Avalonbay Communities Inc (AVB) — Q3 2024 Earnings Call Transcript

Thank you, Melissa, and welcome to AvalonBay Communities' third quarter 2024 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 www.avalonbay.com/earnings, and we encourage you to refer to this information during the review of our operating results and financial performance. And with that, I'll turn the call over to Ben Schall, CEO and President of AvalonBay Communities for his remarks. Ben?

Thank you, Jason, and thank you everyone for joining us today. I'm here with Kevin O'Shea, our Chief Financial Officer; Matt Birenbaum, our Chief Investment Officer; and Sean Breslin, our Chief Operating Officer. Sean and I have some prepared remarks, and then we'll open the line for questions. Per our practice, we posted a presentation in conjunction with our earnings release, which we will reference on today's call. I'd like to start today's call with an update on the four strategic priorities we highlighted during our Investor Day last November. As summarized on Slide 4 of the earnings presentation, our organization has been laser-focused on executing our plans in each one of these areas, confident that they will continue to deliver superior growth for shareholders. First, as highlighted on Slide 5, we continue to make meaningful progress in transforming our operating model and driving both operating efficiencies and incremental revenue. Last November, we raised our target to $80 million of annual incremental NOI to come as a result of these operating initiatives. We are tracking on plan, including further deployments of AvalonConnect and our neighborhood operating model, as well as advancements in our utilization of AI. By year-end, we expect to add another $10 million, bringing our total achievement to $37 million towards our $80 million target, highlighting both our strong progress to date and the significant runway of future earnings we expect to deliver over the coming years. Second, we continue to optimize our portfolio's future growth through proactive portfolio management and our strategy to increase our allocation to the suburbs and our expansion regions as summarized on Slide 6. Our portfolio is now 73% suburban, up from 70% last year and well positioned in the near term to benefit from steady demand and low levels of new supply, and in the long term from shifting demographics, including aging millennials. We also continue to make steady progress toward our expansion region target of 25%, having now reached a 10% allocation. This year, we sold almost $600 million of assets, all from our established regions, half urban and half suburban, and reallocated that capital predominantly to suburban assets in our expansion regions at a very attractive basis as we look to further optimize and diversify our portfolio for the future. The third area that we detailed at our Investor Day was our unique development growth engine and our ability to consistently drive accretive external growth. As highlighted on Slide 7, our 2024 completions have meaningfully outperformed our original underwriting, achieving a 6.5% yield or 50 basis points above pro forma, generating additional earnings growth and value creation. We've increased our planned development starts for this year to nearly $1.1 billion with a projected untrended initial stabilized yield of 6.3% on these projects, which we consider to be well within our strike zone of generating 100 to 150 basis points of spread to both underlying cap rates and our cost of capital. Looking forward, we believe there could be an attractive window to further leverage our development capabilities and our cost of capital advantage to capture an outsized share of what's likely to be a lower overall level of new starts in the industry. Which brings me to our fourth strategic priority, ensuring continuous access to cost-effective capital to fuel future growth. As highlighted on Slide 8, our balance sheet is as strong as it's ever been, among the strongest in the REIT industry, and supported further by our recent forward equity activity, sourcing $850 million at an implied initial cost of approximately 5% to fund future accretive development. We committed to providing this type of follow-up to you at our Investor Day last year, and we're pleased to report out on the strong progress that we've made in each of these four strategic priorities over the last 12 months. We're confident these strategies will position AvalonBay for continued superior growth in the quarters and years ahead. And as I transition to our Q3 results, I want to thank our 3,000 AvalonBay associates for their effort, collaboration, and commitment to these strategic priorities and for delivering another strong quarter of results. Slide 9 summarizes Q3 and year-to-date results and activities with the headline being that we exceeded core FFO guidance for the quarter by $0.03 per share. We also started $450 million of new developments this quarter as part of our planned $1.1 billion of starts this year, a vintage of projects that should face less competition when they open for leasing in a couple of years. Based on our continued operating momentum, we increased our full year core FFO guidance for 2024 for the third time this year to $11.04 per share, implying a peer-leading 3.9% core FFO growth rate as highlighted on Slide 10. For our same-store portfolio, we continue to expect same-store revenue growth of 3.5% and we lowered the midpoint of our same-store operating expense estimate by 30 basis points to 4.5%, which resulted in an increase in our same-store NOI guidance to 3% for the full year 2024. Sean will now speak to our performance in more detail, our momentum in Q4, and our building blocks as we head into 2025.

