Avalonbay Communities Inc (AVB) — Q2 2025 Earnings Call Transcript

Thank you, Zeco, and welcome to AvalonBay Communities Second 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 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 will 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 joined by Kevin O'Shea, our Chief Financial Officer; Sean Breslin, our Chief Operating Officer; and Matt Birenbaum, our Chief Investment Officer. Starting with our key takeaways on Slide 4 of our earnings presentation. Our second quarter and first half of the year results exceeded our initial guidance. As Sean will discuss further, our revenue growth was better than expected through the first half of the year, with higher occupancy and other rental revenue growth driving most of the favorable variance. We also benefited from tight management of operating expenses, which contributed to our same-store NOI outperformance during the first half of the year. As Kevin will detail, these operating expense savings carry through to our updated outlook for the year with OpEx growth now forecasted at 3.1%, 100 basis points better than our original guidance, translating into higher NOI growth in 2025, now projected at 2.7%. While our expectations for job growth in the second half of the year are a little more muted than they were in January, demand remains healthy across most of our portfolio. Importantly, new supply in our established regions continues to decline to levels not seen in over a decade. This low level of supply should continue for the foreseeable future given that the barriers to new development, particularly in our suburban established regions are substantially greater than most markets across the country. As Matt will further discuss, our $3 billion of development projects are expected to continue to generate differentiated external growth with our development underway trending above our pro forma stabilized yields. While we experienced some timing delays in occupancies in the first half of the year, we expect to occupy roughly the same number of homes by year-end. Looking ahead to 2026 and beyond, this unique book of business will generate meaningful incremental earnings and value creation and is one of the primary reasons we continually produce core FFO growth in excess of our same-store NOI growth. We're also making strong progress in advancing on our portfolio allocation objectives. We're well on our way towards our target of acquiring $900 million of assets this year, most of which is being funded by capital from dispositions, a continual process that we're confident will position the portfolio for stronger cash flow growth over time. And lastly, on the key takeaways. Our balance sheet is in terrific shape, having raised $1.3 billion of capital year-to-date at an initial cost of 5.0%. An attractive cost of capital relative to our uses, particularly to yields of north of 6% on new development projects. Page 5 highlights our Q2 and first half of the year metrics, including core FFO growth of 3.3% year-to-date, continuing to position us towards the top of the sector. We also started $610 million of new development projects in the first half of the year and have now raised our target to $1.7 billion for development starts for the full year, up from $1.6 billion. We continue to believe that we are uniquely positioned to secure an outsized share of what will be a lower level of starts in the industry, utilizing our strategic capabilities to execute on high-quality projects on an attractive long-term basis. Page 6 provides the roadmap for our second quarter core FFO of $2.82 per share relative to guidance of $2.77 with revenue exceeding by $0.02, operating expenses better by $0.05, partially offset by lease-up NOI and overhead. Please note that $0.02 of the $0.05 of the lower-than-expected operating expenses were timing related, which we now expect to incur later in 2025. As shown on Slide 7, we head into the second half of the year with very healthy occupancy in our established regions, with total market occupancy at 94.8%. In contrast, market occupancy in the Sunbelt region stands at 89.5% as those markets continue to struggle with elevated levels of standing inventory from recent deliveries. Our established regions are also well positioned from a new supply perspective with deliveries expected to drop to 80 basis points of stock in 2026, further supporting healthy operating fundamentals. Before turning it to Kevin, I want to take a moment to say thank you and congratulations to Jason Reilley. This is his last earnings call before his retirement from AvalonBay later this summer. After 21 years at the company and over a decade as our Head of Investor Relations, Jason has been an integral partner with the executive team here and a thoughtful resource to the investment community shaping the dialogue for AvalonBay and for the wider multifamily REIT sector. Jason has also been a strong developer of talent, including most recently with Matt Grover, who will now be stepping in to lead our Investor Relations team. Many of you know Matt from his prior roles on the buy side and for the last 3-plus years at AvalonBay. Congrats to Jason on his retirement, and we all wish him well in his next stage. I'll now turn it to Kevin to further discuss our updated outlook.

