Q2 2025 AvalonBay Communities Inc Earnings Call

Good morning, ladies and gentlemen, and welcome to AvalonBay Communities, Inc., second quarter 2025 earnings conference call.

At this time, all participants are in listen-only mode.

Following remarks by the company, we will conduct a question and answer session.

You may enter the question and answer Q at any time during this call by pressing star and 1 on your telephone keypad.

Press star and 2.

If you are using a speakerphone, please lift the handset before asking your question. We ask that you refrain from typing and have your cell phones turned off during the question and answer session.

Your host, for today's conference call is Mr. Jason Riley vice president of investor relations.

Mr. Riley, you may begin your conference call.

Matt Birenbaum: Thank you, Zico, and welcome to AVALONBAY COMMUNITIES Second Quarter 2025 Earnings Conference Call. Before we begin, please note that forward-looking statements, 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 Shaw, CEO and President of AVALONBAY COMMUNITIES, for his remarks. Ben?

Thank you, Zoe and welcome to Avalon Bay Community, second quarter 2025 earnings conference call. Before we begin, please note that forward looking statements may be made,

Discussion. There are a variety of risk and uncertainties associated with Ford, looking statements and actual results, May differ materially. There's a discussion of these risks and uncertainties in yesterday, afternoon's press release as well as in the company's form, 10K 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.

Ben Schall: 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 four 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.

And with that, I will turn the call over to Ben Shaw, 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 Breza and our chief operating officer and Matt Bernal, 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.

Ben Schall: As Kevin will detail, these operating expense savings carried through to our updated outlook for the year, with OPEX growth now forecasted at 3.1%, 100 basis points better than our original guidance, and 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. And 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.

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 O'Shea will detail, these operating expense savings carried through to our updated outlook for the year, with Opex growth now forecasted at 3.1%, which is 100 basis points better than our original guidance and translates 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.

And importantly new Supply and our established regions continues to decline to levels, not seen in over a decade.

Ben Schall: 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 performer-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.

This low-level supply should continue for the foreseeable future, given that the barriers to new development, particularly in our suburban established regions, are substantially greater than in 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 performance stabilized yields.

While we experienced some timing delays and 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. It 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 our portfolio allocation objectives.

Ben Schall: 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, and particularly to yields of north of 6% on new development projects. Page five highlights our Q2 and first half of the year metrics, including core FFO growth of 3.3% year to date, continuing to position us toward 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're well on our way toward 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, and 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, we continue to position ourselves toward the top of the sector.

Ben Schall: 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 and an attractive long-term basis. Page six 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 seven, we head into the second half of the year with very healthy occupancy in our established regions, with total market occupancy at 94.8%.

We also started $600 million and $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.

Revenue exceeded operating expenses by 2 cents, improved by 5 cents and was partially offset by lease-up, NOI, and overhead.

Please note that 2 cents of the 5 cents were lower than expected. Operating expenses were timing-related, which we now expect to incur later in 2025.

Ben Schall: In contrast, market occupancy in the Sun Belt 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 Avalon Bay 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 Avalon Bay and for the wider multifamily REIT sector.

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 Sun Belt 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 Riley. This is his last earnings call before his retirement from Avalon Bay later this summer.

After 21 years at the company and over a decade as our head of investor relations.

Ben Schall: 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 three-plus years at Avalon Bay. Congrats to Jason on his retirement, and we all wish him well in his next stage. I'll now turn to Kevin to further discuss our updated outlook.

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 sector.

Jason has been a strong developer of talent including most recently, with Matt Grover who will be now, who will be, 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.

Matt Birenbaum: Thanks, Ben, and congrats, Jason, and excited to have Matt in the elevated role. Turning to slide eight, 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.

I'll now turn to Kevin to further discuss our updated outlook.

Thanks, Ben, and, uh, congrats, Jason. I'm excited to have that, and the elevator role. Turning to slide 8, we present our updated operating and financial outlook for full year 2025.

We are maintaining our full year core of fulfill for share guidance, which at the midpoint is 11.39 per share.

Reflecting a 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 then the impact of capital markets activity, transaction activity, and changes in overhead costs.

We now project same-store NOI growth of 2.7%, which is 30 basis points above our initial outlook.

Matt Birenbaum: 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 nine highlights the impact on full-year growth from updated expectations for key parts of our business as compared to our initial outlook. Specifically, a 4% increase in same-store residential NOI and a 2% benefit from capital markets and transaction activity are expected to be offset by a 4% decline in NOI from new development and a 2% 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.

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 dollars 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 Pho 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 4 Cent increase in same store residential noi and a 2-cent benefit from Capital markets. And transaction activity are expected to be offset by a 4 Cent decline in noi, from new development, and a 2-cent increase in overhead and other items.

And again, this results in an unchanged expectation for full year, core for full year per share of $11.39 per share in 2025.

Matt Birenbaum: 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 3% increase in same-store revenue, a 2% increase in NOI for new development, and a 1% benefit from capital markets and transaction activity and other items will be offset by an 8% 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.

slide 10 provides a bridge from our second quarter core of fulfill for 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-up in lease-up NOI during the third quarter.

In particular, we anticipate a $0.03 increase in same-store revenue and a $0.02 increase in NOI for new development.

And the benefits from capital markets and transaction activity, along with other items, will be offset by an 8-cent increase in same-store operating expenses driven by sequentially higher repairs and maintenance, utilities, and property taxes.

Matt Birenbaum: Here again, we expect to benefit from typical seasonal sequential patterns in our business during the fourth quarter, including a 3% increase in same-store revenue, a 6% decrease in same-store operating expenses, a 4% increase in NOI from new development, and a 1% 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.

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 3-cent increase in same store Revenue. A 6-cent decrease in same store operating expenses.

A 4-cent increase in NOI for new development and a 1-cent benefit from capital markets, transaction activity, and other items.

Sean Breslin: All right, thanks, Kevin. I'm 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 four 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.

And with that overview, we are updated Outlook. I'll turn it over to Sean to discuss operations.

I'm moving to slide 12, our updated outlook for the 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 four 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.

Sean Breslin: 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, and is contributing to the roughly 10 basis point 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.

But fully offset by higher occupancy.

Turning to slide 13, our same store average asking rents exceeded. Our original expectations through May but peaked in June earlier than our original Outlook. It is contributing to the roughly 10 basis point lower contribution, from an effective lease rates noted on the previous slide.

Shifting the 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 portions of the Mid-Atlantic and New York, New Jersey regions.

Sean Breslin: 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 two-thirds 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 in our expansion regions are projected to underperform our original outlook, while Boston is expected to be in line.

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 and 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 two-thirds 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.

Sean Breslin: 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 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 produce mid 4% 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 a strong rent change of 8%.

Sean Breslin: 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 LA, 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.

San Jose remains healthy with a mid-96% occupancy in rent. The change is in the 3.5% range for the quarter.

The East Bay is the lagger in the region but will likely gain momentum later on the 25th and 26th 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 in 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 LA, particularly in the entertainment industry.

Sean Breslin: 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.

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.

Matt Birenbaum: 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 two Denver communities where we completed construction late last year. We completed and leased 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 into the fourth quarter and into 2026.

Now, alternative to Mass to address our development and investment activity.

All right, great. Thanks, Sean. Um, 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

Matt Birenbaum: 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 60. 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 longstanding 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 three of the 21 communities currently underway have reached that point as of the end of Q2.

2026 with this reduction, in 2025 Lisa, 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, 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.

Matt Birenbaum: But we are running 30 basis points ahead of pro forma on those three based on modest rent outperformance of $80 per month and some hard cost savings from the initial capital budget. We do have another seven 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 seven have set their opening rents, which are 3% above pro forma. 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.