All right. Thanks, Ben. Moving to Slide 11 to address recent portfolio trends. Third quarter performance was strong and our same-store portfolio is well-positioned heading into the slower leasing season. Turnover continues to trend well below historical norms, which is typically around 55% on a full year basis, driven in part by a substantially lower volume of move-outs to purchase a home in our established regions, which remains at record lows. Additionally, economic occupancy has increased from the mid-summer low point and we expect it to remain relatively stable during Q4. Turning to Slide 12, during our mid-year earnings call, I mentioned the possibility of a reacceleration in asking rent and rent change given softer comps from Q4 2023. We're now starting to see that trend come to fruition. In the chart on the left, asking rent growth during the year has followed traditional seasonal curves and outperformed our experience throughout 2023. Recently, the level of outperformance has widened, and as of November 1, the average asking rent for our same-store portfolio was approximately 3% greater than the same date last year with the East Coast roughly 4% higher and the West Coast about 2%. The higher average asking rent will flow through to improved rent change, particularly for new move-ins as we look forward. Currently, we're forecasting rent change in November to be stronger than October and increase further as we move through December. Moving to Slide 13 and the outlook for 2025 revenue growth, we expect healthy job and wage growth, a financially well-positioned renter and relatively unaffordable for-sale housing alternatives will all support steady demand for our apartment homes in the year ahead. In Chart 1 on Slide 13, renters in our established coastal regions have experienced strong wage growth over the last several years, so rent-to-income ratios have actually declined and are currently about 10% below where they were at the beginning of 2020. This is important in understanding the potential capacity of renters to pay higher rents, all else being equal. Moving to Chart 2, renting an apartment in our established regions continues to be much more affordable than owning a home with the spread being the widest we've ever seen. This lack of affordable for-sale alternatives should continue to support a lower level of resident turnover and a greater propensity for new households to rent versus own. Moving to Slide 14 and the outlook for supply, our established coastal regions are expected to see new deliveries of 1.4% of existing stock in 2025, roughly 100 basis points lower than what's forecast for the Sunbelt, which is already facing a challenging operating environment given the record level of deliveries over the past year. Our same-store portfolio will further benefit from being roughly 70% suburban, where deliveries are expected to be roughly 1% of stock in 2025. Overall, we believe our portfolio is well insulated from the impact of excessive new supply in 2025. Turning to Slide 15, I'll address the building blocks for revenue growth in 2025. First, we're projecting embedded revenue growth or the earn-in to be roughly 1.1% or approximately 10 basis points greater than where we started 2024. Second, we've estimated that underlying bad debt from residents will improve by roughly 60 basis points from 2023 to 2024, and it has improved on a year-over-year basis in each quarter so far this year. While we haven't yet completed our forecast for 2025, we expect continued improvement in underlying bad debt throughout the upcoming year. And third, we expect to again produce strong other rental revenue growth during the coming year. While we don't expect the growth rate to be quite as strong as the roughly 15% increase we're forecasting for 2024, it should still contribute meaningfully to overall revenue growth for 2025. Moving to the outlook for operating expense growth on Slide 16, we expect overall operating expense pressures to moderate as we move into 2025. In terms of some of the key drivers, the impact from the expiration of tax abatement programs, notably the 421-a program in New York City, will still be present but ease in 2025. Additionally, given our AvalonConnect offering will be substantially deployed across the portfolio, the impact on our utilities expense in 2025 will be materially less than what we experienced in 2024. Most other categories are expected to grow modestly as we look to 2025. Now I'll turn it back to Ben for some more summary comments before we open it up to Q&A.

Thanks, Sean. To quickly summarize, Q3 results exceeded our expectations and supported a further increase to our full year earnings guidance. Our outlook heading into 2025 looks healthy, particularly given the fundamentals in our established regions. We're leaning further into development, a powerful driver of differentiated earnings growth and value creation, and we will continue to execute as an organization on a set of strategic priorities that we are confident will continue to deliver superior growth for shareholders. And with that, I'll turn it to the operator to facilitate questions.

Hi, thanks for taking my questions. You mentioned that deliveries as a percentage of stock should be around 1.4% next year, which I think is down a little bit from this year. Just based on what you're seeing on the ground, your pro formas, like where do you think that percentage could go over the next couple of years? I'm just trying to understand how supply risk might change, especially as you're increasing your Sunbelt concentration.

Yes, Eric, this is Sean. I can provide some insights, and then Matt or others can add as well. Regarding our established coastal regions, we anticipate a decrease in deliveries for 2025, with the exception of New York City, which is projected to see a slight increase. While this increase isn't substantial, it does indicate some positive movement in that area. As for future trends, I want to point out that the development climate has been quite challenging for various reasons, including rising construction costs and fluctuations in capital costs, which particularly affect merchant builders in our regions. With a decrease in construction starts and the lengthy gestation period for projects in our coastal markets, it's reasonable to expect that deliveries in these established coastal regions may continue to decline over the next few years, considering the current trends in starts activity and project underwriting. I hope this addresses your question.

That's helpful. And then for the four Sunbelt apartment projects you started this quarter, could you just talk about the underwritten yields on those and how you're looking at the value creation or margin on those projects? And I guess for Austin specifically, it's certainly been a market that I think people expect supply to weigh on it for a little while. So just curious if there's something specific about that project that lets you get to a higher yield than maybe the overall market would achieve.