Thanks, Ben, and congrats, Jason, and excited to have Matt in the elevated role. Turning to Slide 8. We present our updated operating and financial outlook for full year 2025. We are maintaining our full year core FFO per share guidance which at the midpoint is $11.39 per share, reflecting year-over-year earnings growth expectations of 3.5%. Our updated outlook reflects slightly higher same-store residential NOI growth offset by modestly lower lease-up NOI and the net impact of capital markets activity, transaction activity and overhead cost changes. We now project same-store NOI growth of 2.7%, which is 30 basis points above our initial outlook. This improvement is driven by a 100 basis point reduction in expense growth, partially offset by a 20 basis point decline in revenue growth. We've also modestly increased this year's development starts to $1.7 billion, up from $1.6 billion, and we've opportunistically completed our capital plan for the year at an attractive initial cost of 5%. While our full year guidance for core FFO per share remains unchanged, Slide 9 highlights the impact on full year growth from updated expectations for key parts of our business as compared to our initial outlook. Specifically, a $0.04 increase in same-store residential NOI and a $0.02 benefit from capital markets and transaction activity are expected to be offset by a $0.04 decline in NOI from new development and a $0.02 increase in overhead and other items. And again, this results in an unchanged expectation for full year core FFO per share of $11.39 per share in 2025. Slide 10 provides a bridge from our second quarter core FFO per share to our projected third quarter midpoint. As is typical seasonally in our business, we expect sequential increases in same-store revenue and operating expenses as well as a continued ramp in lease-up NOI during the third quarter. In particular, we anticipate a $0.03 increase in same-store revenue, a $0.02 increase in NOI from new development and a $0.01 benefit from capital markets and transaction activity and other items will be offset by an $0.08 increase in same-store operating expenses driven by sequentially higher repairs and maintenance, utilities and property taxes. Turning to Slide 11. We also provide the components of our expected sequential increase in core FFO per share during the fourth quarter. Here again, we expect to benefit from typical seasonal sequential patterns in our business during the fourth quarter, including a $0.03 increase in same-store revenue, a $0.06 decrease in same-store operating expenses, a $0.04 increase in NOI from new development and a $0.01 benefit from capital markets and transaction activity and other items. 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 12. Our updated outlook for same-store revenue growth is slightly below our original expectations, driven by a change in our same-store pool and underlying bad debt. The change in the same-store pool is primarily related to the pending sale of 4 assets in the District of Columbia in Q3, which Matt will talk about in a minute. In terms of underlying bad debt, which can be difficult to forecast, we've seen steady improvement over the past year, but are expecting it to be modestly unfavorable to our original budget. In terms of rate and occupancy, we're expecting lease rate growth to be 10 basis points below our original forecast, but fully offset by higher occupancy. Turning to Slide 13. Our same-store average asking rent exceeded our original expectations through May, but peaked in June earlier than our original outlook, which is contributing to the roughly 10 basis points lower contribution from effective lease rates noted on the previous slide. Shifting to bad debt. As noted, the pace of improvement year-to-date has been modestly below our initial outlook. So we have adjusted our expectations for the second half of the year to reflect recent trends. Most regions are moving in a positive direction, but we continue to face some challenges regarding the impact of regulatory actions and overloaded court systems in portions of the Mid-Atlantic and New York, New Jersey regions. Moving to Slide 14 to address our updated revenue outlook by region. We expect the New York, New Jersey and Seattle regions to outperform our original budget. Demand has been healthy in both regions with moderating supply supporting better pricing power and occupancy. In New York, New Jersey, our same-store portfolio averaged 96.3% economic occupancy during Q2, up about 30 basis points from Q1 with positive pricing trends across most of the suburban submarkets, which represent about 2/3 of our portfolio in the region. In Seattle, we averaged 96.6% economic occupancy during Q2 and achieved greater than 3% rent change. We continue to see a reduction in the pace of new deliveries in the region, and the outlook for the second half of the year is positive. The Mid-Atlantic, Northern and Southern California and our expansion regions are projected to underperform our original outlook, while Boston is expected to be in line. The Mid-Atlantic had a strong start to the year, but we've seen some softening in demand and pricing momentum over the last 60 days, most notably in Maryland and the District of Columbia. Northern Virginia has held up well thus far and produced mid-4% rent change during the second quarter. Given the level of uncertainty in the region, we've responded with a more conservative approach to pricing, which is impacting our outlook on rates for the second half of the year. In Northern California, San Francisco continues to lead the region with almost 97% occupancy during Q2 and strong rent change of 8%. San Jose remains healthy with mid-96% occupancy and rent change in the 3.5% range for the quarter. The East Bay is the laggard in the region, but will likely gain momentum later in '25 and '26 as performance there typically lags behind both San Francisco and San Jose. Looking forward, the volume of new supply in the Bay Area is expected to be the lowest of any of our regions at roughly 30 basis points of total inventory through 2026. So the overall outlook for the greater region is quite healthy for the next several quarters. In Southern California, our expectations for full year revenue growth have moderated due to continued weakness in the labor market across L.A., particularly in the entertainment industry. The increase in the state's film and tax credit program, which was adopted in late June, resulted in a more than doubling of the program from $330 million to $750 million to support the production of television and film in the state. It will hopefully provide a much-needed boost to the local economy. Now I'll turn it to Matt to address our development and investment activity.