Our long-standing practice is to report rents on our developments underway at the initial UNT trended 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 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 seven communities that are just starting, at least in the second half of this year, and we expect this trend to continue at those projects as well. Six of those seven have set their opening rents, which are 3% above pro forma. Many of those are also likely to finish with savings in their capital budgets, and the eleven that won't start lease-up until 2026 or 2027 are continuing to.

See, encouraging early savings on their construction buyout.

Matt Birenbaum: 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 longstanding 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 four assets in the District of Columbia, as well as communities in Seattle and New York. Executing on asset sales in DC is particularly challenging and hard to predict due to the unique Washington, DC TOPPA law.

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. This will 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.

Depending dispositions includes 4 assets in the District of Columbia, as well as communities in Seattle and New York.

Matt Birenbaum: 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.

Executing on asset sales in DC is particularly challenging and hard to predict due to the unique Washington DC 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 in 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.

Jason Reilley: Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. If you would like to ask a question, please press STAR and 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press STAR and 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the STAR keys. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question comes from Eric Wolf with Citibank. Please go ahead.

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

Thank you.

Ladies and gentlemen, we will now be conducting a question-and-answer session.

If you would like to ask a question, please press star and 1 on your telephone keypad.

A confirmation tone will indicate your line is in the question queue.

You may press * and 2 if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Ladies and gentlemen, we will wait for a moment while we poll for questions.

Our first question comes from Eric Wolf with City Bank. Please go ahead.

Nick Yulico: Thanks, Richard. I'm just 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 a normal leasing pace versus what you're seeing.

With Eric, um, maybe just on the delayed occupancies and development. You mentioned, uh, the Denver community. So I was just hoping to get a little more color on what's impacting the pace there and kind of what it normally sees in case versus what you're seeing.

Matt Birenbaum: Sure. Hey, Eric, it's Matt. So the pace has been fine. You know, the deals that we had in lease-up in the second quarter were averaging about 30 homes per month in leasing, which is, you know, more or less what we would expect for this time of year. And again, the shortfall is really a little bit of it is based on just some deliveries moving around to later in the year at some communities. And then there is one lease-up in particular we have in urban Denver, Governor's Park, where we've had to offer elevated concessions, and the pace is not what we had originally anticipated. That's a very, very competitive submarket within urban Denver. We have a second lease-up in suburban Denver up in Westminster. That one's going fine, but is also just a little bit behind pace, but maybe not as far behind as Gove Park.

Uh, sure. Hey Eric, it's Matt. Um, the uh, so the pace has been fine, uh, you know, the deals that we had at least up in the second quarter were averaging about 30 homes per month in leasing, which is, you know, more or less. Uh, what we would expect for this time of year. Uh, and again, the, the, the shortfall is really a little bit of it is based on just some, uh, deliveries moving around to later in the year as some communities, uh, and

Matt Birenbaum: And that, I guess the other one that I didn't mention is we do have a lease-up in suburban Maryland, which is also seeing a little bit of elevated concession activity. So it really is contained to those two markets. But as we look to a lot of the lease-ups we're opening now, they're in pretty strong markets. So we are seeing pretty good traction in the rest of the book.

Elevated concession activity. So it really is contained to those two markets.

Uh, but as we look to, uh, a lot of the lease-ups we're opening, now they're in pretty strong markets. So we are seeing pretty good traction in the rest of the book.

Nick Yulico: Thanks. And just given the peak leasing season seemed to have occurred a little sooner than expected and maybe the deliveries a little later than expected for some of these, but what gives you the confidence by year-end you'll have the same number of occupied units? You know, if traffic maybe slows down a bit from missing the peak leasing season.

Sean Breslin: Yeah, 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, you know, 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 the lagged occupancies.

Thanks, and just give them a peek. Leasing season seems to have occurred a little sooner than expected, and maybe the delivery is a little later than expected for some of these. But what gives you the confidence that by year-end you'll have the same number of occupied units? You know, traffic maybe slows down a bit from missing the peak we see season.

Yeah, naked, Sean. Um, as Matt noted, we've had pretty good velocity at uh.

Matt Birenbaum: I guess I would, this is, and I would also add just again, you look at the market mix of where we're expecting those occupancies in the second half, and a fair number of them are in lease-ups. We're talking about, you know, we just opened for leasing, for example, in South Miami. You know, I think we're running ahead there of what we expected. We just opened in Wayne in Northern New Jersey. We have another job just getting ready to open in Parsippany in New Jersey. So those are markets which are seeing plenty of strength.

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 and urban Denver, we did 35 a month in the second quarter. So just when you, you know, 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. Is it relates to the deliveries and then the lag occupancies

I, I guess I would, this is, I would also add just again. You look at the market mix of where we're expecting those occupancies in the second half, and a fair number of them are in those new release UPS. We're talking about, you know, we just opened for leasing, for example, in South Miami. You know, I think we're running ahead there of what we expected. We just opened in Wayne in Northern New Jersey. We have another job just getting ready to open.

In the participant in New Jersey. So those are markets which are seeing plenty of strength.

Nick Yulico: That's very helpful. Thank you.

That's very helpful. Thank you.

Jason Reilley: Thank you. Our next question comes from the line of Steve Sacqua with Evercore ISI. Please go ahead.

Thank you.

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

Our next question comes from the line of Steve Saka with Evercore ISI. Please go ahead.

Sean Breslin: Yeah, Steve and Sean, happy to talk about that. Well, as you can tell from looking at the chart, things were ahead of our expectation for a good portion of the first half of the year. But I think you, what we observed is, you know, demand has been a little bit softer. Primarily, our expectation is tied to slightly weaker job growth in the first half of the year than originally anticipated. So when you start to look across the footprint at that, across the first half of the year, we ended up with about 100,000 fewer jobs than originally projected. So, you know, that's probably the primary driver. It usually doesn't show up in the data. It's a little bit later, but you could see that in the job growth figures that we have today.

Uh, yeah, thanks. Good afternoon. Um, I guess I wanted to talk about the chart on, um, I guess page 13 of the asking rent trend. Um, and obviously there was a clear, noticeable kind of leveling off in sort of the maybe mid-May time frame, and I guess I'm just curious from your perspective. You know, what do you think happened there? And, you know, why do you think things sort of softened up or didn't continue that normal seasonal upturn?

Yes, Steve with Sean, happy to talk about that. Um, well as you can tell from looking at the chart, you get things. Uh, we're ahead of our expectation uh, for a good portion of the, uh, the first half of the year. But I think you what we observed is, you know, demand, uh, has been a little bit softer. Primarily our, uh, expectation is tied to slightly weaker job growth in the first half of the year than originally anticipated.

Um, so when you start to look across the footprint, in the first half of the year, we ended up with about 100,000 fewer jobs than originally projected.

Um, so you know, that's probably the primary driver. It usually doesn't show up in the data, so a little bit later, but you can see that in the job growth figures that we have today.

Nick Yulico: 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, you know, why, you know, your portfolio might be having a little bit more headwind here and, you know, not recovering as quickly as some of the other portfolios.

Okay, and then maybe just focusing on bad debt. I mean, your figures are still running noticeably above many of your peers, and I'm just wondering...

Sean Breslin: Yeah, Steve, happy to chat about that one. I mean, first, what I'd say is that I can't speak to everyone else's, you know, policies as it relates to bad debt, what they're reserved 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, it includes everything else. So there could be an issue there where, you know, we're charging just in absolute dollars more than potentially others.

I don't think that's necessarily a market mix issue, so I'm just trying to kind of figure out, you know, why your portfolio might be having a little bit more headwind here and, you know, not recovering as quickly as some of the other portfolios.

Yeah, Steve, having a chat about that. I mean, first what I say is, I can't speak to everyone else's policy as it relates to bad, uh, what they reserved for what they read off, etc. But, uh, I think as you probably know, we've trusted 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 rather than the terms of the lease.

