been weaker than expected in certain markets (Mid-Atlantic, L.A., Denver); expect seasonal patterns to persist through year-end and to watch spring leasing for material shifts.

Contradiction Point 1

Development Yields and Market Conditions

It involves differing statements on development yields and market conditions, which are crucial for investment and strategic planning.

How do capital allocation decisions align with transaction market conditions, considering development yields and real-time transactions? - Nicholas Joseph (Citigroup Inc.)

2025Q3: Capital market pricing remains stable, with transactions yielding mid- to high 4% and low to mid-5% depending on geography. AvalonBay's disposition pricing aligns with these market conditions. - Matthew Birenbaum(CIO)

Does occupancy in the Sunbelt need to return to pre-COVID levels to support pricing power? - Ami Probandt (UBS Investment Bank)

2025Q2: We believe the investments we've made in our existing portfolio have been very attractive and will provide good returns over time. And as we look out into the future, we still believe that we can reinvest in those opportunities, that will provide good returns at the mid-4s even though the transactions may be in the 5s. - Matthew Birenbaum(CIO)

Contradiction Point 2

Job Market and Demand Impact on Rent Growth

It highlights differing perspectives on the impact of job market conditions on rent growth expectations, which are critical for revenue projections and strategic planning.

How does AvalonBay assess market visibility for the rest of the year and into 2026? - James Feldman (Wells Fargo Securities)

2025Q3: We're encouraged by the low supply levels that we see across our footprint. We're encouraged by the demand that we're seeing across our footprint. We're encouraged about the job growth that we're seeing across our footprint. - Sean Breslin(COO)

What caused the rent trend to plateau in mid-May? Why didn't the normal seasonal upturn continue? - Stephen Sakwa (Evercore ISI)

2025Q2: Demand was softer than expected, with about 100,000 fewer jobs than anticipated in the first half of the year. Weaker job growth since January and slower-than-expected job growth across the footprint are contributing factors. - Sean Breslin(COO)

Contradiction Point 3

Development Project Pricing and Yield

It involves discrepancies in the expected pricing and yield of development projects, which directly impacts strategic investments and investor expectations.

How is AvalonBay approaching future development projects and capital allocation decisions given the current environment and potential share repurchases? - Jana Galan (BofA Securities)

2025Q3: AvalonBay's balance sheet is strong, offering flexibility for capital allocation. Priorities for reinvestment in existing portfolio and $1 billion in development starts are planned, with a focus on established regions. Share repurchases are attractive when opportunities arise. The focus remains on projects with yields in the 6.5% to high 6% range. - Benjamin Schall(CEO)

Does occupancy in the Sunbelt need to return to pre-COVID levels to achieve pricing power? - Ami Probandt (UBS Investment Bank)

2025Q2: We believe the investments we've made in our existing portfolio have been very attractive and will provide good returns over time. And as we look out into the future, we still believe that we can reinvest in those opportunities, that will provide good returns at the mid-4s even though the transactions may be in the 5s. - Matthew Birenbaum(CIO)

Contradiction Point 4

Job Growth Outlook

It involves differing perspectives on job growth expectations, which are crucial for assessing market demand and occupancy trends.

How does AvalonBay assess market visibility for the rest of this year and into 2026? - James Feldman (Wells Fargo Securities)

2025Q3: We are monitoring the consensus estimate from NABE, which has come down from 2.3 million net new jobs to around a million net new jobs, reflecting some concern in terms of the economic outlook and policy impacts. - Benjamin Schall(CEO and President)

What key factors will you monitor most closely to decide on projected development starts? - Steve Sakwa (Evercore ISI)

2025Q1: We expect 650,000 to 750,000 net new jobs for the year. We will be closely monitoring this forecast and will adjust as necessary. - Benjamin Schall(CEO and President)

Contradiction Point 5

Capital Allocation and Development Strategy

It involves changes in the company's approach to capital allocation, specifically regarding development projects and capital expenditure, which are crucial for understanding the company's growth strategy and financial health.

How does AvalonBay assess markets such as Southern California and the Mid-Atlantic given recent events and long-term risks? - Steve Sakwa (Evercore ISI)

2025Q3: Low supply levels, structural trends and our core markets drive our confidence. Just because there's a short-term challenge in a given market doesn't necessarily mean we're going to back off our long-term thesis in that market. - Benjamin Schall(CEO)

How will demographic shifts affect your future allocation targets? - Jeff Spector (Bank of America)

2024Q4: We continue to focus on moving to 80% suburban exposure. The demographic shifts indicate that downtown areas are less appealing, and suburban locations will experience more demand. - Benjamin Schall(CEO)