Hi Eric, this is Matt. I can definitely address that. We initiated four deals this quarter, all located in expansion areas, specifically two in North Carolina and two in Texas. These deals are underwritten based on current rents to yield around 6%, which is on the tighter end of our development yield range. Overall, our development starts for the year across the portfolio are trending towards low to mid 6%, around 6.3%. While this is at the lower end, it still exceeds our cost of capital and outperforms where we anticipate cap rates for our assets will be. Each deal has distinct features. For example, the project we began in Austin is on a piece of land we've owned for a couple of years, marking the first phase of what could eventually become a 1,300 to 1,400 unit garden community. The initial phase has some atypical costs, as we're front-loading infrastructure and amenities that will define this project in the market. This is our first investment in Austin, a location we've identified as a growth area for about four or five years but approached with caution until now. We're optimistic about this initial start, as we believe it aligns well with the current decline in hard costs, which have decreased by double digits compared to 18 months ago when we could have launched earlier. Considering that this asset won't be leasing until 2026, we expect minimal new competition by that time, and we're confident in the basis we've established.

I'll add a couple of additional comments to your question about our relative positioning. As we focus on external growth and development, one advantage we have is our lower cost of capital compared to private sector competitors. Additionally, we are increasingly able to achieve higher yields from our new investments, including both acquisitions and development. This improvement stems from applying our operational transformation to new projects. While this can vary depending on specific projects and submarkets, many of these initiatives allow us to generate an additional 30 to 40 basis points of yield due to our strategic capabilities.

Got it. That's helpful. Thank you.

Thank you. I guess, sticking with development, can you talk about your thoughts, your early thoughts on what's in the pipeline that you could possibly start in '25? And I guess just kind of continuing with a similar discussion with the starts you've done all-in the Sunbelt, I mean, clearly, Sunbelt is recovering from a supply glut, but who's to say it can't happen again? The Austin project certainly sounds unique, but can you just talk through how you think you can navigate development in the Sunbelt better differently than people who are facing a lot of supply here as we just think about the longer term based on the projects you're starting?

Yes, I can address that. This is Matt. When we examine our 2025 starts book, we believe there is an opportunity to increase our start volume further next year. While we’re not providing guidance at this time, we could potentially see our start activity rise to around $1.5 billion, compared to $1.050 billion this year. This increase is partly in response to what Ben mentioned, as we believe we can capture a larger share of fewer starts due to our strong balance sheet, capital position, and the capabilities we offer. This year, we expect about 40% to 45% of our start activity to be in the expansion regions, which may remain similar or slightly decrease as a percentage next year. We have a few starts planned on the West Coast where development economics have faced pressure for several years, but we’re starting to see positive signs both operationally and in hard cost savings. We might initiate a significant project in San Diego and possibly another in the East Bay. Additionally, we have a garden project in Denver, other higher yield opportunities in New Jersey, a deal in the Mid-Atlantic, prospects in Boston, and a project in Palm Beach County, Florida. Overall, the product we’re focusing on tends to be lower density garden style, which features simpler construction and is currently proving more effective. More likely, we'll concentrate on expansion regions or established regions such as Denver and Southeast Florida, where assets are generally trading above replacement costs. There is somewhat more pressure in areas like North Carolina and Texas, and outcomes are heavily influenced by the specific product type, submarket, and the unique dynamics of each site.

Okay. That's very helpful. Impressive $1.5 billion number. I guess just switching gears to expenses. We appreciate the detailed line-by-line view for next year. I guess two ways to ask the question. One is just focusing on insurance specifically, I mean, clearly a lot is happening in Florida, happened in Florida. What gives you confidence that insurance can go lower in '25? And then also just if you were to boil down this third column on the right, do you think your expense growth rate is higher or lower in '25 than '24, if you're even able to answer that question?

So Jamie, this is Kevin. I'll start on insurance and Sean will probably follow on the broader look on OpEx for next year. So in terms of insurance, this year's expected insurance expense increase of about 10%, just to kind of give you some context, it's being driven primarily by increases in property insurance premiums and losses where the premium increases from property relate to our May 2023 renewal that continued to affect us earlier this year. But we had a roughly flat property renewal in May of this year, very successful in that regard, partly due to the kind of the abatement of the decline in insurance premium pressures in that property insurance market relative to prior years. And that flat property renewal this past May provided some relief from the impact of higher premiums in this year's numbers and into next year. As we move into 2025, we just see based on what's going on in the various insurance markets that we have, a continued movement towards stabilization in program costs, as we look to renew property and other types of insurance next year such that we expect to generally renew those at more typical growth rates. Our property renewal is in May, and as you know, we have very little exposure to the high-risk areas, where there have been problems such as in Florida, where we have limited exposure to Southeast Florida where there's concrete construction and generally have more of a coastal footprint. So we've been insulated from a lot of those pressures as well. The only exception we see with respect to insurance is liability insurance, which is seeing some above average premium increases, but fortunately, liability insurance comprises less than a quarter of our overall total insurance spend. So as a result, when you put it together and look at insurance costs for next year, while it's still early, we currently expect our overall insurance costs to be more in the mid to high single-digit range for next year, which is closer to more normal levels for us.

Jamie, as it relates to the broader question about the direction of OpEx growth in 2025 relative to 2024's growth rate, yes, the purpose of the slide was to give you some general sense that we do expect the growth rate to ease in 2025 relative to 2024. And the main callouts as it relates to that are items that are relatively well known. For example, the 421-a and other pilot programs. That's about an 80 basis point impact on the 2024 overall growth rate that will diminish somewhat as we get into 2025. In terms of our operating initiatives, AvalonConnect will be pretty much 90% deployed by year-end '24. There will still be some roll-through of leases in '25, but the gross impact of that in 2024 on total OpEx growth was 120 basis points. That's the forecast. So that will come down. Just those two items alone will lead to some easing there. We don't see pressure points in the various other categories that would overcome the impact of those two items as an example. So we do expect growth rates to come down in '25 relative to '24.