All right. Great. Thanks, Sean. Looking at our current lease-up activity, as Kevin mentioned, we now expect development NOI for the year to be modestly lower than our budget at the start of the year. This is due to some delays in deliveries at several communities, as shown in the chart on the left on Slide 15 as well as slower leasing velocity at 2 Denver communities where we completed construction late last year. We completed at least 330 fewer homes in total in the first half of the year than we expected, with most of those now expected to be absorbed in the second half, delaying the NOI uplift as these homes start to generate revenue in the fourth quarter and into 2026. With this reduction in 2025 lease-up NOI, the projected increase for '26 should be that much greater as we still expect to occupy 3,000 additional homes next year. Importantly, these delays are not impacting the overall profitability of our development activities, as shown on Slide 16. Our $2.9 billion in development underway is completely match-funded, was underwritten to a yield on cost of 6.2% based on estimated market rents at the time of construction start and continues to reflect outperformance relative to that initial underwriting as communities enter lease-up. Our long-standing practice is to report rents on our development underway at the initial untrended underwriting until we have leased about 20% of the homes, at which point we mark the rents to current market levels. Only 3 of the 21 communities currently underway have reached that point as of the end of Q2, but we are running 30 basis points ahead of pro forma on those 3 based on modest rent outperformance of $80 per month and some hard cost savings from the initial capital budget. We do have another 7 communities, which are just starting lease-up in the second half of this year, and we expect this trend to continue at those projects as well. Six of those 7 have set their opening rents, which are 3% above pro forma, and many of those are also likely to finish with savings in their capital budgets. And the 11 communities that won't start lease-up until 2026 or '27 are continuing to see encouraging early savings on their construction buyout. Turning to Slide 17. While Q2 was a quiet quarter for us on the transaction front, we have a number of pending transactions expected to close in the third quarter. This includes almost $600 million currently under contract for sale with those proceeds used to fund $295 million in pending acquisitions as well as to fund the cash component of the Texas acquisitions we completed last quarter. This increased trading activity further advances our long-standing portfolio allocation goals as we reallocate capital within our portfolio from older urban assets in our established regions to younger suburban assets in our expansion regions. The pending dispositions include 4 assets in the District of Columbia as well as communities in Seattle and New York. Executing on asset sales in D.C. is particularly challenging and hard to predict due to the unique Washington D.C. TOPA law. While these transactions have been in the works for an extended period of time dating back to 2024, the unusual level of uncertainty of the process led to these assets being included in our same-store bucket at the beginning of the year. Now that the timing is confirmed, they've been removed from same-store, driving 10 basis points of the reduction to our projected same-store revenue growth rate, as Sean mentioned. We look forward to providing more detail on all of these transactions after they close. And with that, we're ready to open the line up for questions.

It's Nick Joseph here with Eric. Maybe just on the delayed occupancies and development. You mentioned the Denver communities. So I was just hoping to get a little more color on what's impacting the pace there and kind of what's the normal leasing pace versus what you're seeing?

Sure, Eric, it's Matt. The pace has been fine. In the second quarter, we averaged about 30 homes per month in leasing, which aligns with our expectations for this time of year. The shortfall is partially due to some deliveries being pushed to later in the year at certain communities. We have one lease-up in particular at Governor's Park in urban Denver, where we've had to offer higher concessions and the pace is not what we initially expected. That area is quite competitive within urban Denver. We also have a second lease-up in Westminster, a suburban part of Denver, which is going well but is slightly behind pace, although not as much as Governor's Park. Additionally, we have a lease-up in suburban Maryland that is also experiencing some elevated concession activity. Overall, these issues are limited to those two markets. However, many of the new lease-ups we are opening are in strong markets, and we're seeing good traction in the rest of our portfolio.

And just given the peak leasing season seem to have occurred a little sooner than expected and maybe the deliveries are a little later than expected for some of these. So what gives you the confidence by year-end you'll have the same number of occupied units if traffic maybe slows down a bit from missing the peak leasing season?