Sean Breslin: And two, you know, 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 some 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're charged for, we can charge for, and those are the primary reasons in those specific regions that it's slightly unfavorable to our initial outlook.

So that includes not only the brands it includes late fees, it includes utilities includes everything else. So there could be an issue there, where, you know, we're charging just an absolute dollars more than potentially others. Um, and 2, you know what, I would tie it to for us in terms of the pace of improvement, being good. But not as good as we expect.

Expected is we have seen things back up and actually increased in some cases in terms of the time to evict across portions of New York, the District of Columbia, and Maryland. Those particular jurisdictions. Now we might have a little bit greater footprint in terms of some 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 charge for, we can charge for, and those are the primary reasons in those specific regions that are slightly unfavorable to our initial outlook.

Jason Reilley: Does that answer your question, Steve?

Does it answer your question Steve?

Matt Birenbaum: If you could move on to the next caller, thank you.

Jason Reilley: Yes, please. Thank you. The next question comes from Jamie Feldman with Wells Fargo. Please go ahead.

Jamie Feldman: Great. Thanks for taking the question. 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, you know, as we think about earning into '26 and your view on year-end rents, you know, how much do you think this change in your outlook affects your '26 earning?

"Is he going to move on to the next caller? Thank you. Yes, please. Thank you. The next question comes from Jamie Feldman with Wells Fargo. Please go ahead."

Great. Thanks for taking the question. Um, I guess just following up on on the chart on page 13.

So can you talk about what this means for your 3Q and 4Q blends, uh, in your outlook? And then also, you know, as we think about earning into '26?

And your view on year-end rants. You know how much you think this change in your outlook affects your 2026 earnings.

Sean Breslin: Yeah, Jamie and 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 tell you 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.

Yeah, Jimmy and Sean. Uh, I mean we're giving we're sitting here in July. I don't think we're really prepared to talk about the urn in for a 2026 yet. But what I was saying in terms of Blends is that we're essentially expecting, uh, 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.

Jamie Feldman: Okay. I guess I was thinking about just if you look at the math, like just the math on the chart, like how much would that change impact a '26 earning number from what you originally thought to where you are now for the year-end number?

Okay.

I guess I was thinking about just if you look at the math like, just the math on the charts. Like how much would that change impact?

A 26 earned in number.

Sean Breslin: Yeah, we haven't run that at this point in time. I mean, you can guesstimate it if you like just based on lease expiration volume, but there's still a lot of leasing to do. There's a lot of things that move around in terms of mix of like term and not like term, et cetera. So it's just not, I think it's just way too early to even sort of guesstimate what that's going to look like in terms of the impact.

From what you originally thought to where you are now for the year. End number

Jamie Feldman: 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?

Yeah, we haven't run that at this point in time. I mean, you can guesstimate it if you like just based on lease expiration volume, but there's still a lot of leasing to do. There's a lot of things that move around in terms of the mix of like term and not like term, etc. So, it's just not—I think it's just way too early to even sort of guesstimate what that's going to look like in terms of the impact.

Sean Breslin: Yeah, what I'd say at this point in time, as you know, we're only, you know, two, three months in here, but things are trending pretty much as expected as of now.

Okay, so maybe I'll ask a better question. Um, you're a couple of months into the Dallas acquisition. Can you talk about how it's going, what's better than expected, what's worse than expected? Uh, just any kind of feedback on that deal?

Yeah. What I would say at this point in time is you're not really, you know, 2 or 3 months in here, but things are trending pretty much as expected as of now.

Ben Schall: Yeah, I'll add to that, Jamie. I'll add to that, Jamie. I think, you know, we're tracking well. We have been investing more resources in our asset management function, and so they've been, that group's been taking a more active role in the implementation of the portfolio. And then the third piece I'd add is, you know, we're definitely seeing the scale benefits in that market and particularly in Dallas and just what it brings to our larger ecosystem down there.

Yeah, I'll add to that. Jamie, a lot of the Jamie I think, um, you know, we're tracking well, uh, we have been investing more resources in our asset management function. So they've, they've been that group has been taking a more active role and the implementation of the portfolio. And then the third piece I'd add is, you know, we're definitely seeing the scale benefits in that market and and particularly in Dallas and just what it brings to the our larger ecosystem. Um, down there.

Jamie Feldman: Okay, thank you.

Jason Reilley: Thank you. Our next question comes from Austin Wershmidt with KeyBank Capital Markets. Please go ahead.

Okay, thank you.

Thank you.

Jamie Feldman: Yeah, just going back to the asking rent growth curve this year, which markets really dragged on, you know, 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, you know, last year and sort of in the pre-COVID period you outlined?

Our next question comes from Austin, WMID with KeyBanc Capital Markets. Please go ahead.

Sean Breslin: Yeah, 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, you know, the various regions, it's pretty apparent that, you know, the job growth being slower than anticipated is pretty broad-based. Obviously, it impacts different regions to varying degrees. 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. You know, Southern California, I think we've all talked about LA. You know, we talked about LA in the first quarter call. We talked about it in 88.

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

Yeah, Austin, good question. Um, I mean I I'd say as I mentioned earlier, first it fundamentally in our mind, it is a, a job growth issue. Um, when you look at it across, you know, the various regions, it's pretty apparent that, you know, the job growth being slower than anticipated is pretty broad-based.

Um, obviously it impacts different regions to varying degrees and say at this point in time, the regions where we're expecting, um, underperformance to be most material relative to our original Outlook. Uh, when you start thinking about rent, change in Revenue performance or really the Mid-Atlantic and Southern California.

Sean Breslin: It 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 had softened up most notably in the district and in suburban Maryland. I'd say those are the two that kind of stand out the most in terms of expectations coming down relative to our original outlook when you look across the footprint.

Matt Birenbaum: That's helpful. And I guess, you know, how much has 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 as, you know, levels not seen in a decade as you look out over the next year. Thanks.

Uh yeah, Southern California. I think we've all talked about La. You know, we talked about La in the first quarter call. We talked about it in a rate. Uh, 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 to push rents and then more recently, as I mentioned, in my prepared, remarks on the Mid-Atlantic, uh, which in the last 60 to 90 days, has softened up, most notably in the district and in uh 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 uh, the footprint.

Ben Schall: Yeah, Austin, you know, as we think about starts for the remainder of 2025, we're in a fortunate position in that we've pre-funded that capital, and we've pre-funded 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, you know, still in the high 4% or 5% range, this feels like sufficient spread as we think about generating incremental values as it relates to development. Other aspects that you've heard Matt talk on, we are seeing, you know, 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, you know, starting construction and buying out these deals, we're getting that long-term basis lower.

It's helpful and I I guess you know how how much is really that trajectory of Market rents um along with maybe the attractiveness of your cost of capital or certain aspects your cost of capital today impacted your thoughts about sort of future starts given. Also kind of the backdrop and you reference Supply is you know at levels not seen in a decade as you look out over the next year. Thanks.

Ben Schall: And then this is a cohort of projects that also, you know, 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, you know, 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, you know, 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.

And so as we're looking out, thinking about our development yields relative to both of that cost of capital and where we're seeing uh underlying market cap rates, which are, you know, still in the High 4 5 percent range. Um, this feels like, uh, sufficient spread as we think about generating incremental, values relates to development. Um, other aspects that have you've heard Matt talk on, we are seeing, you know, some pretty meaningful buyout savings. Um, that started in certain regions. I'd say it's now kind of gravitated more broadly across the country. So, um, as we get to the stage of actually, you know, starting construction and buying out these deals, we're getting that long-term basis, um, lower. And then this is a cohort of projects that also, you know, given that starts are coming down, uh, when they open in a couple of years, we'll be facing less competition. Um, so we feel good about this, you know, this book of business for the remainder of 2025, as we get into 2026 cost of capital, uh, that does look different today, right? And so,

As we always do, you know, focusing on in on the 1001 150 basis, points of spread and making sure that we remain Nimble and continue to continue continue to adjust based on what we're seeing in the market.

