AvalonBay Communities, Inc.

Good morning, ladies and gentlemen, and welcome to the Avalon Bay Community's first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. Following remarks by the company, we will be conducting 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, press star 2. If you're using speaker equipment, please lift the handset before 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.

Thank you, Doug, and welcome to Avalon Bay Community's first quarter 2023 earnings conference call. As a reminder, this call may contain forward-looking statements, and actual results may differ materially. There's a discussion of these risks and uncertainties in yesterday's afternoon's press release, as well as in the company's Form 10-K and Form 10-Q filed with the SEC. I'll now turn the call over to Ben Shaw, Chairman and CEO and President of Avalon Bay, for his remarks.

Thanks, Jason. In terms of key themes for this quarter, I will start by reviewing our strong start to the year and describe why we believe our suburban coastal portfolio is particularly well positioned. Sean will discuss our operating performance and relative strength as we enter the peak leasing season. Matt will comment on the evolving development market and detail the differentiated earning stream that our developments currently underway are set to provide. And Kevin will review our strong financial position and highlight the advancements at our industry-leading centralized service center we utilize to drive revenue and operating efficiencies. Turning to our presentation, starting on page four, we continue to meaningfully grow earnings in Q1, with core FFO increasing 13.7%. A significant part of this uplift is related to the roll-through of leases signed last year. We also continue to grow rents during Q1, with light-term effective rent change of 4.1%. For the quarter, we exceeded core FFO guidance by 5 cents, with the one cent of revenue primarily attributable to better than expected collection rates from residents, three cents due to lower operating expenses, and one cent related to interest income and other items. In early April, we drew down the proceeds of our equity forward, which we entered into about a year ago at the spot price of $255 per share. A couple of items to highlight here. First, the initial cost of this $500 million of capital is in the low 4% range. As was originally intended, we've allocated this capital to development projects underway, which are projected to generate development yields of 6% or more. So when we talk about funding our underway development at yesterday's capital cost, this almost 200 basis point spread is what we're referring to and leads to significant value creation for shareholders as these projects stabilize. The second aspect of the drawdown of the equity forward is unique to the current environment in which we can earn outsized returns on cash. We weren't originally planning to draw down the equity forward until Q4 of this year, but we executed it now and have invested the cash at 5% plus interest rates with extremely strong banking partners. On a net basis, the incremental income on this cash is projected to increase 2023 core FFO by approximately 3 cents per share after factoring in the incremental shares outstanding. We in turn increased our full year core FFO guidance by 10 cents to $10.41 per share at the midpoint. The breakdown is as follows. Two cents in revenue, with the one cent from Q1, and then an additional one cent in Q2, based on slightly better rental rates. There's an assumed two cent improvement for operating expenses for the full year, which includes the three cents from Q1, partially offset by one cent higher off X in the second half of the year. And then six cents of additional core FFO, primarily from the interest income on the equity forward proceeds, as well as other cash management and slightly updated assumptions related to transaction timing. We did not adjust our same store guidance ranges at this point, and we'll reevaluate those as part of our more fulsome mid-year re-forecast. Turning to page five regarding market fundamentals, occupancy and rent trends in our established regions are experiencing less volatility than in the Sunbelt regions. Part of this is a reversion to long-term trend lines. There are also underlying demand factors providing greater stability in our established regions, and two are worth noting. First, rent to income ratios are generally in line with traditional levels. As noted in chart three, effective market rents in our established regions have grown about 10% over the past three years, with income levels more than keeping pace with rent growth. And second, with limited single-family home inventory and higher interest costs, the economics of renting are considerably more favorable than buying a home in our markets. The near-term supply picture also bodes well for the performance of our suburban coastal portfolio. As shown on page six, our established regions have meaningfully less new supply coming online this year, estimated at 1.6% of stock, as compared to Sunbelt markets at 3.6%. And as shown on the right-hand side of this page, when we look at supply that is directly competing with our portfolio, levels are even lower, at 1.4% of stock overall, and only 1.2% of stock in our suburban markets, which comprises roughly two-thirds of our portfolio. In terms of our portfolio allocation objectives, we do still want to shift 25% of our portfolio to our expansion regions over time in order to diversify and optimize our longer-term growth profile. So that has not changed. And in the nearer term, the relative trade of selling assets in our established regions to acquire assets in the expansion regions could be more attractive to us than it has been, allowing us to more profitably reposition our portfolio for future growth. And with that, I'll turn to Sean for more specifics on the operating backdrop.