Yes. Nick, it's Sean. As Matt noted, we've had pretty good velocity at the various communities averaging around 30 a month, even at Governor's Park in Denver, which is sort of in the middle of the battle zone with a lot of supply in urban Denver, we did 35 a month in the second quarter. So just when you get things a little bit late from a delivery standpoint, you got to push a little harder on concessions to try and get that velocity, so that's kind of the simple answer as it relates to the deliveries and then we'll lag the occupancies.

This is Matt. I would also like to mention that when looking at the market mix for expected occupancies in the second half, a significant number are in the new lease-ups we've discussed. For instance, we just started leasing in South Miami, and we are performing better than anticipated there. We also recently opened in Wayne, Northern New Jersey, and have another project about to launch in Parsippany, New Jersey. These markets are demonstrating a lot of strength.

Yes. I guess I wanted to talk about the chart on, I guess, Page 13, the asking rent trend. And obviously, there was a clearer noticeable kind of leveling off in sort of the maybe mid-May timeframe. And I guess I'm just curious, from your perspective, what do you think happened there? And why do you think things softened up or didn't continue that normal seasonal upturn?

Yes, Steve, it's Sean. I'm glad to discuss that. From the chart, you can see that we were performing better than expected for much of the first half of the year. However, what we've noticed is that demand has softened a bit, mainly due to slightly weaker job growth in the first half of the year than we initially forecasted. When we examine the broader trends for that period, we ended up with approximately 100,000 fewer jobs than we had projected. This is likely the main factor. Typically, such changes don't immediately reflect in the data, but you can observe it in the current job growth figures we have.

Okay. And then maybe just focusing on bad debt. I mean, your figures are still running, I guess, noticeably above many of your peers. And I'm just wondering I don't think that's necessarily a market mix issue. So I'm just trying to kind of figure out why your portfolio might be having a little bit more headwind here and not recovering as quickly as some of the other portfolios.

Yes. Steve, happy to chat about that one. I mean, first, what I'd say is that I can't speak to everyone else's policies as it relates to bad debt, what they reserve for, what they write off, et cetera. But I think as you probably know, and we've stressed in the past that with our customer care center in Virginia Beach, number one, we pretty much charge for everything that is due to us under the course of the lease or under the terms of the lease. So that includes not only rent, it includes late fees, it includes utilities, includes everything else. So there could be an issue there where we're charging just in absolute dollars more than potentially others. And two, what I would tie it to for us in terms of the pace of improvement being good but not as good as we expected is we have seen things back up and actually increase in some cases in terms of the time to evict across portions of New York and the District of Columbia and Maryland, those particular jurisdictions. Now we might have a little bit greater footprint in terms of the suburban markets around New York, but New York City is also a challenge as well. So again, I can't speak to everyone else, but I can tell you that we charge everything we can charge for. And those are the primary reasons in those specific regions that are slightly unfavorable to our initial outlook.

Zeco, move on to the next caller.

I guess just following up on the chart on Page 13. So can you talk about what this means for your 3Q and 4Q blends in your outlook? And then also, as we think about earning into '26 and your view on year-end rents, how much do you think this change in your outlook affects your '26 earning?

Yes, Jamie, it's Sean. I mean, given we're sitting here in July, I don't think we're really prepared to talk about the earning for 2026 yet. But what I would say in terms of blends is that we're essentially expecting what we saw in the first half to continue through the second half of the year in terms of overall rent change performance. So that's the current expectation.

I was just considering how much the change would affect the earnings number for 2026 compared to what you initially expected, based on the data presented in the chart.

We haven't analyzed that yet. You can try to estimate it based on lease expiration volume, but there's still a significant amount of leasing work to be done. There are many variables involved regarding the mix of lease terms, so it's premature to accurately estimate the potential impact at this stage.

Okay. So maybe I'll ask a better question. You're a couple of months into the Dallas acquisition, can you talk about how it's going? What's better than expected, worse than expected? Just any kind of feedback on that deal.

Yes. When I say at this point in time, as you know, we're only 2 or 3 months in here, but things are trending pretty much as expected as of now.

I'll add to that, Jamie, I think we're tracking well. We have been investing more resources in our asset management function. That group has been taking a more active role in the implementation of the portfolio. Additionally, we're definitely seeing the scale benefits in that market, particularly in Dallas, and just what it brings to our larger ecosystem down there.