Matt Birenbaum: Thank you.

Jason Reilley: Thank you. The next question comes from Adam Kremer with Morgan Stanley. Please go ahead.

Thank you.

Thank you.

Ben Schall: Great, thanks for the time. I think you guys referenced maybe a little bit softness in DC in recent months. Wondering if we can maybe just double-click on that. You know, what exactly are you seeing in the market? I think it's sort of surprised to the upside earlier in the year, maybe surprised with its stability early in the year. What sort of change there? Is it resident uncertainty? Is it, you know, sort of more concrete job loss? I guess just maybe let's unpack what's happening in DC.

The next question comes from Adam Kramer with Morgan Stanley. Please go ahead.

Great, thanks for the time. Um I think you guys referenced maybe a little bit softness in DC in recent months wondering if we could maybe just double click on that. Um, you know what, what exactly are you seeing in the market, right? I think it's sort of surprised to the upside earlier in the year. Maybe surprise with its stability early in the year. What sort of change there? Is it residents uncertainty? Is it? You know sort of more more concrete job loss and I guess, just maybe let's unpack what's happening in DC?

Sean Breslin: Yeah, Adam, happy to talk about that. I think it's a combination of different things in terms of what we're actually seeing on the ground. As I mentioned previously, at NAIRRIET, I think the, you know, we're having a lot of conversations with existing residents at renewal time about their lease options moving forward, both, you know, what term of the lease they can sign, what happens if I happen to lose my job, you know, what are the lease termination options, what does that cost me, you know, if I need to transfer to another apartment, kind of, you know, speculating a little bit on the downside from residents, which is just pushing out the commitments that they're making, just trying to preserve optionality. So, you know, we're hearing that from our centralized renewals team in terms of closing on those renewals.

Yeah, Adam happy to talk about that. Um, I think it's a combination of different things. Uh, in terms of what we're actually seeing on the ground, as I mentioned previously, um, at at Nate, I think the

Uh, you know, we're having a lot of conversations with existing residents.

Sean Breslin: We've also seen an uptick in concessions, again, mainly in suburban Maryland submarkets and the District of Columbia, as I think the market has sort of prepared for what's anticipated to be maybe weaker demand. And then, you know, obviously, job growth just hasn't been there as well. So I think you have some sort of behavioral things where people are anticipating some weakness and some potential impacts to the job market that are sort of flowing through here, and then you have some actual activity in terms of a lack of jobs. So you got sort of a confluence of a couple of different things going on there.

At renewal time about their lease options. Moving forward, both, you know what term of the lease they can sign what happens if I happen to lose my job, you know, what are the least? Termination options? What does that cost me? You know, what, if I need to transfer to another apartment, kind of, you know, speculating a little bit on the downside from residents, which is just pushing out the commitments that they're making just trying to preserve optionality. So, you know, we're hearing that from our centralized renewals team in terms of closing on those renewals

We've also seen an uptick in concessions. Again, mainly in Suburban, Maryland submarkets in the District of Columbia, as I think the market has sort of prepared for with anticipated to be maybe weaker demand. Um and then, you know, obviously job growth just hasn't been there as well. So I think you have some sort of Behavioral things uh where people are anticipating some weakness and some potential impacts to the job market, other sort of flowing through here and the you have some actual activity in terms of a lack of jobs. So you got sort of a Confluence of a couple different things going on there.

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

Got it, that's helpful. And then maybe just uh maybe more of a sort of geopolitical um, or public policy question. But, you know, obviously the the mayoral Primary in New York, uh, the squaw sort of situation in California, wondering, maybe just high level, you know, your your thoughts on on each of those. And, um, you know what, what it might mean for you guys in terms of your exposure to to each of those uh markets.

Sean Breslin: Yeah, 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, you know, what's going to happen politically. But, you know, what I'd tell you is in terms of rent-stabilized units, you know, nothing would take effect for a while. It's going to be, you know, 26, 27 if there was anything done. But in terms of a 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 SEQUA, you know, Matt can chat about the development impact.

Yeah, in terms of the New York situation, I'm happy to talk about that 1. I mean, you never know exactly what's going to happen there. So it's you can't speculate on, you know, what's going to happen in politically. But you know, what I tell you is, in terms of rent stabilized units, um, you know, nothing would take effect for a while. It's going to be, you know, 26/27, if there was anything done. Uh, but in terms of our rent stabilized portfolio, it's about 2100 units.

So there could be potentially some impact on that. Um, that population of units, depending on what the actions are that are taken.

Matt Birenbaum: Yeah, so, you know, the SEQUA reform is really one in a series of actions that we've seen come out of the legislature in California really over the last five, seven years trying to encourage more housing production or reduce the barriers, which are at the local level primarily. So it's important to understand as it relates to the SEQUA reform, it doesn't actually open up more sites to multifamily development. It still only applies to sites that are zoned or planned for multifamily. So you still have to go through the same approval process that you would anywhere else in terms of getting your zoning and getting a site plan approval.

As it relates to Squaw your Mac and chat about the development impact.

Matt Birenbaum: But what it does do is in California has an extra layer on top of all that, which is you also have to show compliance with SEQUA, which can cost into the seven figures and can slow the process down. You're submitting 500-page reports sometimes to small jurisdictions that don't really have staff to review them. So we do think that it will help accelerate or take some of the pursuit cost risk and time out of our pipeline, development rights pipeline in California, and, you know, get us in the ground sooner on some deals. So, but, you know, I don't know that it, we don't think that it fundamentally changes kind of the supply outlook kind of in the medium term for California. It's still a very supply-constrained place.

A site plan approval. But what it does do, is it right? California has an extra layer on top of all that, which is, you also have to show compliance with SQL which can cost into the 7 figures.

And can slow the process down. You're submitting 500 page reports sometimes to small jurisdictions that don't really have staff to review them. So we do think that it will help accelerate or take some of the Pursuit cost risk and time out of our pipeline development rights pipeline in California and uh you know get us in the ground sooner on some deals. Um so uh but you know, I don't know that. It we don't think that it's fundamentally changes kind of the supply Outlook kind of in the medium term for California. It's still a very Supply constrained place.

Ben Schall: Great, thanks for the caller.

Great, thanks for the caller.

Jason Reilley: Thank you. Our next question comes from Rich Hightower with Barclays. Please go ahead.

Sean Breslin: Hey, good afternoon, guys. So, Matt, I'm looking at slide 16 and I appreciate your comments earlier about, you know, sort of the way you quote development yields prior to stabilization, you know, a little bit more conservatively. But if I look at that bucket that is, you know, 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 six number we see in front of us?

Thank you. Uh, next question comes from Rich. Hightower with Barclays. Please go ahead.

Hey, good afternoon guys. Um,

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

Matt Birenbaum: Yeah, you know, we really don't mark them to market until the time comes when we're getting ready to start leasing internally, and then we don't, you know, externally till that's validated, as I mentioned, through the 20% leasing. So if you're talking about the 11 deals that don't start lease up till '26 or beyond, you know, we really haven't looked at that, but I would, when you look at the market mix, you look at where they are. The one thing I can tell you, you know, that we do know is that costs are probably going to come in under, at least from what we can tell today. And, you know, you're still a year and a half to two years out from opening for lease-up. So, you know, who knows what happens to market rents between now and then.

yeah, you know, we really don't mark them to Market until the time comes when we're getting ready to start leasing internally and then we don't, you know, externally till that's validated as I mentioned through the 20% leasing so if you're talking about the 11 deals that don't start at least up till 26 or Beyond you know we really haven't uh looked at that but I would when you look at the market mix you look at where they are the 1 thing I can tell you you know that we do know is that costs are probably going to come in under at least from what we can tell today and you know, you're still a year and a half

Matt Birenbaum: I wouldn't say that their market rents in that basket is below where they were when we underwrote them. When you look at the mix of the locations of where they are, I mean, what we're seeing is market rent growth over the last, you know, 12 months, call it, has been, you know, flattish. But, you know, these aren't deals that started, you know, in Austin in the peak three years ago where rents are down, you know, 15%. We don't have anything like that.

