AvalonBay Communities, Inc.

Good morning, ladies and gentlemen, and welcome to Avalon Bay Community's second quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. Following remarks by the company, we will conduct a question and answer session. You may enter the question and answer queue at any time during this call by pressing star 1. If your question has been answered or you wish to remove yourself from the queue, please press star 2. If you are using a speakerphone, please lift the handset before you're asking your question. and 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.

Jason Riley, Vice President of Investor Relations, Thank you, Cody, and welcome to Avalon Bay Community's second quarter 2019 conference call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There's 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, followed with the SEC. As usual, this 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.avallonbay.com forward slash earnings, and we encourage you to refer to this information during the review of our operating results and financial performance. And with that, I'll turn the call over to Tim Naughton, Chairman and CEO of Avalon Bay Communities, for his remarks.

Tim? Tim Naughton Yeah, thanks, Jason. And with me today are Kevin O'Shea, Sean Breslin, and Matt Bierenbaum. Sean, Kevin, and I will provide a brief commentary on the slides that we posted last night, and then all of us will be available for Q&A afterwards. Our comments will focus on providing a summary of Q2 and the year-to-date results, an update to our 2019 outlook, a review of portfolio performance, and then lastly, a discussion of risk management. Starting now on slide four, highlights include the core FFO growth of just under 2 percent for the quarter and 3.6 percent year-to-date. Saving store revenue growth in Q2 came in at 3.1 percent, or 3.3 percent, including redevelopment, with most regions except Seattle clustering in the 3 percent range. Year-to-date, same-store revenue growth stands at 3.3 percent. We completed a $90 million development deal in New Jersey this quarter at an initial yield of 6.5 and $240 million so far this year at an average yield of 6.4 percent. Meanwhile, we started another $430 million in three communities located in the Mid-Atlantic, Southern California, and Boston markets. And lastly, we raised almost $600 million this past quarter in external capital at an average rate of 3.9 percent and have raised roughly two-thirds of our projected capital needs for 2019 in the first half of the year. Turning now to slide five and our revised outlook for the full year. We expect the core FFO growth of 3.9 percent or 5 cents a share and 60 bps above our original outlook. Same-store revenue growth remains unchanged at 3 percent. And NOI growth is up 25 bps to 3.25, driven by lower-than-expected OpEx, which is down 60 basis points from our initial outlook. Development starts are expected to be down modestly in the $900 million range. And then lastly, In terms of acquisitions, we're projecting $300 million for the year, which really reflects what we've closed so far through Q2, plus what is expected to close in Q3. Acquisitions are roughly offset and funded by an increase in dispositions and opportunistic GEP activity that took place in the first half of the year. Turning now to slide six. The upward revision of core FFO growth is being driven primarily by the unbudgeted acquisitions in a favorable interest rate environment newly issued in the existing floating rate debt. Projected outperformance in our same store portfolio is being offset by shortfalls in the redevelopment and lease-up portfolios. Turning to slide seven, which provides many of the key assumptions underpinning our revised outlook I'm not going to go through this entire chart, but economic growth is moderating, as expected, with the recent print of Q2 GDP growth of 2.1 percent, which is down 100 basis points from Q1 and the rate that was experienced for much of last year. The consumer remains in good shape, but it is also showing signs of moderation, with retail spending decelerating from its healthy pace of last year and auto and home sales flattening in recent quarters. Consumer confidence remains at a healthy level for now, supported by a very healthy labor market. Business investment has been relatively healthy so far this year as well, although business confidence has recently declined to a cyclical low as the prospect of trade wars weighs heavily on the psyche of many executives and capital allocators. This and other leading indicators have caused the Fed to reverse course with its rate cut earlier this week. Let's now turn to slide eight to see how this economic backdrop is impacting fundamentals in our markets. Job growth is expected to be in line with our initial outlook at 1.3%, with most regions in the low 1% range, with the exception of Northern California and Seattle, which are projected to produce job growth in the low to mid 2% range. And while wage growth is projected to remain healthy at around 3%, This is 50 base points below our initial assumption. And then lastly, while completions remain healthy at 1.9 percent of stock, this projection is down 40 bps due to the continuation of project delays experienced over the last few years, mostly from shortages in skilled labor. So, fundamentals are a little mixed from what we expected at the beginning of the year. Job growth is in line. Deliveries are projected to be lower than expected. And wage growth is expected to be slightly less than our initial outlook. And with that, Sean and I will discuss our markets and portfolio performance in more detail.