Just going back to the asking rent growth curve this year, which markets really dragged on that specifically? And I guess what do you think really you need to see? Is it just a pickup in job growth to kind of get back to that same steepening in the curve that you saw last year and sort of in the pre-COVID period you outlined?

Yes, Austin, good question. I mean I'd say, as I mentioned earlier, first, fundamentally, in our mind, it is a job growth issue. When you look at it across the various regions, it's pretty apparent that the job growth being slower than anticipated is pretty broad-based. I'd say at this point in time, the regions where we're expecting underperformance to be most material relative to our original outlook, when you start thinking about rent change and revenue performance, are really the Mid-Atlantic and Southern California. I think we've all talked about L.A. We talked about L.A. in the first quarter call. We talked about it at Nareit, continues to kind of be more of the same in terms of relatively stable occupancy but not a lot of pricing power there given the weaker job environment to push rents. And then more recently, as I mentioned in my prepared remarks, on the Mid-Atlantic, which in the last 60 to 90 days has softened up most notably in the district and in suburban Maryland. I'd say those are the 2 that kind of stand out the most in terms of expectations coming down relative to our original outlook when you look across the footprint.

That's helpful. And I guess, how much is really that trajectory of market rents along with maybe the attractiveness of your cost of capital or certain aspects of your cost of capital today impacted your thoughts about sort of future starts given also kind of the backdrop. Ben, you referenced supply is at levels not seen in a decade as you look out over the next year?

Austin, as we think about starts for the remainder of 2025, we're in a fortunate position in that we've prefunded that capital, and we prefunded it at an attractive cost of 5%. And so as we're looking out thinking about our development yields relative to both that cost of capital and where we're seeing underlying market cap rates, which are still in the high 4%, 5% range. This feels like a sufficient spread as we think about generating incremental value as it relates to development. Other aspects that you've heard Matt talk on, we are seeing some pretty meaningful buyout savings. That started in certain regions. I'd say it's now kind of gravitated more broadly across the country. So as we get to the stage of actually starting construction and buying out these deals, we're getting that long-term basis lower. And then this is a cohort of projects that also, given that starts are coming down when they open in a couple of years, we'll be facing less competition. So we feel good about this book of business for the remainder of 2025. As we get into 2026, cost of capital that does look different today, right? And so as we always do, focusing in on the 100 to 150 basis points of spread and making sure that we remain nimble and continue to adjust based on what we're seeing in the market.

I think you guys referenced maybe a little bit softness in D.C. in recent months. Wondering if you could maybe just double-click on that. What exactly are you seeing in the market, right? I think it's sort of surprised to the upside earlier in the year, maybe surprised with it stability early in the year. What sort of changed there? Is it resident uncertainty? Is it sort of more concrete job loss? And I guess just maybe also unpack what's happening in D.C.

Yes, Adam, I’m glad to address that. I believe it’s influenced by several factors regarding what we’re observing on the ground. As I mentioned before at Nareit, we are having numerous discussions with current residents during renewal time about their lease options ahead, including the lease terms they can sign, what happens if they lose their job, the lease termination options and associated costs, and what to do if they need to move to another apartment. There seems to be some apprehension from residents, leading them to delay their commitments as they seek to maintain flexibility. Our centralized renewals team is reflecting this trend in how they are closing those renewals. Additionally, we've noticed an increase in concessions, especially in suburban Maryland submarkets and Washington, D.C., as the market appears to be adjusting for what might be weaker demand. Moreover, job growth has not met expectations. Therefore, you have a behavioral aspect where people are anticipating some weaknesses and potential impacts on the job market, coupled with actual activity reflecting the lack of jobs. This confluence of different factors is contributing to the situation.

Got it. That's helpful. And then maybe just maybe more of a sort of geopolitical or public policy question. But obviously, the mayoral primary in New York, the CEQA sort of situation in California. I'm wondering, maybe just high level your thoughts on each of those. And what it might mean for you guys in terms of your exposure to each of those markets?

Yes. In terms of the New York situation, I'm happy to talk about that one. I mean, you never know exactly what's going to happen there. So you can't speculate on what's going to happen politically. But what I'd tell you is in terms of rent stabilized units, nothing would take effect for a while. It's going to be '26, '27, if there was anything done. But in terms of our rent stabilized portfolio, it's about 2,100 units. So there could be potentially some impact on that population of units depending on what the actions are that are taken. As it relates to CEQA, Matt can chat about the development impact.