Sean Breslin: Right. Okay. Yeah, that kind of answers the 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 region, so this is a question for Sean really, you know, it looks like trends kind of went the opposite direction that might have been expected, you know, Q2 sequentially versus Q1. And I think that's maybe a little bit in contrast to some other, you know, I guess Sunbelt reporters, you know, 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?

To 2 years out from opening for lease up. So you know, who knows what happens to Market? Rents between now and then, I wouldn't say that they're Market rents in that basket is below where they were when we underwrote them when you look at the mix of the locations of where they are. I mean, what we're seeing is Market rent growth over the last, you know, 12 months call, it has been, you know, flattish. Um, but you know, these aren't deals that started, you know, in Austin in the peak 3 years ago, where rents are down, you know, 15% we don't have anything like that.

Right. Okay. Yeah. That that kind of answers my question. Um, okay and then, secondly, um, if I look at, um, same store like term effective rent. Change in these supplemental and I look at the other expansion region. So this is a question for Sean. Really. You know, it looks like

It looks like Trends kind of went the opposite direction. Um, that that might have been expected, you know, Q2 sequentially versus q1 and I, I think that's maybe a little bit in contrast to some other, um, you know, I guess Sunbelt reporters, you know, 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 to those other pools. But um just what what happened there and and obviously it bounced back in July as well. So that's encouraging. But what what happened during the 2q specifically if you don't mind?

Sean Breslin: Yeah, happy to chat about that. I mean, if you, one of the things I would just point to as it relates to the expansion regions for us, again, small sample size, as you noted. But given, you know, the supply on the ground that is known, you know, we've always erred on the side, at least to date, of, you know, keeping occupancy relatively stable and erring on the side of being slightly defensive as opposed to opportunistic on rents. So I think that partly reflects on the strategy. I can't speak to the distribution of the portfolios for the peers on that, but, you know, that's pretty much the rent change that was required to kind of get to the occupancy targets that we had for that portfolio across those different regions.

Yeah, I have a chat about that. I mean, if you... one of the things I would, uh, just point to as it relates to the extension regions for us again, small sample size as you noted, but given, you know, the supply on the ground that is known, you know, we've always erred on the side at least the date of, you know, keeping occupancy relatively stable, an area on the side of being slightly defensive as opposed to opportunistic on rents.

So, I think that partly is a reflection.

Sean Breslin: And there are different supply elements in each one, but certain submarkets are still getting a fair amount of supply, like the South End of Charlotte as an example, is still getting plenty of supply and probably will for the next, you know, three, four quarters before it really abates. So it's really, again, given it's a small sample, it's a submarket by submarket assessment, and you do have pressure in some of those submarkets. And that's what you're seeing in the rent change to hold the occupancy that we targeted. Okay, that makes sense. Thanks.

Um, I can't speak to the distribution of the portfolios for the peers on that, but you know, that's pretty much the rent change that was required to kind of get to the occupancy targets that we had for that portfolio across those different regions.

And there are different Supply elements in each 1, but certain submarkets are still getting a fair amount of Supply. Like the south end of Charlotte is an example of still getting plenty of supply and probably will for the next, you know, 3 4 quarters before it really abates. So it's really again, give us a small sample. It's a submarket by submarket assessment and you do have pressure on some of those sub-markets. Um, and that's what you're seeing in the rent, change to hold the occupancy that we targeted.

Matt Birenbaum: Yeah.

Okay, that makes sense. Thanks.

Jason Reilley: Thank you. Our next question comes from John Kim with BMO Capital Markets. Please go ahead.

Yeah.

Thank you.

Uh, next question comes from John Kim with BMO Capital Markets. Please go ahead.

Nick Yulico: Thank you. On the pending DC asset sales, I think, Matt, you mentioned that you started marketing that last year. I'm wondering how.

Jason Reilley: Sorry to interrupt you, John. I'm extremely sorry to interrupt you, but your audio is not clear. Could you please use your handset, please?

I'm sorry to interrupt you, John. I'm extremely sorry to interrupt you, but your audio is not clear. Could you please use your handset?

Ben Schall: Is it better?

Jason Reilley: Yes, please go ahead. Thank you.

Is that better?

Nick Yulico: Sorry about that. On the four DC 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.

Yes, please go ahead. Thank you.

Sorry about that uh on the 4 DC asset sales. Um Matt you mentioned that those started marketing, you start marketing those last year. I was wondering if you could discuss how pricing has changed during that time frame.

Matt Birenbaum: I don't know. You know, DC specifically is a very difficult market to sell assets in, maybe the most difficult in the country with the way their TOPPA law works there. So there's not a lot that does trade there. There were a couple of recent trades that closed in DC, I think one that closed a month or so ago that maybe 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, you know, kind of October, November of last year, probably about the same.

Um, I don't know. Um, you know, DC specifically is a very difficult market to sell assets in. Um, maybe the most difficult in the country with the way their Topel law works there. So there's not a lot that does trade there. Um, there were a couple of recent trades that closed in DC. I think one closed.

A month or so ago, that maybe, uh, JBG sold. So, um, there have been a few. But, um, I would tell you in general, cap rates today.

Matt Birenbaum: You know, some markets might be up a little bit, some might be down a little bit, but generally speaking, you know, if you look at where the 10-year 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.

In most of our markets, relative to where they were when we struck that deal, you know, kind of October-November of last year, probably about the same. Um, you know, some markets might be up a little bit, some might be down a little bit, but generally speaking, you know, 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. I would say the same about cap rates. So, um, I don't have any reason to believe it would be significantly different today.

Ben Schall: Okay. John, there is definitely an element as we think about our overall portfolio allocation approach, and part of that is shifting further from 70% suburban to 80% suburban. You know, there are a select set of urban assets that have been on our target list. Either the, you know, we haven't had the right buyer on the other side, but more recently, we haven't been comfortable with where values were, right? And so part of what helped facilitate the transaction here was the recovery, particularly in the rent roll in these DC assets as we were building up to the end of last year. And so we got the values where we then were comfortable transacting.

Okay, John there. Yeah, there is definitely an element as we think about our overall portfolio allocation approach. And, you know, part of that is shifting further, you know, from 70% suburban to 80% suburban. You know, there are a select set of urban assets that have been on our target list either. The, you know, environment, we haven't had the right buyer on the other side, but more recently, we haven't been comfortable with where values were, right? And so part of what helped facilitate the transaction here was the recovery, um, particularly in the rent roll, um, in these DC assets as we were building up to the end of last year. And so, we got the values where we then were comfortable transacting.

Nick Yulico: 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 somewhere the second half of the year, it will be somewhere 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.

Okay. And then on the blend, at least growth guidance that you took down a little bit, I think you mentioned it's going to be somewhere in the second half of the year, will be somewhere near the first half of the year. But I was wondering if you could provide any more color on how the third and fourth quarters play out for you.

Sean Breslin: Yeah, I mean, what you would typically expect, John, is that things would trail off, you know, given normal asking rent. What I would tell you is that for this year, you know, 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, but I don't think it'll be terribly different from what you would typically see from us.

Yeah. I mean, uh, what you would typically expect, John, is that, uh, things would trail off, you know, given normal asking rent cards.

Um, what I would tell you is that for this year, um, you know, if 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 I don't think it'll be terribly different from what you would typically see from us.

Nick Yulico: Great. Thank you.