Okay, great. Thank you. Very helpful.

Hi guys, thanks for the time. I just wanted to look at the kind of projection for improvement in lease growth in November and December. I guess just maybe kind of whether it's just easy comps or kind of what are the other maybe indications or things you're seeing in the portfolio today that kind of give you the confidence that, okay, things could reaccelerate here in the last two months of the year relative to October?

Yes, Adam, this is Sean. I can take that one. So first, in terms of high-level strategy for us, as I mentioned on the mid-year call, we had a nice run-up in occupancy at the beginning of the year kind of throughout the first quarter. And so we started pushing harder as it related to rate growth and we were able to do that through Q2 and most of Q3, which is the time when you want to do that given the heavy lease expiration volume, roughly 60% of our leases expire during those two quarters. So that's when you want to get it. But in terms of overall strategy then as you get into September and October, you do want to sort of stabilize occupancy as you head into the slower leasing season. So as we move through September into October, you saw that in terms of the deceleration, particularly on the new move-in side. So that was part of the broader strategy. As it relates to where we are today, occupancy is relatively stable, and as I mentioned in my prepared remarks, given the softer comp in terms of where asking rents were in Q4 of 2023 relative to where they are as of now, asking rents are about 3% higher than where they were last year. So where we are signing leases currently is presenting a nice spread on the move-in side. So as we look forward, you know, October blended rent change was 1.2%. We see it ticking up into the high 1% range for November and then the mid-2%s in December, our expectation is that all of that is really on the backs of new move-ins, which were down about 180 basis points in October, but we expect that to flip to be modestly positive in November and a little over 100 basis points in December. Renewal offers were already out. We negotiate with residents, so for the most part, what you're going to see is the improvement coming on new move-ins as we move through November and December, given where asking rents are today.

That's really helpful. Thanks for all that color. And maybe along similar lines, kind of a forward-looking question here just on the bad debt improvement. So it looks like 170 basis points is kind of the forecast for this year. I know it's still early. I know it's a tough line-item to maybe make a call or predict, but just maybe a sense of the whether it's the level of bad debt that you can get to next year or maybe the other way of asking it is just how long could it take? Will it take potentially to get back to the pre-COVID kind of bogey level of bad debt as you think about next year and going forwards?

Yes, that's a good question. It's hard to predict, as everyone's view is different and none of us can be completely accurate due to the various external factors involved. We've seen a significant improvement this year, with a decrease of about 60 basis points year-over-year. From 2022 to 2023, the decrease was 140 basis points, indicating a more substantial improvement. I anticipate that by the end of 2025, we may not return to a fully stable level but will be making good progress toward it. We gauge this by looking at the volumes of skips and evictions within our portfolio. For instance, in the third quarter, we recorded over 300 evictions, and there are around 1,300 accounts pending resolution through either skips or evictions. At the current rate, it seems we are at least a year away. I suspect it could take a bit longer, so normalization might begin more in 2026 rather than in 2025.

Thanks so much for all the detail.

Yes.

Great. Thanks. Good morning. I think, Sean, you mentioned that renewals were out for November, December, but I don't think you quoted a figure on those. Could you share that? And I guess just how much negotiation is going on kind of on those renewals today versus maybe what's happened over the last six to nine months?

Yes. I mean, what I can tell you is our expectation for November and December, I talked about the move-ins. On the renewals, we're expecting renewal achievement to be in the high 3% range for both November and December based on what we already know today that's signed as well as the expectation for negotiation spreads. So where those renewals went out, it's going to be irrelevant at this point. It's more kind of where they're trending and that's our expectation for November and December is high 3%.

Yes, that's correct, Steve. That was what our intention was when we executed the forward equity deal back in early September. It was intended to support an elevated level of development starts next year. So we don't anticipate issuing the shares under the forward this year, but expect to do so next year as we kind of ramp development starts.

Hi, thank you for the question. Regarding new starts in the expansion markets and the current yield underwriting, should we interpret this to mean that you believe rents have reached their lowest point in those areas you are developing, or do you think any further decline would be temporary?

Yes, Austin, it's Matt. I think, the reason why we underwrite on an untrended basis is we feel that that's pretty conservative that on average over time, rents grow. So we're not counting on that trending of the rents to make the deal work. We wouldn't start a deal that only works because of trended rents as opposed to current rents. So we're comfortable with our yield and our basis on those deals we're starting now in today's environment. And then it's really everybody can have their own view on what happens going forward. I would say any deal we're starting now, we're probably not leasing it for two years or maybe a year and a half. So I do think that in almost every case, we would think markets by that time should have positive momentum to them. What happens between now and then it's going to vary from market-to-market. And honestly, that's probably more relevant for our acquisitions in our development because there we are stepping into a rent roll and whether that existing rent roll has lost lease or gained lease in it, will affect our kind of short-term kind of year one yield and that in turn weighs on the IRR of the investment. So it's probably subject to a little more scrutiny on acquisitions than on development just based on the greater value creation margin there.