Yes. The CEQA reform is part of a series of actions from the California legislature over the past five to seven years aimed at promoting housing production and minimizing local barriers. It's crucial to note that the CEQA reform does not increase the number of sites available for multifamily development; it only applies to areas already zoned or planned for multifamily use. Therefore, the approval process remains the same, requiring zoning and site plan approval. However, California also imposes an additional requirement to demonstrate compliance with CEQA, which can be quite costly and time-consuming, often involving lengthy reports that local jurisdictions may struggle to review. We believe this reform will help speed up our development pipeline in California by reducing costs and time delays, allowing us to start projects sooner. Nevertheless, we don't think it will significantly change the medium-term supply outlook for California, as the area remains largely supply-constrained.

Matt, looking at Slide 16, and I appreciate your comments earlier about sort of the way you quote development yields prior to stabilization a little bit more conservatively. But if I look at that bucket that is kind of not as seasoned at the moment and you simply mark that to market today. I mean what does that yield uplift look like relative to the sort of low 6 number we see in front of us?

We typically don't assess the market value until we're preparing to begin internal leasing, and we don’t do so externally until it's confirmed through the 20% leasing. Regarding the 11 projects that won't start leasing until 2026 or later, we haven't evaluated them yet. However, considering the market distribution and their locations, we do know that costs are likely to come in lower than expected based on current estimates. There is still a year and a half to two years before these start leasing, so the future of market rents is uncertain. I would not say the market rents for these projects are lower than when we originally evaluated them. The locations show that market rent growth has been relatively flat over the past year, but these deals did not start in Austin at the peak three years ago when rents have decreased by 15%. We haven't encountered situations like that.

Right. Yes, that kind of answers my question. Okay. And then secondly, if I look at same-store like-term effective rent change in the supplemental and I look at the other expansion regions. So this is a question for Sean, really. It looks like trends kind of went the opposite direction that might have been expected Q2 sequentially versus Q1. And I think that's maybe a little bit in contrast to some other, I guess, Sunbelt reporters, peers of yours in the space in terms of the trends in their blended rents for 2Q relative to Q1. So obviously, this is a small sample size relative to those other pools. But just what happened there? And obviously, it bounced back in July as well. So that's encouraging. But what happened during the 2Q specifically, if you don't mind?

Yes, I'm glad to discuss that. Regarding our expanded regions, as you've mentioned, we have a small sample size. However, based on the supply available, we've prioritized maintaining stable occupancy levels and have taken a slightly defensive approach rather than being aggressive with rent increases. This reflects our strategy. While I can't comment on how our peers' portfolios are distributed, the rent adjustments we made were necessary to meet our occupancy goals in those regions. Each area has its unique supply factors; for instance, the South End of Charlotte continues to see significant supply, which is likely to persist for the next three to four quarters before it tapers off. Thus, with our limited data, we need to assess each submarket individually, as some do experience rental pressure. This is what influences the rent adjustments needed to maintain our targeted occupancy levels.

On the pending D.C. asset sales, I think, Matt, you mentioned that you started marketing that last year. I'm wondering how...

Better?

Sorry about that. On the 4 D.C. asset sales, Matt, you mentioned that you started marketing those last year. I was wondering if you could discuss how pricing has changed during that timeframe.

I don't know. D.C. specifically is a very difficult market to sell assets in, maybe the most difficult in the country with the way their TOPA law works there. So there's not a lot that does trade there. There were a couple of recent trades that closed in D.C., I think one that closed a month or so ago that may be JBG sold. So there have been a few, but I would tell you, in general, cap rates today in most of our markets relative to where they were when we struck that deal kind of October, November of last year, probably about the same. Some markets might be up a little bit, some might be down a little bit. But generally speaking, if you look at where the tenure is, it's kind of gone all over the place, but it's not far off of where it was then. And I would say the same about cap rates. So I don't have any reason to believe it would be significantly different today.

John, as we consider our overall portfolio allocation strategy, we are looking to increase our suburban holdings from 70% to 80%. There are certain urban assets that we have had our eye on, but we haven't found the right buyer yet. Recently, we have felt uncertain about the values in that market. However, the transaction we facilitated was made possible by the recovery in the rent roll of these D.C. assets as we approached the end of last year, allowing us to reach a comfortable valuation for the transaction.

Okay. And then on the blended lease growth guidance that you took down a little bit, I think you mentioned it's going to be similar to the second half of the year, will be similar to the first half of the year. But I was wondering if you could provide any more color on how the third and fourth quarter plays out for you.