Jason Reilley: Yep. Thank you. Our next question comes from Jeff Specta with Banco America. Please go ahead.

Great. Thank you.

Yeah, thank you.

Nick Yulico: Great, thank you. 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, you know, your more muted job growth forecast. I guess, you know, can you talk about that a little bit, the 3,000 development homes occupied for '26? Has that changed?

Our next question comes from Jeff Spectre with Bank of America. Please go ahead.

Great, thank you. Um, first I just want to congratulate Jason and Matt. Um, my question is on the, um, the development homes occupied—the expectation for 2026—and tying that to, you know, your more muted job growth forecasts. I guess, you know, can you talk about that a little bit? The 3,000 development homes occupied for 2026? Has that changed?

Matt Birenbaum: Hey, Jeff, it's Matt. No, that hasn't changed. That's really a function of deliveries. And so when you look at, you know, we are in a down year for us for deliveries, which goes back to, you know, two, three years ago, we had started less development. So, you know, we're ramping up development starts. Last year, we started a billion. This year, we're starting a billion seven. That's going to translate into more deliveries in '26, '27, '28 than we had in, you know, '24 and '25. So, you know, we'll generally price the homes to absorb them. So it's not really a function of a macroeconomic view of what '26 is going to look like.

Uh, hey Jeff. It's Matt. Know that hasn't changed. That's really a function of deliveries. And so when you look at, um, you know, we are in a down year for us for deliveries, which goes back to, you know, 2-3 years ago, we had started less development. So, you know, we're ramping up development starts. Last year, we started $1 billion; this year we're starting $1.7 billion. That's going to translate into more deliveries in 2026, 2027, and 2028 than we had in, uh, you know, 2024 and 2025. So, you know, we'll generally price the homes to absorb them. Um, so, uh, it's not really a function of a macroeconomic view of what 2026 is going to look like.

Nick Yulico: Okay. But so you're saying the more muted job growth forecast is not concerning to you on what you're planning to deliver for next year?

Okay. But, are you saying the more muted job growth forecasts are not concerning to you regarding what you're planning to deliver for next year?

Matt Birenbaum: No, I mean, those are shovels in the ground. That train left the station a couple of years ago.

Ben Schall: Yeah, yeah. And just to reemphasize, you know, we're also, you know, spot point in time, kind of running above performa on those rents, right? So there's a little, you know, we'll see what the market rent environment looks like between now and then, but we are going into next year with some cushion on those development deals as you think about the value that's being created for shareholders.

Nick Yulico: Okay, thanks. And then my second, I just want to confirm on the delays in development. I know you talked.About

No, I mean those, those are shovels in the ground. That train is moving. Is that train left the station a couple of years ago? Yeah. Yeah. And, and just to reemphasize, you know, we're also, you know, spot point in time, kind of running above performer on those rents, right? So there’s a little, you know, we’ll see what the market environment looks like between now and then, but we are going into next year with some cushion on those development deals. As you think about the value that’s being created for shareholders.

Jason Reilley: specific projects, but just to confirm, that had nothing to do with the tariffs, delays in imports or or materials, please.

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?

Kevin O'shea: Yeah, no, it's we haven't really seen those supply chain bottlenecks for a while now. It's still a little bit tough with, electrical switchgear, but, it's just, you know, occasionally you get the normal delays about, you know, getting elevator inspections, getting final COs from some of these smaller local jurisdictions. so it's, you know, that kind of stuff.

Please.

Yeah, no, it's it. We haven't really seen those supply chain bottlenecks for a while. Now they're still a little bit tough with electrical switchgear. But it's just, you know, occasionally you get the normal delays about, you know, getting elevator inspections, getting final COs from some of these smaller local jurisdictions. So, it's, you know, that kind of stuff.

Jason Reilley: Great. Thank you.

Great. Thank you.

Sean Breslin: Thank you. Our next question comes from Nick Culico with Scotiabank. Please go ahead.

Thank you. Our next question comes from Nick Ulo with Scott Share Bank. Please go ahead.

Jason Reilley: Thanks. I want to turn back to the development pipeline and thinking about future starts and the magnitude of what that could be, you know, beyond this year. What I'm wondering is how much your equity price is going to factor into that since, you know, 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, you know, if your stock price kind of stays, around where it is today, how much does that, you know, impact the size of a potential development start, number for 2026?

Uh, thanks. I, I want to turn back to the development pipeline and think about future starts and the magnitude of what that could be, you know, beyond this year. What I'm wondering is how much your equity price is going to factor into that since.

You know, you did have the forward Equity at very attractive, uh, price and and cost of capital. Uh, it's not exactly where you'd want it to be right now. So, in terms of your stock price, I imagine so, you know, if your stock price kind of stays

Kevin O'shea: 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 a billion a quarter 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.

Around where it is today? How much does that, you know, impact the size of a potential development start number for 2026?

Kevin O'shea: And if you're trying to look at the the spread cost or the incremental cost of that source of funds, really just functional looking at how you want to treat our free cash flow, which, you know, 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, you know, today, depends on where we're tapping, the debt markets. Fresh 10-year debt for us today would be around five and a quarter, give or take. we did just do a debt deal on a 10-year basis at 505, 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.

Sure, Nick. This is Kevin. Um I'll start on the funding side and others may want to chime in. Um 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 a billion a quarter of new development uh through a combination of free cash flow um dispositions where we can keep the proceeds and then leveraged uh IBA growth. All in a leveraged neutral basis and so if you want to try to understand, um so that's the capacity component. If you're trying to look at the the spread cost or the incremental cost of that source of funds really just functional looking at how you want to treat our free cash flow, um, which, you know is free from an accounting point of view. But obviously has an opportunity cost, free investment rate that you have to put in there for the company and then um, debt which you know, today, um, depends on where we're tapping. Um, the debt markets. Fresh tenure debt for us today, would be around 5 and a quarter give or

Kevin O'shea: We also have been able to do, debt, by leaning into the term loan market where we did, term loan debt at fours. And we have capacity for leverage. So, you know, the number I gave you about a billion a quarter is sort of leverage neutral. If it made sense, we could lean into that leverage capacity. and then, you know, we've got asset sales, which, you know, as Matt and Ben have alluded to, are still tracking at sort of the high four, low five kind of range for most, transactions, transactions that are being completed.

Kevin O'shea: So, generally speaking, we can, in the current environment, fund in the low fives about a billion a quarter of capital, to fund development and and do so on a creative basis, given the opportunity set, particularly in our established markets where supply remains constrained and our lease of 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 were 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.

Take, uh, we did just do a debt deal, 10 year basis at 5:05, um, a few weeks ago, um, 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 uh debt um, by leaning into the term loan Market where we did, um term loan debt at at 4S and we have capacity for leverage. So you know, the number I gave you about a billion. A quarter is sort of Leverage neutral, if it made sense, we could lean into that leverage capacity. Um, and then, you know, we've got assets sales, uh, which you know has, uh, has Matt and Ben have alluded to are still tracking at a sort of a, the high for low 5 kind of range for most, uh, transaction um, transactions that are being completed. So,

Jason Reilley: All right. That's helpful, Kevin. Thanks. And then a second question, maybe going back to, Sean and what you were talking about with the, you know, the weaker job growth, you know, versus expectations, so far this year. I'm wondering if there's also, it's not just a level, you know, number of jobs, but it's also a composition of jobs issue issue. I mean, we've seen, you know, at the national data, it's been more education, leisure, healthcare jobs, not professional services. maybe you could just talk about if there's also just a composition of jobs, issue that that you see, unfolding in multifamily right now. Thanks.