I want to highlight a few additional aspects regarding our approach, which we discussed earlier on the call. As we consider development yields in both established and expanding regions, we are targeting a spread of 100 to 150 basis points over the underlying cap rates, market rates, and our cost of capital. Kevin mentioned our cost of capital for next year's projects, which we've secured at a five. Over the past six months, transaction activity hasn't been extensive, but we’ve gained more insights, which has strengthened our confidence in understanding underlying values. Additionally, we have observed a decline in construction costs in many of our regions, which encourages us to pursue new external growth opportunities at this time.

Yes, both of your responses, appreciate the color there and they kind of lead into the next question on the transaction market. And just curious, are you seeing more investment opportunities within expansion markets start to come forth, and with the equity proceeds now to help fund the development capital commitments next year, does that enable you to accelerate the paired strategy, the paired trade strategy given I think there are some limitations on capital gains from annual dispositions. Thanks.

It's a valid point, Austin. To answer the latter question, yes, but not so much for the former. The transaction market remains quite limited with little activity, and we aren't observing distress. Recently, at the ULI conference, many discussed the scarcity of distressed opportunities. If asked 30 days ago, I would have said the transaction market seemed poised to finally exceed 3% and reach a healthy volume level, especially when the tenure was in the mid-3s range, which fostered optimism and confidence. However, it's a turbulent time, and with the loan rate rising significantly, we've seen a decline in transaction activity just in the past month. We still find ourselves in an environment where select assets that meet the criteria for specific buyers are trading. As Ben mentioned, we have gained more confidence in asset values, and many are seeking similar purchases, including us. However, we haven't witnessed the large-scale transaction activity we'd like, as we aim to increase portfolio trading. So far this year, we've sold $590 million and bought $325 million. We still have one more sale and hopefully another acquisition or two planned before year's end, but we anticipate ending the year as a net seller by approximately $150 million to $200 million. Ideally, we would aim for net neutrality, buying as much as we are selling. Importantly, we don't require the capital from net dispositions to support growth through development. We are pleased with the trades we're executing, as we are selling significantly older assets at higher price points that have been good investments in our established regions for years, but they lack the growth profile of what we are acquiring. Our regulatory exposure also factors into that strategy. We hope to engage in more transaction trading in 2025.

Great. Thanks for the time.

Yes, hi guys. Thanks for the time. Just looking at the lease rate growth across the markets, just two kind of stood out to me, it was Pacific Northwest and Northern California. Any kind of color you could give on maybe the deceleration going into October versus what you saw in 3Q?

Josh, this is Sean. I mean, what I say with sort of a broad-brush is, yes, new moving rent change pretty much came down in every single region. And as I mentioned, that was sort of the strategy to sort of help stabilize occupancy as we went into the slower leasing season. And the one thing I would just point to is that Seattle tends to be more seasonal than average. And therefore, as you are attempting to build occupancy, any market that is more seasonal than average, you're going to take it a little bit harder on the new move-ins relative to maybe some other markets that aren't quite as seasonal. That's really sort of the primary issue for Seattle. In Northern California, really nothing significant to note there. It's kind of a submarket-by-submarket decision based on availability and pricing and the occupancy targets. So I wouldn't read too much into it other than in those particular submarkets, we gave a little bit more to shore up on the new move-in side.

Okay. I appreciate that Sean.

There's not a lot, there's not a lot of volume, keep that in mind.

Yes, thank you. Could you provide a lost lease number?

Yes, Brad, this is Sean. We actually haven't, but overall lost lease as of November 1 is about 100 basis points across the portfolio, slightly higher in the East than the West and we're actually in a modest gain to lease situation in the expansion regions.

Okay. Thanks for that. And then you mentioned in the slides that the DFP program now covers build-to-rent. That's new to me at least. I guess, can you walk-through that addition, especially given it isn't a property type that you develop?

We have decided to formally advance our plans in the build-to-rent space, viewing it as an expansion of our existing business. We've been constructing townhomes since the inception of AvalonBay, often alongside apartment flats or as standalone townhome communities. This presents an opportunity for us to leverage our strengths in operations and development as we explore this broader range of possibilities. We are organizing specific resources around these opportunities. In the near term, we will focus primarily on townhome communities within the build-to-rent framework and pursue growth primarily through acquisitions. For instance, we recently acquired a full townhome community in Austin and are also working on the Plano project through our developer funding program. We're enthusiastic about the opportunities ahead and believe we can leverage our strategic advantages to provide substantial growth moving forward.

Okay. Thank you.

Good morning. On your building blocks for same-store NOI growth next year, I think the one item that you haven't addressed yet on this call is property taxes. Do you expect that to go down next year and this is following a year where asset values have gone up and you've increased your Sunbelt exposure where the rates are higher. Can you just comment on just why you see taxes going down next year and maybe the quantum?