Yes. I mean what you would typically expect, John, is that things would trail off given normal asking rent curves. What I would tell you is that for this year, we do have softer comps relative to the fourth quarter of last year. So it may flatten out a little bit more as we get into the fourth quarter as compared to the third quarter. But don't think it will be terribly different from what you would typically see from us.

First, I just want to congratulate Jason and Matt. My question is on the development homes occupied the expectation for '26 and tying that to your more muted job growth forecast. I guess, can you talk about that a little bit, the 3,000 development homes occupied for '26, has that changed?

Matt here, Jeff. No, that hasn’t changed. It really comes down to deliveries. Currently, we are experiencing a decline in deliveries compared to the past couple of years. We’ve initiated fewer developments, but we are now increasing our development starts. Last year, we began a $1 billion worth of projects, while this year, that amount has risen to $1.7 billion. This will result in a higher number of deliveries in 2026, 2027, and 2028 compared to 2024 and 2025. We will generally price the homes accordingly to accommodate this increase. Therefore, it’s not primarily influenced by a macroeconomic outlook for 2026.

Okay. So you're indicating that the more subdued job growth forecast does not concern you regarding your plans for next year?

No. I mean those are shovels in the ground. That train has moved. The train left the station a couple of years ago.

And Jeff, just to reemphasize, we are currently running above our pro forma on those rents. We'll see what the market rent environment looks like between now and then, but we are entering next year with some cushion on those development deals when considering the value being created for shareholders.

Okay. And then my second, I just want to confirm on the delays in development. I know you talked about specific projects, but just to confirm, it had nothing to do with the tariffs, delays in imports or materials, please?

Yes. No, we haven't really seen those supply chain bottlenecks for a while now. It's still a little bit tough with electrical switch gear, but it's just occasionally, you get the normal delays about getting elevator inspections, getting final COs from some of these smaller local jurisdictions. So it's that kind of stuff.

I want to turn back to the development pipeline and thinking about future starts and the magnitude of what that could be beyond this year. What I'm wondering is how much your equity price is going to factor into that since you did have the forward equity at a very attractive price and cost of capital. It's not exactly where you'd want it to be right now, so in terms of your stock price, I imagine. So if your stock price kind of stays around where it is today, how much does that impact the size of a potential development start number for 2026?

Sure, Nick, this is Kevin. I'll start on the funding side and others may want to chime in. So the way to think about our business model is that on a leverage-neutral basis in a typical year, we are able to start about $1.25 billion of new development through a combination of free cash flow, dispositions where we can keep the proceeds and then leveraged EBITDA growth, all on a leverage-neutral basis. And so if you want to try to understand, so that's the capacity component. If you're trying to look at the spread cost or the incremental cost of that source of funds, really just a function of looking at how you want to treat our free cash flow, which is free from an accounting point of view, but obviously has an opportunity cost, reinvestment rate that you have to put in there for the company. And then debt, which today depends on where we're tapping the debt markets, fresh 10-year debt for us today would be around 5.25%, give or take. We did just do a debt deal 10-year basis at 5.05% a few weeks ago, and we typically achieve among the best spread pricing in our sector. So that's a relative cost of capital advantage for us. We also have been able to do debt by leaning into the term loan market, where we did term loan debt at mid-4s. And we have capacity for leverage. So the number I gave you about $1.25 billion is sort of leverage neutral. If it made sense, we could lean into that leverage capacity, and then we've got asset sales, which, as Matt and Ben have alluded to, are still tracking at sort of the high 4%, low 5% kind of range for most transactions that are being completed. So generally speaking, we can in the current environment, fund in the low 5s, about $1.25 billion of capital to fund development and do so on an accretive basis given the opportunity set, particularly in our established markets, where supply remains constrained and our lease-up activity remains generally quite strong. So that's generally what we have been doing in most years; every now and then, like last year, we're able to tap the equity markets. But by no means are we dependent on the equity markets in order to drive differentiated earnings growth through a significant amount of development activity.

That's helpful, Kevin. For my second question, Sean, I want to go back to the topic of job growth this year and its weaker performance compared to expectations. I'm curious about whether there's an issue not only with the number of jobs but also with the type of jobs being created. The national data indicates an increase in education, leisure, and health care jobs rather than professional services. Could you elaborate on the job composition issue that you're observing in the multifamily sector at this time?