Generally speaking, we can in the current environment Fund in the low fives about a billion, a quarter of capital, um, to fund developments and, and do so in a creative basis, given the opportunities that particularly in our established markets for Supply remains constrained and our lease of activity remains, uh, generally quite strong. So, um, that's generally what we have been doing in most years every now and then, like last year, we were able to tap the equity markets. Um, but by no means are we in dependent on the equity markets in order to drive differentiated earnings growth through a significant amount of development activity?

Sean Breslin: Yeah, Nick, good observation and, definitely on point, as being accurate there. So not only have the, absolute number of jobs sort of disappointed relative to the original forecast, but, the composition, does not favor sort of, you know, higher-end multifamily right now, given the 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. You know, there's a lot of money pouring into AI and other, you know, 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.

All right, that's helpful. Kevin thanks. And then, uh, second question may be going back to, uh, Sean and what you were talking about with the, you know, the weaker job growth. Uh, expect, you know, versus expectations. Uh, so far this year, I'm I'm wondering if there's also it's not just a level, you know, number of jobs, but it's also a composition of jobs issues issue. I mean, we've seen, you know, at the National Data, it's been more education. Leisure, uh, health care jobs, not Professional Services. Um, maybe you could just talk about it. There's also just a composition of jobs, uh, issue that that you see, uh, unfolding in in multi family right now. Thanks,

Uh, good observation and, um, definitely on point, uh, as being accurate there. So, not only the, um, absolute number of jobs are disappointing relative to the original forecast,

It's not favored, sort of, you know, higher-end multi-family right now given the weaker environment for finance, professional services, technology, etc. So that is expected to improve as we get into the second half of the year. You know, there's a lot of money pouring into AI and other, you know, technology sectors, etc. So, um, 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, uh, necessarily supportive either.

Jason Reilley: Thanks.

Thanks.

Sean Breslin: Thank you. Our next question comes from Michael Goldsmith with UBS. Please go ahead.

Yep, thank you.

Matt Birenbaum: Hi, thanks. This is Amy 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?

Our next question comes from Michael Goldsmith with UBS. Please go ahead.

Hi, thanks. This is Amy on for Michael. Um, I thought that there was a really interesting chart in the presentation on market occupancy across the Sun Belt. Um, so my question is, do you think that we need to see occupancy trends back towards essentially the pre-COVID level in the Sun Belt in order to really see pricing power in that region?

Sean Breslin: Yeah, Amy, this is Sean. I mean, it certainly needs to move that direction. you will gain some incremental pricing power, you know, 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. You know, 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 a month free, two 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 the quite the same degree. But you need those communities to lease up and then the whole market to come back to a stabilized level before you have really, I'd say, firm or strong pricing power.

Uh, yeah, Amy, this is Sean. I mean, it certainly needs to move that direction. Um, you will gain some incremental pricing power, um, you know, 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, you know, in the case of that big spread.

There’s a ton of standing inventory, as Ben mentioned in his prepared remarks. And so that’s, uh, whether it’s a month, free, 2 months free, look and lease specials, etc., concessions. Those communities will be pretty heavy getting leased up, which will certainly impact the existing stock, which is not to quite the same degree, but you need those communities to lease up and then the whole market to come back to a stabilized level before you have really, I’d say, firm or strong pricing power.

Matt Birenbaum: And then what do you think of, the timing to get back to that level?

And then, what do you think of?

um,

Sean Breslin: That is a good crystal ball question. That depends a lot on, job and wage growth in these markets. So, you know, 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, you know, 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 role in revenue growth, that typically takes longer than most people anticipate because you've got to get at least up, then you've got to burn off the concessions, the leases have to expire. It's usually a couple-year process to where you see things actually start to impact revenue growth in a material way.

That is a good crystal ball question. That depends a lot on job and wage growth in these markets. So, yeah, 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, you know, I think one thing to keep in mind here is if you're thinking about...

Sean Breslin: 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.

When they actually occupy versus when it shows up in the rent roll and revenue growth, that typically takes longer than most people anticipate. Because you've got to get at least... then you've got to burn off the concessions. The leases have to expire. It's usually a couple-year 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.

Matt Birenbaum: Great. Thank you very much.

Sean Breslin: Sure. Thank you. Our next question comes from Alexander Goldberg with Piper Sandler. Please go ahead.

Great, thank you very much.

Sure.

Thank you. Our next question comes from Alexander Goldberg with Piper Sandler. Please go ahead.

Ben Schall: Hey, I guess good afternoon. So two questions here. First, just big picture, you know, there's the debate over return to office, you know, how that's impacting apartments. You know, certainly, you know, for urban apartments would make sense that 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?

Hey, uh, good afternoon. Uh, so two questions here. First, uh, just big picture. You know, there's the debate over return to office, you know how that's impacting apartments. You know, certainly, you know, for urban apartments it would make sense that 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?

Sean Breslin: Yeah, Alex, it's Sean. What I would tell you is it's not often that we see that. I'd say the one place where, maybe two places we have seen that over the last year, it's not really recent, I would say, is during Q2 and Q3 of last year, we definitely saw more people moving from parts of central New Jersey, you know, up into northern New Jersey to be closer to the city, as an example. And then we did see some migration out of Florida back to some of the major employment markets in the Northeast. Those would be the two places where I'd say we've seen that really occur. But I mean, the other thing to think about is, given our footprint, you know, some of these suburban markets are job centers, right?

Yeah, Alex, it's Sean. What I would tell you is it's not often that we see that. I say the one place where maybe two places we have seen that over the last year. It's not really recent, I would say, is during Q2 and Q3 of last year. We definitely saw more people moving from parts of central New Jersey up into Northern New Jersey to be closer to the city, as an example.

Sean Breslin: So you think about Microsoft and where they're located, you know, outside of Seattle, you know, Google and Facebook and others, you know, and around Mountain View and parts of San Jose. So it's not just an urban situation that's creating that demand. You do have these core sort of suburban job center locations that definitely have benefited from return to office.

Ben Schall: Okay. And then the second question is, you know, certainly the risk profile of development in wreat land is a lot higher today than it has been historically. You guys have like almost 100 million, if I look at your SEP correctly, of, you know, development-related cost, you know, 60% of that being overhead and 40% interest. You know, how do you guys manage that in the sense of, you know, that capitalized impact driving deals? Meaning, you know, if you wanted to scale back, it's certainly an impact, you know, on a personnel basis. It's an impact to your expense, you know, interest expense versus, you know, maintaining that.

That's definitely benefited from the return to office.

Okay. And then the second question is, you know, certainly the risk profile development in reeand is a lot higher today than it has been historically. You guys have like almost a hundred million if I look at your sub correctly of, you know, development related cost, you know 60% of that being overhead and 40% interest. You know, how do you guys manage that in the sense of you know that capitalized impact driving deals, meaning

Ben Schall: And I guess to the earlier question, I think it was Nick who asked on, you know, this equity funding, sort of, is 100 million of capitalized overhead and interest for development, is that an appropriate amount just given the increased risk profile and just how do you manage that?

You know if you wanted to scale back it's certainly an impact you know on a Personnel basis. It's an impact to your expense, you know, interest expense versus you know, maintaining that. And I guess to the earlier question, I think it was Nick who asked on, you know, this Equity funding sort of is a 100 million of capitalized overhead and interest for development is that an appropriate amount. Just given the increase risk profile and just how do you manage that?

Kevin O'shea: Hey, 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.

Ben Schall: I was saying this in general, not specific in general.

Kevin O'shea: But I, you know, the first thing I'd say is all of our capitalized basis on all of our deals includes capitalized interest and includes all that capitalized overhead in our basis. So, the deals pay for it. And 100 million on, you know, what do we have? 2.8, 2.9 billion underway right now is a pretty small percentage. And if you, at any given point in time, you know, that's all funded. So, and if you think about this year, we're starting a lot more than we're completing. So, you know, this time next year, we're going to have more than 2.8 billion underway.