Yes, John, it's Sean. The main driver and we haven't settled all of our property tax budgets yet, but the main driver that will impact the growth rate for property taxes in 2025, particularly relative to 2024 is a modestly diminished impact from the expiration of various tax abatement programs, notably the 421-a program in New York City, which boosted overall expense growth by roughly 80 basis points this year, and we expect that to come down next year. So that will move the needle, all else being equal based on what we know today in terms of changes in assessed values or rates across the other markets when you have something that significant.

Okay. That makes sense. And then on development yields, I know you typically outperform your initial projections once you stabilize the projects. But the yields on your current pipeline are now 5.9%, which is slightly lower than it was last quarter. Were there any projects that underperformed as far as rent levels or budgeted costs versus your expectations?

Yes, it's Matt. The change is primarily due to a mix shift; we had two deals last quarter with yields in the high 7s that are now out of the development bucket and classified as stabilized. We also added four deals with yields around 6%. So, the adjustment is essentially a change in the mix of our portfolio. Currently, we have a small number of projects in lease-up, about 5%, and they are still performing ahead of our projections, though not as strongly as some earlier deals this year. We are moving forward from the aggressive rent growth we experienced in 2022. These projects are running $175 per month ahead on rent and 20 basis points above yield target. We expect the 5.9% yield to increase over the next few quarters, likely moving into the low 6%s and possibly reaching the mid-6%s by this time next year as more deals initiated this year and in 2023, which were underwritten for the 6%s, complete, and as earlier deals from 2021 and 2022 roll out of the mix as their cap rates were lower and yields were around 5%.

Thank you.

Hi, thanks for taking my question. Going back to your comments on the build-to-rent communities, are you anticipating acquiring any detached single-family home build-to-rent communities as well or stick to the more townhome like product? And if so, can you give us a sense of the size of the pipeline you're evaluating?

In response to your first question, Anne, detached build-to-rent products are being considered, but they are not our initial focus. As I mentioned, we will prioritize the townhome products that align more closely with our traditional operations. We believe that purpose-built communities with 80 to 130 units each offer an opportunity, particularly since there are not many large-scale institutional operators in this sector. By managing both apartments and build-to-rent units, we see potential synergies. We have not outlined a specific pipeline or set a target percentage for the overall portfolio yet, but we are allocating resources to this area and plan to increase our focus on it over the next 12 to 18 months.

Thank you. And just moving over to construction costs that you were talking about earlier. They have been shifting down. Could you also provide a sense for how land values have trended over the last few months and the construction, the labor costs in particular?

Yes, Anne, it's Matt. Land values tend to be the most resistant part of development, and they're very localized, which makes it challenging to generalize. Last year at our Investor Day, we pointed out an example from Quincy, Massachusetts, where we purchased land for 40% less than its peak value during the market frenzy. We've observed similar trends in certain situations. In California, not much land is changing hands because it's tough to get development approved there. However, we have noticed some significant decreases in land values when transactions do occur, especially in markets where land is a large part of the overall deal capitalization. In contrast, in some Sunbelt areas like North Carolina and Texas, land constitutes a smaller portion of the deal cap, so fluctuations in land prices—whether it's 30, 35, or 40 per door—aren't as impactful. While there has been some correction, it’s not extensive, and outcomes can differ significantly between markets, though overall, there haven’t been major movements except for a few cases.

Great. Thank you.

Hi, thanks. What is the outlook for when the expansion markets could reach an equilibrium in terms of supply and demand and see a return to some pricing power?

Our expectations for 2025 is particularly the high supply submarkets in the Sunbelt regions are going to continue to face fairly meaningful pressure. And then the impact on rent rolls and cash flows for those properties in those types of submarkets would then roll over into 2026. Start volumes, as we all seen are definitely coming down. I would emphasize they're coming down in both the Sunbelt and in our established regions. So as you get out into 2026, kind of all else being equal, we do expect lower levels of supply, and I'd say sort of equal levels of demand as we think about demand drivers in our established regions relative demand drivers in our expansion regions.

Okay. And then a quick one. What assumptions are baked into the earnings calculation? Does this include your prospective rents through the end of the year?

Yes, Amy, it does based on the numbers I described previously. So yes, it does.

Hi, thanks, and good morning. It seems you're feeling more optimistic about the timing of new deliveries in 2026. What economic assumptions are you using to reach that conclusion, especially for next year? You likely have insights on the direction of the broader economy and employment that give you confidence for the year ahead. Could you provide an overview of the underlying assumptions for the upcoming year that support your confidence in 2026 deliveries? Thank you.

Sure, Rich. Let me provide some insight and context regarding our economic outlook for 2025. According to consensus views and guidance from the National Association of Business Economics, job growth is expected to slow in 2022 compared to 2024, with net new jobs decreasing from around two million to approximately 1.5 million. One notable point is that the job composition next year may change, potentially leading to more higher-income positions in our knowledge-based economy, which is our core customer base. Wage prospects for our main customers also appear strong as we move into next year. When comparing the job outlook for 2024 to 2025, we see a slight decrease in job growth alongside a decline in supply. However, market conditions across the country regarding job and supply ratios seem fairly consistent. Looking ahead to which markets might outperform next year, those with lower levels of new supply are likely to excel, while markets with higher levels of new supply may face more challenges.

