AvalonBay Communities, Inc.

Good morning, ladies and gentlemen, and welcome to Avalon Bay Community's second quarter 2023 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, press star 2. If you are using a speakerphone, 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 Second Quarter 2023 Earnings Conference Call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release, as well as in the company's Form 10-K and Form 10-Q filed with the SEC. As usual, 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.avalonbay.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 will turn the call over to Ben Shaw, CEO and President of Avalon Bay Communities, for his remarks. Ben?

Thank you, Jason, and thank you, everyone, for joining us today. I will start with an overview of our outperformance in Q2. speak to the limited new supply in our markets as compared to most other markets, and then provide additional color on our guidance raise, our second raise of the year. Sean will speak to our underlying market fundamentals, including the progress we are making on bad debt, and provide a further update on our operating model initiatives, which are exceeding expectations. And then Matt will highlight the continued outperformance of our new projects in lease up, and summarize our recent transaction activity, including the sale of three assets at a 4.7% cap rate. Our balance sheet is as strong as it has ever been, with total liquidity of $3 billion. And Kevin is also here with us for Q&A. Turning to slide four in the presentation that we posted yesterday, we achieved second quarter core FFO of $2.66 per share, which equates to a 9.5% growth as compared to last year. and which is 7 cents per share higher than the Q2 guidance that we provided in April. I'll speak more to the underlying drivers of that outperformance in a second. We completed two new developments this quarter and started one new project. And as a reminder, early in Q2, we completed the exercise of our $500 million equity forward, capital we raised at $245 per share, and have subsequently been investing safely at rates in the low 5% range. In terms of our outperformance in Q2, it was primarily revenue driven, with same store revenue growing 6.3%, or 110 basis points higher than we had anticipated, as shown on slide five. Lease rates and other rental revenue were modestly favorable to our prior guidance, partially offset by slightly lower occupancy. The most significant driver of the favorable variance was underlying bad debt, where we have been successful as our landlord rights have been reinstituted, of getting back and releasing apartments that were previously generating no revenue. As we look forward, we continue to expect our portfolio, which is two-thirds located in suburban coastal markets, to benefit from significantly less competitive new supply coming online than in the Sun Belt and other parts of the country. Slide six shows the magnitude of this differential, where starts in our established regions have remained stable over time, while Sun Belt starts have increased 50% since 2020. The ramification of this activity is that in 2023, new apartment deliveries will be almost 4% of existing stock in the Sunbelt as compared to only 1.5% of stock in our established regions. And this meaningful differential is set to continue in 2024. Moving to slide seven, we are raising our full year guidance for core FFO to $10.56 per share. which equals a 7.9% increase over 2022. As a reminder, we increased guidance by $0.10 in April to $10.41 per share, which was attributed primarily to Q1 outperformance and the earnings benefit of accelerating our equity forward. The second increase of an additional $0.15 per share incorporates our outperformance in Q2 and reflects our latest revenue and expense forecast for the year, including improved expectations for bad debt. As part of this updated guidance, we have increased our same store revenue growth expectation to 6%, kept expense growth constant at 6.5%, and the resulting same store NOI growth outlook of 6% is up 175 basis points at the midpoint. For bad debt, we are now assuming underlying bad debt of 2.3% for 2023 and improvement of approximately 50 basis points from our initial estimates. As it relates to operating expenses, while the midpoint of our guidance remains the same, we expect lower payroll costs driven by our innovation efforts and lower repair and maintenance and property tax expenses to be offset by higher legal eviction and bad debt costs as we reclaim apartments from nonpaying residents. The further breakdown of the increase from $10.31 to $10.41 and now to $10.56 per share is shown on slide eight with 14 cents coming from same store NOI. We also continue to adjust our capital allocation approach based on the changing external environment. While our developments in lease up continue to perform exceptionally well, we have raised our required returns on new development starts given our increased cost of capital and focus on maintaining 100 to 150 basis points of spread between underlying market cap rates and our projected development. Based on these factors and as part of our guidance update, we reduced our expected level of starts in 2023 to $775 million from $875 million. On the transaction side, as part of our portfolio repositioning, we continue to take the tact of selling assets first, locking in that cost of capital, and then pursuing acquisitions in our expansion markets. Given this cadence and given that we are remaining selective on the acquisitions that we pursue, our guidance now assumes that we'll be net sellers of assets this year with expected dispositions exceeding acquisitions by roughly $200 million. And with that, I'll turn it to Sean.