Hey Alex, it's Matt. Um, oh, I'm not, 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, uh, have a pretty impressive track record of managing those risks well. But I was saying this in general, not specific, in general. Okay. Okay. Um, but I, uh, you know, the first thing I'd say is all of our capitalized bases on all of our deals includes capitalized interest and includes all that capitalized overhead in our basis. So, uh, the deals pay for it and, um, $100 million.

Kevin O'shea: If we saw a shift in the environment that we thought was durable, you know, we have the next two or three years' worth of that overhead already funded and covered because it's in those projects that are underway and in those budgets that we've pre-funded and match-funded. So, you know, if that were to be the case, we could definitely see it coming and adjust. And we have over the years, you know, we cut back the overhead pretty materially in the teeth of the GFC. And, you know, even we had cut it back really in the latter part of the last cycle where we saw that, you know, kind of the cycle was getting a bit long in the tooth. So, but we have a pretty well-oiled machine that we can see it coming.

Kevin O'shea: The other part of it, I would say, is a lot of that is incentive comp. So there is some of this that's self-correcting. The less business we do, the less profitable it is, the less that compensation is.

On, you know, what do we have 2.8? 2.9 billion underway right now. Uh, is a pretty small percentage and if you if you at any given point in time, you know, that's all funded. So, and if you think about this year, we're starting a lot more than we're completing. So you know, this time next year we're going to have more than 2.8 billion underway. If we saw a shift in the environment that we thought was durable, you know we have the next 2 or 3 years worth of that overhead already funded and covered because it's in those projects that are underway and in those budgets that we pre-funded and match funded. So you know if that were to be the case, we could definitely see it coming and adjust and and we have over over the years, you know, we we cut back the overhead, pretty materially, uh uh, in the teeth of the GFC. And um, you know, even we had cut it back, uh, really in the latter part of the last cycle, where we saw that, you know, kind of the cycle is getting a bit long in the tooth. So um but we have a we have a pretty well-oiled machine uh that that we can see it coming. The other part of I would say is a lot of that is in

Ben Schall: Okay. And again, it was a general comp, general.

Incentive compensation. So, there is some of this self-correcting. The less business we do, the less profitable it is, and the less that compensation is.

okay, and again, it was

Kevin O'shea: Yeah.

Ben Schall: Yeah.

Kevin O'shea: Yeah, just maybe to say a couple of comments, Alex, this is Kevin. I mean, as you look at those costs, cost components you mentioned, first of all, they all do work their way into the cost of the project and it pays for itself when you look at the yield relative to our initial cost of capital. I would separate, however, capitalized overhead from capitalized interest expense and look at them differently. The capitalized overhead cost essentially reflects the payroll cost for the groups that are working on the entire development book of business, which is the sum of the development underway, I'd call it roughly $3 billion, plus our development rights pipeline, which we sometimes have disclosed, but that's probably another $4 billion. So essentially, you've got $40 to $50 million of annual overhead costs associated with, you know, $7 worth of business.

Done, real comp. Uh, General. Uh, yeah. Yeah.

Kevin O'shea: Let's call it whatever, 60, 65 basis points. I think if you were to compare to that cost structure to what you see in the private sector, what you would find is that essentially the development machine we have built over three decades at AVALONBAY is remarkably efficient and adds to our profitability and helps explain why our development yields are incrementally more profitable than many private market participants are able to achieve. So it's a very profitable machine we've been able to build. And if you're looking at the profitability of development, I think the way we frame it is the way I would suggest you sort of look at it, which is the incremental stabilized yield relative to our incremental funding cost.

Yeah just maybe it's a couple comments. Alex this is Kevin I mean as you look at those costs cost components you mentioned first of all they all do work their way into the cost of the project and it pays for itself, when you look at the yield relative to our initial cost of capital I would separate however capitalized overhead from capitalized interest expense and look at them differently, the capitalized overhead costs, essentially reflects the payroll cost for the groups that are working on the entire development book of business, which is the sum of the development underway of Colorado, roughly 3 billion, plus our development rights pipeline, which we sometimes are disclosed, but that's probably another 4 billion dollars. So essentially you've got 40 to 50 million dollars of annual overhead costs associated with, uh, you know, 7 dollars worth of business that's called whatever 60, 65 basis points. I think if you were to compare to that, that cost structure to what you see in the private sector, what you would find is the essentially the development machine. We have built over 3 decades that have on

Kevin O'shea: And that's the way to think about the associated all of capital costs, including capitalized interest, which is really more of an accounting charge, which is intended to reflect those costs on an accounting basis. The way we track it is to show you what the actual cash funding costs are putting that capital, that development into service.

is remarkably efficient and adds to our profitability and helps explain why our development yields are incrementally Prof. More profitable than many private Market participants are able to to achieve. So it's a very profitable machine. We've been able to build and if you're looking at the the profitability of development, I think the way we frame it is the way I would suggest you sort of look at it uh which is the incremental stabilized yield relative to our incremental funding cost and

Sean Breslin: Okay. Thank you.

And that's the way to think about the associated costs. All the capital costs, including capitalized interest—which is really more of a county charge—are intended to reflect those costs on the accounting basis. However, the way we track it is to show you what the actual cash funding costs are for putting that capital development into service.

Kevin O'shea: Yep.

Thank you.

Sean Breslin: Thank you. Our next question comes from Michael Stephanie with Mizuho Securities. Please go ahead.

Thank you.

Our next question comes from Michael Stephanie with Mizuho Securities. Please go ahead.

Ben Schall: Hi there. Good afternoon. In your 1Q Investor presentation, I noticed you had a construction hard cost pie chart that broke down input costs. I didn't see that in your 2Q Investor deck. My question is, what inputs are you seeing? Higher costs now and/or lower costs than when you forecast this six months ago?

Hi there. Good afternoon.

In your Q1 investor presentation, I noticed you had a construction hard cost pie chart that broke down input costs.

Back. My question is, what inputs are you seeing higher costs now and/or lower costs than when you forecast this 6 months ago?

Kevin O'shea: Yeah, hi, this is Matt. I don't think it's necessarily changed. That Q1 presentation was really kind of illustrative, and it was really put out there to kind of orient investors to the fact that the materials component of the hard cost is a relatively small percentage of the overall deal capitalization of a deal. So, you know, we haven't seen that that's necessarily changed. And again, right now what we're seeing is that headwind of potentially higher materials costs is being more than offset by the tailwind from subcontractors getting hungry for work. And if anything, over the last quarter, that's just accelerated with you're starting to now see a reduction in for sale starts activity. And, you know, again, we're continuing to see great bid coverage and, you know, buyout savings relative to our budgets. So, you know, the trend continues to be favorable in that regard.

Um, yeah. Hi. This is Matt.

I don't think it's necessarily changed. Um, that Q1 presentation was really kind of illustrative, and it was really put out there to.

Kind of Orient. Uh, investors to the fact that um, the hard, the materials component of the hard cost is a relatively small percentage of the overall Dio capitalization of a deal. So um you know I I don't we haven't seen that that's necessarily changed. And again right now what we're seeing is

That, uh, headwinds of potentially higher materials costs are being more than offset by the tailwind from subcontractors, uh, getting hungry for work. And if anything, over the last quarter, that's just accelerated with you're starting to now see a reduction in, uh, for sales starts activity. And, you know, again, we're continuing to see great bid coverage and, you know, buyout savings relative to our, uh, budgets. So, um, you know, the trend continues to be favorable in that regard.

Ben Schall: Thank you.

Thank you.

Sean Breslin: Thank you. As there are no further questions, I would now like to hand the conference over to Ben Shaw for closing comments.

Thank you.

Are there any further questions? I would now like to hand the conference over to Ben Shaw for closing comments.

Ben Schall: Thank you. Appreciate everyone joining us today, and we look forward to connecting soon.

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

Sean Breslin: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.