What are the positive factors for investing in multifamily properties next year? You seem to have some solid economic insights and an overall optimistic outlook, while Equity Residential characterizes the situation as good, which is reassuring. However, I wonder if next year will simply be stable without significant movement, or if you believe the outlook for the year is more promising as we look ahead to 2026 and 2027.

Yes, Rich, I want to highlight a couple of areas. First, we expect our suburban coastal business to continue to perform well. If you consider the foundational elements and factors we've discussed as we head into next year, and what Sean elaborated on, we feel quite positive about that. The second aspect is our focus on external growth. We've mentioned our development activities and the progress we've made, as well as the opportunities in the transaction markets. I believe that with improved visibility and stability regarding rates and cap rates, we can expect increased transaction activity. As I consider our prospects for next year and into 2026, our size, cost of capital, and ability to create additional value through our assets should enable us to pursue external growth more aggressively.

Hi, good morning. Two questions for you. And maybe first, just following up on Rich's question. It's been five years since we've had a normal leasing market in apartment land. As you guys look to 2025, do you think it will be back to a normal leasing market or do you think there will still be some anomalies in what we see as we go through 2025?

Hi, Alex, it's Sean. When you said normal, just kind of normal seasonal patterns of pricing is what you mean specifically, I assume?

Yes, 2020 was affected by COVID, and things have been unpredictable since then.

Yes. For the most part, the pricing curves are generated based on demand patterns. We expect that the traditional seasonal demand patterns are unlikely to change anytime soon regarding why people move, when they want to move, and their preferences for apartments. There are two unusual factors that may not have fully played out yet, particularly in our coastal markets: the trends of returning to office work and the impact of job and wage growth that Ben discussed. The return to office trends have certainly improved, but we might not have experienced the full effect across all coastal regions as people gradually adapt back to what feels normal. The announcements from companies like Amazon and Salesforce about bringing employees back to San Francisco in January are certainly positive and help build confidence in the city, alongside other issues in places like Los Angeles and D.C. Additionally, the lack of affordable for-sale housing in our established regions has resulted in a significant gap between the costs of owning a home and renting. It's difficult to predict how these factors will fully play out, but they are currently in motion. We can observe this in the return to office trends and on the for-sale side, which is reflected in lower turnover. We believe this trend will be durable for a while, and as new households form, renting still appears more attractive compared to historical norms. Therefore, while the seasonal patterns may not seem different, they might offer additional support for growth in established regions relative to what we've seen historically.

The second question is on site selection, clearly, especially here in the Northeast, lower Westchester, New Jersey have had a lot of floods. As you guys look throughout your existing markets and expansion markets, have you seen a change in the land that you're looking at as far as land that years ago was not considered flood area is now considered and therefore, your site selection has changed? I'm curious if in fact, your site selection has changed based on how you know some of these rivers and such are overflowing with storms.

Hi, Alex, it's Matt. For us, I'd say for at least the last six or seven years, we actually do have a pretty formal process for that where every site gets run through a third-party coastal risk model. It's actually a resiliency risk model, which tries to capture wind, flooding, pluvial flooding, fluvial flooding excessive heat, wildfire risk, all those different things. So I'd say we were early adopters of that. And so there are probably sites we've passed on that maybe today would be harder for somebody to get financed than would have been the case five years ago. And we did switch vendors to a more robust reporting format on that, but we've always been pretty mindful of that.

Thank you.

Hi, guys. Thanks for taking the questions. I have two quick ones here. First, I guess is, can you talk a bit about the year-to-date performance of your East versus West Coast markets versus your initial expectations and some thoughts on the relative opportunity ahead in the East Coast markets? Boston, New York, D.C. have been very strong this year, but have tougher year-over-year comparison next year, while some of your West Coast markets, San Francisco and Seattle have easier comps and some RTO upside as you outlined, but less clarity. Thanks.

Yes, Haendel, this is Sean. I'll provide a little bit of color there. Yes, certainly what I'd say for this year is we've seen better performance out of Boston, New York City, specifically of the New York, New Jersey region, and the Mid-Atlantic to a certain degree and then also in the West Coast Seattle. In terms of the outlook for those markets, yes, the earn-in, if you want to describe it that way, it certainly is a little more robust in those markets relative to others. So all else being equal, in terms of, as you said, if everything else was equal in terms of rent change across the markets, those ones would outperform in 2025 relative to 2024. But to the extent you see significant momentum due to other factors in the various other markets that haven't performed as well as those in '24 that can certainly overwhelm the earn-in pretty quickly. So I think it's really a reflection of how you want to look at what the job growth expectations are for a particular market, how it blends with supply and then these other trends in terms of for sale housing and return to office and how that they play out. That would really impact the performance in '25 in terms of who is top of the leaderboard versus not?

Would you care to quantify some of that earn-in for those East versus West Coast markets or perhaps weight?

Yes. I mean, we can look at it. I mean, I give an overall number of 110 basis points. The earn-in on the East is about 130 basis points and the earn-in on the West is about just under a point, it's around 94 basis points, 95 basis points. And it's a forecast. So things can move around a little bit here. And then as I mentioned earlier, as we were talking about lease-to-lease, loss-to-lease, or gain-to-lease as it relates to our expansion regions, it's actually a little bit negative around 20 basis points.

