AvalonBay Communities, Inc.

Good morning, ladies and gentlemen, and welcome to Avalon Bay Community's second quarter 2024 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 conference by pressing star 1. If your question has been answered or you wish to remove yourself from the queue, you may 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 having your cell phones turned off during the question and answer session. Your host for today's conference is Mr. Jason Riley, Vice President of Investor Relations. Mr. Riley, you may begin your conference call.

Thank you, Paul, and welcome to Avalon Bay Community's second quarter 2024 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'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, 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 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 Ben Shaw, CEO and President of Avalon Bay Communities, for his remarks. Ben?

Thanks, Jason, and thank you everyone for joining us today. I'm here with Kevin O'Shea, our Chief Financial Officer, Sean Breslin, our Chief Operating Officer, and Matt Bierenbaum, our Chief Investment Officer. I will start by emphasizing a number of key themes that are top of mind. and that we believe are important drivers of our continued outperformance, and then turn it to Kevin, Sean, and Matt to go deeper. As usual, we will reference our investor presentation starting on page four as we proceed through our prepared remarks. Our operating momentum continued in the second quarter with us exceeding revenue expectations and also successfully managing operating expenses lower. Based on this momentum, we further raised our guidance for the year and are projecting sector-leading full-year core FFO and same-store revenue growth among our closest peers. Our operating momentum through the first half of the year has been driven by better than expected demand, with our core renter, the knowledge-based worker, in a relatively strong position right now. Sectors of the economy that encompass our core customer are at effectively full employment with stable job and income prospects. We also continue to benefit from customers' strong tilt towards renting versus buying a home, given the lack of for sale inventory and unaffordability. And finally, as expected, we continue to benefit from the low levels of new supply in our suburban coastal markets, a dynamic that should continue to benefit our portfolio versus most of the rest of the sector for another 12 to 18 months at least. Our strong internal growth is also being fueled by our continued progress with our operating model transformation. As we detailed at our Investor Day last November, our collective set of initiatives, from our investments in technology and centralization to our reimagined operating neighborhoods, are driving meaningful operating efficiencies and allowing us to drive healthy increases in ancillary revenue streams. We're on track with these operating initiatives for 2024 with a strong runway of future earnings growth ahead of us. Importantly, we're also increasingly tapping these operating capabilities to drive outsized yields and returns on new developments and acquisitions. Further to that point, our platform is uniquely positioned to continue to drive incremental earnings growth and value creation from our external investment activity. Our developments underway continue to outperform. During the quarter, we completed three new development communities at an impressive initial stabilized yield of 7.7%, as noted on slide five. We are also incrementally more optimistic about new development, adding two additional developments to this year's starts for a total just north of $1 billion. We're underwriting mid-6% yields on this set of new projects, well within our strike zone of having 100 to 150 basis points of spread relative to market cap rates and our cost of borrowing. And as the final differentiator that I'll highlight up front, We continue to actively reposition our portfolio for superior, longer-term growth, heading from 70% suburban to 80% and 8% of our portfolio in our expansion regions to 25%. We believe we are now moving into a more attractive environment to execute on this repositioning, particularly with the froth in rents and cap rates off in our Sunbelt expansion regions. We're also tailing our portfolio in our expansion markets with lower density and lower price point assets at an attractive basis. At the bottom of page five, $500 million of the $900 million of capital raised year to date has been from asset sales at an average cap rate of 5.1%, which we are then reallocating into acquisitions in our expansion markets. The remaining $400 million was our prior unsecured debt deal with an effective rate of 5.05%, including the benefits of swaps we had in place, highlighting our relative cost to capital advantage. Before turning it to Kevin to discuss our updated guidance, let me touch on a couple of the details of our Q2 results. Page 6 provides the detail of our $0.09 core FFO outperformance in Q2, broken down by category. And please take note that $0.02 of this $0.09 outperformance was timing related and costs we expect to incur in the second half of the year. Slide seven zooms closer in on our Q2 revenue outperformance, with better than expected outcomes on lease rates, occupancy, and other rental revenue, partially offset by bad debt staying more elevated than we had hoped. Other than bad debt, our revenue momentum was strong, which is a nice segue to Kevin discuss our updated and increased guidance for the year.