Nick, good observation and definitely on point as being accurate there. So not only of the absolute number of jobs sort of disappointed relative to the original forecast. But the composition does not favor sort of higher-end multifamily right now, given the weaker environment for finance, professional services, technology, et cetera. So that is expected to improve as we get into the second half of the year. There's a lot of money pouring into AI and other technology sectors, et cetera. So there may be a better picture for that in the second half of the year, even in the context of lower absolute levels of job growth than we originally anticipated. But year-to-date, you are correct that the mix has not been necessarily supportive either.

This is Ami on for Michael. I thought that there was a really interesting chart in the presentation on market occupancy across the Sunbelt. So my question is, do you think that we need to see occupancy trend back towards essentially the pre-COVID level in the Sunbelt in order to really see pricing power in that region?

Yes, Ami, this is Sean. I mean it certainly needs to move that direction. You will gain some incremental pricing power as it moves up, but you won't realize sort of full pricing power until you get back to a more normal stabilized level of occupancy. In the case of that big spread there, there's a ton of standing inventory, as Ben mentioned in his prepared remarks. And so that stuff, whether it's 1 month free, 2 months free, look and lease specials, et cetera, concessions in those communities will be pretty heavy, getting them leased up, which will certainly impact the existing stock, just not to quite the same degree. But you need those communities to lease-up and then the whole market come back to a stabilized level before you have really, I'd say, firm or strong pricing power.

And then what do you think is the timing to get back to that level?

That is a good crystal ball question. That depends a lot on job and wage growth in these markets. So you have to kind of take a look at what your forecast is for each one of those individual markets in terms of job growth and then the level of standing inventory that's required to achieve it. But I think one thing to keep in mind here is if you're thinking about when they actually occupy versus when it shows up in the rent roll revenue growth, that typically takes longer than most people anticipate because you've got to get it leased up, then you've got to burn off the concessions, the leases have to expire. It's usually a couple of years process to where you see things actually start to impact revenue growth in a material way. You'll see it show up in rent change first, but that's not really going to drive revenue growth in the short run until you roll the whole rent roll through. So just keep that in mind as you think about the sequence of the events that lead to revenue growth.

So 2 questions here. First, just big picture, there's the debate over return to office, how that's impacting apartments. Certainly, for urban apartments would make sense as that would be a clear benefit. As you look at your suburban portfolio, just given predominantly that's what you have, have you seen any nuance where return to office has actually been a negative in any of the locations?

Yes, Alex, it's Sean. I would say it's not often that we see this. The one or two instances we've noticed over the past year occurred during Q2 and Q3 of last year, when we observed more people relocating from parts of Central New Jersey to Northern New Jersey to be closer to the city. We also saw some migration from Florida back to major employment markets in the Northeast. Those are the two areas where we've seen significant movement. Additionally, it's important to consider that some suburban markets serve as job centers. For example, Microsoft is located outside of Seattle, and Google and Facebook are positioned around Mountain View and parts of San Jose. Therefore, the demand isn't solely driven by urban factors; these suburban job center locations have also benefited from the return to office trend.

Okay. The second question is about the current risk profile of development in the REIT sector, which is significantly higher than in the past. According to your supplemental information, you have nearly $100 million in development-related costs, with 60% attributed to overhead and 40% to interest. How do you manage this, given that scaling back could impact personnel and expenses, specifically interest expenses? Also, regarding the earlier question about equity funding, is $100 million in capitalized overhead and interest for development reasonable, considering the heightened risk profile? How do you handle that?

Alex, it's Matt. I'm not sure I would agree that it's an increased risk profile. I think we've been doing it for a long time and have a pretty impressive track record of managing those risks well.

I would say in general. Not specific, in general.

The first thing I'd mention is that all of our capitalized basis on our deals includes both capitalized interest and overhead. The deals are financially self-sustaining, and $100 million on our current $2.8 billion to $2.9 billion in projects is a relatively small fraction. At any given moment, all of this is funded. If we consider this year, we are initiating more projects than we are finishing. By this time next year, we expect to have more than $2.8 billion in progress. Should we notice a significant and lasting shift in the environment, we have already secured funding for the overhead for the next two to three years within these ongoing projects and their budgets. If that situation arises, we could certainly anticipate it and make adjustments. In previous years, we have successfully reduced overhead during challenging times, such as during the financial crisis or when we recognized the end of a cycle approaching. We have a well-functioning system that allows us to see changes ahead. Additionally, much of the compensation is tied to performance, meaning that less business and lower profitability would naturally result in reduced compensation.

Thank you. I appreciate everyone joining us today, and we look forward to connecting soon.