Got it. Appreciate that. And then one more if I could, just on the other income. I think it's up 15% or so this year, another 10%, I think you outlined for next year. I guess I'm curious on what's the remaining opportunity there, what's driving those numbers into next year? And then how should we think about the associated costs related to some of the initiatives that you'd be rolling out next year? Thanks.

Yes, I have no problems addressing that. We do anticipate a slowdown in the growth rate for other rental revenue in 2025 compared to 2024, based on our current knowledge. Several categories are showing above-average growth, but the main contributor has been our AvalonConnect offering, which will still be active in 2025. We have set programs in place for this, and it will be approximately 90% deployed by the end of 2024. Revenue will start to flow in as leases expire in 2025, since it can't be recognized while tenants are still under existing leases. This is the primary factor driving growth. Regarding operational expenses, as mentioned earlier, we expect an impact of about 120 basis points on total OpEx growth in 2024 due to some initiatives. However, we believe this impact will significantly decrease in 2025, as the program becomes more fully deployed and affects fewer units.

Got it. Appreciate the color.

Hi, thanks for taking my question. Just on the view of that like effective rent is reaccelerating into year-end, does this hold into January too? The chart on Page 12 looks like the comparisons stay reasonable in January. Would you expect new lease growth to be positioned to be positive as well?

Yes, Linda, we haven't provided a forecast yet for January as we're sort of still working through that. We felt comfortable doing that for November, December just given the volume of lease expirations in those months, what we already know about it and the shift in asking rents more importantly. So we're not providing that for January, but feel good about what we did provide for November and December.

Yes. And then just on BTR, how would yields differ between townhomes over, say, single detached? And then from the perspective of resident preferences, where do townhomes sit between traditional multifamily and single attached homes?

Yes, hi Linda, it's Matt. It's still too early to determine because this is a relatively new and rapidly growing area of our rental housing business. However, based on our experience with the townhomes we own and what we've observed from third-party sources, the yields don’t seem to differ significantly, and the cap rates likely aren’t very different either. Regarding the customer base for single-family homes versus townhomes, it begins with location. Townhomes are typically found in more urban areas where land is too valuable for larger lots, leading to developments with 10, 15, or 20 units per acre. As you move further from urban centers, there's more available land for true detached single-family homes. I haven't noticed a large difference in the customer demographics, though some buyers, especially empty nesters, might find a three-story townhouse to be excessive. Families with children may prefer larger yards. We do have a number of townhome build-to-rent properties that include their own yards and garages, which is important to many residents. The community we just started in Plano includes both yards and garages. There are likely subtle differences in customer preferences based on life stages. The quality of the school district is probably more significant for single-family homes than for townhomes. Nonetheless, this is just the beginning, and we will gain more insights as we roll out more of this product.

Thank you.

Hi, thanks for taking my question. I wanted to ask about your apartment renter base. Have you seen any demographic shifts recently as millennials continue to age and move-out to buy remains low? How are the younger age cohorts showing up in your portfolio?

Yes. So this is Sean. I wouldn't say there's been any meaningful shifts recently. Obviously, as we went through COVID and then initially started coming out of COVID, there was a lot of movement initially in COVID, not as much doubling up, more single-person households. All those things have sort of transitioned through COVID, I'd say have stabilized at more normal levels, the percentage of roommates, et cetera. So I don't think there have been any significant shifts. I think as you look forward, just given the nature of demographics and some of the development Matt was talking about, I think, being more heavily suburban, some of the townhome products certainly fits the aging millennial profile where they want to be a little more infill in our established regions. It's very expensive to buy a home. So if they get a nice quality townhome product with a small yard or a nice deck and be in a good school district, that's highly attractive. So we are making sure our portfolio is well-positioned for the demand that's to come, which may represent slightly larger households when you include kids in some of these markets than what we've seen in the past. But looking at it over a short period of time, you get a lot of false signals in terms of just some noise in there that I wouldn't necessarily say has really resulted in anything significant in terms of shifts in the last few quarters.

Got it. Makes sense. And then switching gears here to bad debt. You mentioned that you anticipate bad debt to continue to improve in 2025, I mean, can you talk about which markets are driving that change specifically or may have more runway for improvement as well? Thanks.

Yes, happy to do that. I mean the regions with the greatest opportunities, I'll say top four or five New York, New Jersey, particularly the New York City market, still running in the low 2% range. The Mid-Atlantic low 2% range as well, particularly the D.C. and Maryland being the outlier issues relative to Virginia actually doing pretty well, a little bit in Northern California still running high relative to historical norms, but it's about 125 basis points. LA still running a little over 2% with LA and Ventura being the issues there within Southern California, Orange County, San Diego, getting closer to norm at 70 to 90 basis points. Virginia, as I mentioned, around 70 basis points. Boston is back to 60%, so it's really New York, New Jersey, the Mid-Atlantic and then to a certain degree, Northern California and LA are the markets where we need to see more significant improvement as you move through 2025.

Thanks for the color.

Thank you everyone for joining us today and we look forward to seeing many of you shortly at Nareit. Have a good day.